Walmart Reverses Course on SKU Rationalization
A RetailWire poll in June of last year found respondents
split on the value of SKU rationalization efforts. Forty-two percent stated
that efforts undertaken by retailers were somewhat (26 percent) or very unsuccessful
(16 percent). Forty-one percent thought SKU rationalization had been somewhat
(39 percent) or very successful (two percent). Eighteen percent said the book
was still out.
Perhaps the most high-profile SKU rationalization program took
place at Walmart as part of the company’s Project Impact that sought to clean
up the chain’s shopping environment. A subsequent dip in sales resulted in
numerous executive and operational changes, including the announcement yesterday
that Walmart was adding 8,500 SKUs to its mix.
Walmart plans to add an average
of 11 percent more products to the average store. Shelf tags announcing “It’s
Back” will  accompany
products that had been delisted and subsequently brought back.
“We’ve listened to our customers and we’re bringing back
the products and brands they want,” Duncan Mac Naughton, chief merchandising
officer, Walmart U.S., said in a press release. “Customers have already
seen a wider selection of products on our shelves and we’ll continue
to bring back great products at great prices.”
Another RetailWire poll
conducted last month found that SKU rationalization efforts need to look beyond
simple sales numbers to succeed. Consumer loyalty for a particular product
was listed as the element most critical (33 percent) to determine before cutting
a product.
Discussion Questions
Discussion Questions: Does Walmart’s reintroduction of thousands of previously delisted products make it more likely that others will alter their own SKU rationalization efforts? What lessons do you think can be learned from the Walmart experience?
It’s debatable whether SKU rationalization was a good idea or a bad one. Walmart had a deserved reputation for carrying “too much stuff” and making its stores difficult to navigate. To lay the blame on the assortment planning process is missing the point, but to add back SKUs that can carry their weight makes sense as long as Walmart continues to focus on the store experience.
The real issue is pricing, and Walmart has lost share not because of SKU rationalization but because it has “given away” its key pricing edge to Target, Costco and others. Walmart had arguably the best sustainable competitive advantage in the history of retail, with an entire company culture and supply chain focused on low-price leadership. Refocusing on price leadership is long overdue, especially with consumers pinched more than ever by rising gas prices.
As predicted, SKU “over rationalization” hurt retailers. In the beginning, retail executives were happy because “rationalization” seemed to weed out slow movers.
But guess what? After a short while, thanks to SKU over rationalization, almost all retailers were carrying the same SKU assortment at the almost the same prices with the only variance being the discounts on any given day.
What SKU over rationalization didn’t “rationalize” in the beginning was that consumers still want choices, they still want specialties, and they still want innovation and niche. Companies such as Walmart and now other retailers are starting to recognize that the process of SKU rationalization needs to consider the human factors as well as overall destination and productivity of even some slower moving products.
Walmart bringing back 8,500 items I am sure is happy news to a number of manufactures and more importantly their customers. But before we call this a full retreat from SKU rationalization, how many items were discontinued to start? 10,000, 12,000, 15,000…. I am sure not every item was returned, and I agree this is an expensive way to learn a lesson. But I would think there was a lesson learned by both them and other retailers watching them.
The bigger issue for SKU rationalization and for chains in general is for them to get back to selling product, working with manufacturers with sustainable promotional support programs and move away from ridiculous slotting and opening deals that kill any prospect for brands to create market share a niche for themselves.
Years ago when I worked in direct mail (yes, I’m that old) I used to say, “it’s only junk mail if it’s poorly targeted.” Same holds true for product SKUs. If it’s an item customers want, that gives them multiple price point and quantity options in a brand they trust, it’s not junk even if it’s not the highest turning item.
Getting the mix right is difficult and brand specific; I think customers have come to expect a more curated experience at Target whereas Walmart is the price leader and needs to support that positioning with choice. The art and science of SKU rationalization has to extend to local market planograms, unique SKUs by region, and a true understanding of where an item works and where it doesn’t. Managing that mix is challenging but critical to keeping customers in the shopping experience.
Walmart has learned that whatever they do, someone will surely follow. I wonder sometimes if Walmart really did alter their SKUs. Only to sit back and watch their competitors commit suicide thinking they are copying the great Walmart. True or not, competitors will often follow Walmart’s lead, and believe they are being lead to the promised land.
The only SKU rationalization that works is done on a store by store basis, looking at sales history and with the involvement and input from the store manager. Store-specific planograms are available and should be used in place of centralized and ill-fated “one planogram fits all” shelf management.
