Brands Hit By Wal-Mart’s SKU Reductions
It’s tough losing your biggest customer and many brands
today are finding that out firsthand as Wal-Mart Stores is aggressively pursuing
SKU reduction in its stores.
Advertising Age reported last week that Wal-Mart has decided to go
from four plastic food storage bag brands in its stores to two. Pactiv Corp.’s
Hefty and Clorox’s Glad brand products have been removed from the retailer’s
store shelves, leaving all the space for SC Johnson’s Ziploc and Wal-Mart’s
own Great Value private label. Wal-Mart’s business likely represents a third
or more of the individual brands’ food bag sales.
The news isn’t all bad for Pactiv,
however, as the company is manufacturing Wal-Mart’s Great Value bags. A spokesperson
for the company told Ad Age, “We are
currently off the shelf on the food bag business, but we expect to be back
on the shelf in that category sometime in the future.”
Bill Pecoriello, an
analyst with Consumer Edge Research, said Wal-Mart’s cuts in plastic food bags
is likely to expand to other categories.
“If you look
at the trash-bag category, you really have to ask yourself, ‘Is there really
a need to have more than one brand and private label?’” he told Ad
Age. “I think Wal-Mart is going to make similar moves in some of the
cleaning areas and then across the portfolio.”
In a separate but related
story, Wal-Mart has been testing an expanded selection of spices in stores,
taking space from McCormick products. The chain currently represents about
11 percent of McCormick’s sales.
Robert Moskow of Credit Suisse told The
Wall Street Journal that private
label spice sales grew from 13.5 percent in 2008 to 14.5 percent last year.
Discussion
Questions: What are the implications for manufacturers in light of significant
delisting activity by Wal-Mart and others around the country? Will this situation,
for example, hasten manufacturers’ move into direct to consumer sales?
Without knowing all of the details and negotiations that took place, the only comment can be a general one–if you are not differentiated from competition in a sufficiently compelling way to the shopper, consumer, or retailer, you will not have space. The channel will not change that (online vs. store)–irrelevant is irrelevant.
Not being on the shelf at key retailers has to be a significant problem for those manufacturers. I hope they can figure out a way to return based on value offered so that they can earn their way back on the shelf.
Wal-Mart is certainly too big an opportunity for any manufacturer to ignore and simply say they aren’t going to do business with them but in light of the changes it is making with its Great Value brand and SKU rationalization efforts, if you are not one of the top two brands, you had better start thinking about what it’s like after Wal-Mart. If you have built your supply chain based on this volume, what happens to it now? My suggestion is that those that don’t firm the top two criteria start (if they haven’t already) developing a plan “B.”
Direct-to-consumers may be an option for larger ticket items but I don’t foresee any scenarios where many of these items would fit that business model. Lower cost and other bulky items don’t work because the shipping cost are disproportionate to the items value.
This goes back to the age-old question; Who owns the customer? Walmart feels that if their customers can’t find their favorite brand on the Walmart shelf, they won’t walk out of the store, they will buy an alternative. Brand owners feel that with the right amount of marketing, and the brand equity that they build, customers will seek out the brand even if they have to change stores.
Will this happen on food storage bags? Only if there is innovation developed by the branded company. For example, if the brand has functionality that measures freshness with a duration device, and the Private Label product does not, consumers might seek out the innovative product, and yes, they might go to another store to find what they want. If it is simply a nicer color box, or better typography, the PL wins.
It is all about innovation when it comes to building a brand. Walmart should not sell its customers short. They too want innovative products, and if Walmart continues to reduce its sku selection, I fear their foot traffic will see a reduction as well in the future.
Sounds like Wal-Mart has finally figured out there may be too much choice and too little differentiation in a lot of grocery categories. Presumably they’ve tested this and found the reduced category still fulfills shoppers’ needs.
Manufacturers need to do more research (some already are) into their category’s assortment, both to have recommendations for reductions ready and justifications for their own products remaining (or somebody else will make the decision for them).
As brand, SKU and supplier rationalization marches on, one fact tends to get left out of the discussion: these brands are not usually stand-alone, make-or-break propositions for the companies that own them. They are part of a portfolio of products that Clorox and other big companies manage, just as the brands within a particular category are part of Walmart’s brand portfolio which they in turn manage.
However, instead of looking at their brand portfolios holistically, many big brand houses run individual brands in silos, with each assigned aggressive (and often unrealistic) volume goals. When that is the case, every rationalization looks like a failure and a total loss (and indeed, that is how it is perceived by others outside of the company). Moreover, many of our clients have successfully returned to the shelf as retailer brand strategies and decision-makers transition (yes, rationalization isn’t always “rational,” it can be quite subjective). Brands that accept these rationalization moves as permanent are missing out.
What concerns me most is the backlash from all of this as though brands have a RIGHT to exist on the shelf and retailers owe continuity presence to them. SKU and brand rationalization processes, particularly at much-vilified Walmart, get thrown in the “killing the little guy” pile when in most cases, nothing could be further from the truth.
The implications are reduced revenue for the vendor. I guess the saying “don’t put all your eggs into one basket” is true across any industry. Especially if that basket is Walmart. They aren’t known for their rosy attitude towards suppliers. I know it’s a big account but if you can make business without them, you are much better off in the long run.
It’s not just Wal-Mart but other stores as well. One of my local grocers recently added a second private label and is heavily promoting it in order to be more competitive with Wal-Mart and Aldi. Since the store didn’t get bigger, it’s obvious some name brands had to be removed to make room for all these products. This is just basic supply and demand and if these products that are being removed had a compelling demand, they would still be in the stores. Wal-Mart is just fast forwarding the inevitable.