This really is Walmart just formalizing and announcing something that has been in the works for months. Wrapping a one-two punch message around Walmart’s ongoing SKU re-introduction and reiterating low (not “lowest” by the way) prices was a logical pairing and a logical first assignment for Walmart’s new CMO.
However, let’s not frame this as Walmart going retro. At the same time, Walmart has been (wisely) adding premium offerings in cosmetics (Hard Candy, Kinerase), household cleaning (Mrs. Meyers, Seventh Generation), and other categories, giving them the ability to play high-low as needed.
This is Walmart having a price strategy, not “back to the future.”
Walmart is only a role model to those retailers who want to commit suicide. Copying Walmart’s SKU or pricing practices gains a competitive retailer too little today. WM is behind in like-store sales and that indicates it doesn’t have the exclusive SKU sorcery it once had.
SKU rationalization has several pluses. It lowers working capital requirements, lowers processing and transportation costs, builds leverage among the vendors, etc., etc.
Identifying the SKUs to rationalize away is when the problems begin. The simplest (and most often used) approach is build a list of sales/margin by SKU by category and then eliminate the bottom X%. What you learn very quickly is another obvious but often overlooked fact. In a country as large and diverse as America, there is a very broad variety of climates, preferences, and demographics. Put differently, a SKU may not be a big deal nationally, but regionally it may be a major draw.
MacNaughton mentioned that, in some rural communities, fishing is a very big pastime. For those communities, discontinuing the fishing section was a clear message that Walmart was inviting them to shop elsewhere, which they did.
The recognition that different stores have different preferences is a very big deal. The recent re-organization into three separate geographic zones with separate merchandising and planning organizations is, like My Macy’s, another big deal.
My prediction is that, if done thoughtfully, this initiative will enable WMT to finally see some meaningful revenue growth.
Walmart adding 8500 SKUs back should not alter many, if any, retailers’ approach to assortment.
Reason One: Other retailers are not Walmart. They do not make the same promise to consumers–to meet every need at the lowest price everyday.
Reason Two: Walmart’s “failure” with SKU rationalization is being overplayed just as much as its original efforts were. When even the local paper and evening news are running stories on what a retailer is doing with product assortment–that’s overplayed. And consumers noticed (and reacted) to a lot of things they normally wouldn’t have if not so sensitized to the change.
Too many studies have proven that, when unaided, consumers perception of a change from 100 cluttered SKUs to 75 properly merchandised SKUs results in a perception of MORE choice–not less.
I agree with Richard Seesel that this was much more about bad pricing decisions. Lisa Bradner makes a great point too–about having the right product mix for the Walmart consumer. Chalk the bulk of Walmart’s pain up to the strategic decision to “go upscale.”
The theory of SKU rationalization is simple–just remove unproductive or under-productive SKUs and replace them with SKUs that move and generate profit dollars.
The devil, of course, is always in the details. The early pioneers of SKU rationalization–Coca-Cola, Wegmans, HEB, etc.–found that from both a consumer and retailer point of view, less is often more.
But all good tools are subject to operator misuse. Cut out inventory “fat” and you’re healthy. Cut inventory “muscle and bone” and you begin to turn shoppers off.
Walmart, it seems, cut too deep and/or added back higher demand SKUs too slowly.
SKU rationalization is a great tool for inventory cost control, profitability enhancement and–done correctly–more effective merchandising and customer satisfaction. But, like so many things at retail there’s plenty of science in the theory, but lots and lots of art in the execution.
As always, Mr. Hoffman is spot on. The retail landscape is littered with companies that tried to follow what Walmart executed and failed.
In terms of lessons learned, it is critical that retailers understand the potential customer reaction to eliminating a product and not just the financial impact of removing the SKU on the bottom line. Walmart is trying to accomplish this without a loyalty card and while much can be accomplished with credit card info and market basket analysis, they are still facing limitations to their shopper insights.
My first (cynical) reaction to this is that it gives retailers a chance to bill slotting expenses for products previously carried. Remove a product from your inventory, bill the vendor for discontinued product expenses, reintroduce the product and then bill for slotting. Not a bad way to make the books look better, at least for a year or two, but I’d worry it would make the retailer seem unreliable to consumers.
It’s a mistake to look linearly at SKU rationalization. Sales doesn’t tell the whole story. Four other dimensions are just as vital: companion selling, trend, substitutability, and customer segmentation. Companion selling reveals what items are being sold along with the candidate for SKU rationalization. Trend looks at the percentage of your customers that include the candidate SKU in their basket. Substitutability looks at what happens to the rate of sale of potential substitutes to the SKU candidate when the SKU candidate is out of stock. And market segmentation looks at the above three by customer type. Two segments are particularly important: best/most loyal customers and the new customers. Looking at all five metrics will reveal the best candidates for SKU rationalization.
Walmart missed the simplest of steps in SKU rationalization–testing it. We have manufacturers testing SKU rat all the time, looking at ways to trim category offerings without negatively impacting sales or shoppers’ perceptions. Adding the SKUs back is not the best idea either.
There’s SKU rationalization and then there’s gutting the store. I feel like they cut their assortment so drastically that they hurt business and now they are taking a more moderate approach. I wonder, with the shelf space they eliminated by re-organizing their stores, will they have room for these additional SKUs?
The more SKUs the better, always, UNLESS you use them to bury the top sellers. Oh, right, that’s standard retailer practice! Never mind.
When you look at the proliferation of product variations I don’t think anyone in retail does not understand the desire to slim down assortments. The rise in commodity prices and the increase in fuel costs will only accelerate the need to reduce assets tied up in inventory. The challenge for the retailer is to make it obvious to the supplier and the consumer that “less is better,” and to be smart in choosing which products to cut.
One way to make this a positive experience for consumers is to involve them in the process. Frequent shopper data can go a long way in helping a retailer make the right choices. The challenge Walmart has is that they do not have a frequent shopper program, and the last I knew they had dropped out of many of the market research surveys because they felt that they were the market in many areas. Frequent shopper information allows you to take many more perspectives of item sales data besides units sold, basket size, and time of day. By understanding broader shopping patterns you involve your customers in the decision process without asking them directly.
Another positive factor is the “long tail” of the Internet. By keeping many of the products and brands available online, the retailer can still offer them while not having them in the store. There needs to be an obvious financial incentive, offering online prices that are lower than the consumer could find in any brick and mortar location. Customers must be pointed to the online option through kiosks and promotion campaigns (frequent shopper again) directing them to the online sources.
Just because Walmart did not make it work, does not mean that aggressive assortment reduction should be written off. I think there are plenty of opportunities to reduce the product handling and improve customer service by offering more products from a central location.
While naysayers seem to think that this is the proof that SKU rationalization doesn’t work, let’s note that of those polled the split was 42% to 41%. Hardly overwhelming.
SKU rationalization isn’t about taking items away from your shoppers. SKU rationalization is about finding the right mix. And every bit as important, finding a profitable mix.
As Charlie Moro points out, cutting 15,000 items and adding back in 8,500 is not a mistake, but a huge win for Walmart. If this is the case, SKU rationalization is not a failure. It is a success.
But, pricing isn’t the answer either. At best, how much can we rationally forecast the base Walmart business to grow? Population +10%? Let’s be outlandish! Population +20%!!!! That gives Walmart a growth rate of less than 1.2%. How much should Walmart be willing to cut prices to get that 1.2%? If cutting prices means cutting profit (and it does) my answer is nothing. Reminder: in the 4th quarter sales were down 1.2%, profits were up 28%. That is performance that should give the CEO a big bonus.
Walmart should take their money and find better markets and better retail alternatives and optimize the profitability of the main line stores.
A real SKU review should be performed annually at a minimum. Some would say it is performed with each new product introduction. In reality, this does not happen. Discontinue one SKU and add two is more the norm. If all Walmart is doing is adding back the SKU they discontinued, the end result will be the same as before, i.e. too many slow-selling items.
Walmart has another challenge–that is, any SKU listed with them automatically becomes the number one selling item in the category. It is well known that customer research is rarely accurate for SKU selection. Walmart should set up test stores, then follow the customers’ purchase decisions. They have the technology, so decisions can be made quickly.
The lesson learned for Walmart is that the consumer will define who they are and that’s not a bad thing since consumers like them.
Consumers shop at Walmart because of the wide selection available. It’s what defines the stores, it’s the expectation. By reducing inventory, Walmart failed to meet expectations and consumers visited other options (if the consumer wants Target they will visit Target).
The lesson for other retailers is, define your brand and if it’s successful, evolve organically from its roots, don’t head on tangent that separates you from your core consumer.
SKU rationalization is a wonderful and necessary effort, but it should not affect the DNA of the retailer.
On the other hand, the NY Times reckon customers like loadsa SKUs piled up all over the place any which way….
SKU rationalization, discomfort, price sensitivity, same store sales declines–all things that make Walmart mad. I’m not sure anyone wants a mad Walmart, including Walmart themselves.
Certainly there was internal discomfort in the SKU rationalization process at Walmart. There’s an even split in opinion here. The issue is that there is a perception that the consumer has noticed. Have they? Or, is it something else. One of the worst causes of consumer frustration is when they visit a retailer and they no longer carry what they came looking for in the first place. Worse is when what they do carry is out of stock. Consumers are likely more frustrated with the later than the rationalization.
More retailers have made in roads in the price perception battle. Make no mistake its ‘perception’ over reality, but nevertheless, retailers like Target and others are making gains. The result is more frustration for Walmart. After all, they own price? Don’t they? Today, the answer is more of a ‘maybe’ than it ever was even thought they’d likely still come out the winner in a survey. The problem is “not so much.” So, if its ‘not so much’ consumers are (and same store sales prove it out) looking and trying other retailers.
SKU rationalization may be a small part of Walmart’s problem. Just as even a slight erosion of the perception war on price is a part of the problem, out-of-stocks is a larger problem for their stores than SKU rationalization. It’s likely a huge factor in their same store sales declines. We don’t have a number to put to that and likely can’t. However, when missing inventory is visible to the eye, it’s a problem. I have never visited any store of any retailer and seen more holes on the shelves than I have in the last year in visiting any Walmart in any location that I have visited. It’s a problem. It’s a problem tied to SKU rationalization but it’s also tied to likely attempts to reduce inventory as a result of declining sales. In addition, if you remove variety, the remaining sales go up and if you’re not forecasting correctly and adjusting for the reduction in variety’s impact on the remaining SKUs, it’s a double impact.
Walmart has a lot of issues–SKU rationalization is one. There are more. More what? More retailers taking advantage, winning and the combination of many doing better is having an impact. No one retailer will overtake Walmart on their own. Many doing slightly better will over time have its impact. There are a collision of forces happening that are converging.
All that being said, no one wants a mad Walmart. They sound mad. That enough is cause for concern itself and good reason to pay attention. Follow? No. Pay attention? Yes.
Walmart – store’s too messy/too much money invested in inventory.
Action step – reduce SKUs.
Position – good for customers.
Oops – that didn’t work.
Action step – reverse course/add “back” 8,500 SKUs
Position – good for customers.
Did I miss anything?
Customers want choice. They want to make the choice for themselves and not have some buyer at HQ making it for them. Walmart learned the hard way to start to listen to their customers and not to their executives. Once again the customer is right, and will continue to be right until Walmart really learns its lesson. Walmart needs to take a page from Nordstrom’s successful 2-rule employee handbook: Rule 1 – The customer is always right.
Rule 2 – Any questions? Go back and read Rule 1.
Many retailers today need to better understand their business by using this proven retail basic.
Let’s fast-forward to 2015. Walmart has executed an aggressive EDLP strategy and reclaimed low price leadership, however the gap between it and other retailers will never match what it was in the 2000s. Average basket is up, but trip frequency continues to decline because of heightened competition from hard discount food stores (e.g., Aldi and Save-a-Lot) and because of Internet sales. Walmart finds it has too much floor area for certain categories that have migrated to the Internet, e.g., pet supplies. Hundreds of small format Walmart Markets have opened in urban and rural locations, but their operating margins are far below those of supercenters. The pressure on margins forces Walmart to lay off hundreds of workers at its Bentonville HQ. New CEO Doug McMillan promises shareholders that Walmart will optimize its merchandise mix to restore shopper loyalty, and announces an agreement with labor leaders and city officials for the construction of a new supercenter in the Bronx.
Walmart will not be the only retailer getting rational about SKU rationalization and re-examining its rationale. It’s all about balance–swing the pendulum too far one way or the other and there’s trouble. Walmart is trying to right the ship. My concern is which of their multitude of initiatives (e.g., pricing, assortment, store design, advertising, etc.) will be the tipping point. And how, with so many simultaneous changes, will they ever know what’s truly working and what’s not? Hmmm. This could be another entire discussion topic.
Depth, Breadth, Price. These are three of the levers retailers need to jointly optimize to truly crack the assortment nut (with space taking a back seat for this conversation). Unfortunately, they are not independent, and they change over time. Treating them as neither gives the see-saw decision-making we see even in such power houses as Walmart.
Critically, one must understand the role that the item is to play in the assortment (and that will change by location/channel). Given the correct role for the items in an assortment (in a location), how do you stock and price them? Is the assortment now balanced and does it achieve the objectives of the category? It is over or under assorted? Are there other items external to the category that play a major role and do they support the category’s objectives?
And of course, you’ll never really know for sure if your hypotheses are correct, so continued monitoring, testing, and tweaking is always to be expected.
SKU Rationalization is not easy, so it’s not surprising why so few retailers get it right, but optimizing these three pieces is necessary in getting the equation right.