While this may be the right thing for Wal-Mart to do, it should create new opportunities for their competitors. Many consumers are looking for more choices and a broader assortment and Wal-Mart’s move will force these consumers to shop elsewhere. Woodman’s is a great example of a chain that offers a very broad assortment and this will drive more business to them.
It will give smaller, independent retailers a valuable point of difference that is affordable for them to achieve. More power to Wal-Mart, this may be the best thing they have done for their competition in a very long time.
Dancing with the devil is a dangerous activity if he’s your only partner. Given the uncertainty of the retail environment and the likelihood that retailers that survive will be streamlining their offering, vendors must mitigate their risks and avoid putting too much reliance on a single source.
There’s several options. As George points out, there is Direct to Consumer through the internet. Expanding the product assortment around a core brand for additional, different channels is is another. The goal has to be flexibility and thoughtful risk management.
There’s no question that, as the retail channel is rationalized to come into balance with lower, more diffused demand, so too will the supplier population. As someone else has pointed out–it ain’t a time for sissies.
Necessity is the Mother of Invention. And, the best manufacturers (brand-builders in this instance), will make adjustments to keep their various product lines in front of the consumer. It might mean being a manufacturer of generic items, opening up new channels, placing resources against new product development, linking savings from distribution, marketing (e.g.–packaging or display), sales (brokerage relationships), taking costs out of their system without sacrificing quality, and, of course, remaining focused on the end CONSUMER, etc.
Walmart is a smart 800 pound gorilla. They too know that great ideas come from everywhere. Those manufacturing mothers will innovate, as they want their children to thrive. And, Walmart needs the best and brightest of those “children.”
It’s not the time to say “woe is me, I lost shelf space.” It’s time to view the whole picture, starting with the end consumer, and building it back to Walmart, and other new channels.
Implications–yes. When two entities, the maker and the distributor, record relatively different operating results in a mutual consumer-oriented environment, the one with the greater leverage such as Walmart acts and the ones with lesser results react.
Most food retailers are producing sub-par performances today. Rising costs and challenged margins are threatened by price-cutting and the oppressive Walmart phenomenon.
Retailers, after cutting costs and prices, consider SKU reductions. And that seems to be where many retailers are today. This in turns sends shivers through affected suppliers who are forced to create new margin opportunities for retailers and/or new items for shelf space that doesn’t expand. This has a demanding effect on brand suppliers as they explore alternative methodology such as direct distribution, as Pepperidge Farms has. Meanwhile, Wall Street places its big bucks on the game’s emerging scores.
Concentration at retail has been ongoing in many categories for some time now. Brand marketers that have put themselves into the small basket to national retailers now face the result of their ongoing quest for efficiency as well as their own growth as brands which allow more PL activity. So, it is time to accept that and move on. Brand marketers need to look hard at what kind of leverage they can develop to get shelf placement. When one only goes after the big guys, they also tend to lose leverage. This is not news, as the national retailers tend to be consumer harvesters rather than farmers developing new consumers.
While retail concentration may limit storefront choices, marketers need to look at online, direct, or even niche plays where they can highlight differentiation and prove out audiences. Why should Walmart or others carry a brand unless it brings them a consumer they otherwise would not get? What are you as a brand maker doing to win consumer fans? If you are not certain other than how you compete with others, then you are at risk of delisting. Take a hard look, things are not going to go back.
This is just the beginning. Hopefully this will help other manufacturers out there understand that it’s time to broaden their horizons.
This “Battle of the Bags” shouldn’t surprise anyone. At Store Brands Decisions, our view is that Walmart’s classification of all product categories into Win, Play or Show categories as part of Project Impact is affecting suppliers across the store as the role of store brands in each category is being redefined.
I do, however, find two things interesting in the outcome of this particular battle. First, the national brands that lost out were substantial brands that spent tens of millions of dollars in consumer advertising to be “the last bag standing.” The failure of this strategy to maintain shelf space puts national brands on notice that even massive consumer ad budgets won’t save them from being de-listed. It makes you wonder, what CPG brand managers will do as they can no longer spend their way onto the shelf?
Secondly, Hefty’s parent company, Pactiv, received a substantial consolation prize with the contract to manufacture Great Value plastic bags. This move provides support for my comment in previous SBD Views that Walmart’s growing appetite for store brand manufacturing capacity will be partially satiated by national brand suppliers that don’t make the cut. Watch for more national suppliers to exit Walmart as national brands, and re-enter under Great Value, the world’s largest CPG brand.
This would be an enormous blow if it were this retailer only and in isolation.
However, the other three largest grocery retailers are going through their own version of SKU rationalization. So is the largest Drug chain….and the largest (by store count) C-Store operator.
If a product is culled by one major retailer, what are the chances it will remain on the shelf in another?
The impact on line items within manufacturers will be significant. I spoke to one manufacturer who had had the bulk of their items cut at the subject retailer…and they were hopeful that the rationalization roll-out would be slow (the roll-out has since been accelerated) and that they would have time to prove the value of the cut items (they won’t). They looked pretty ill at ease while claiming they would figure out a way to replace the volume….
These moves make it much more critical for manufacturers to measure compliance for the remaining items in the modular. Thank goodness ShelfSnap came along 😉
My fear is that more jobs will be lost in the retail sector with Wal-Mart’s action. Product reps, vendor reps visiting their offices, and manufacturing sector jobs lost. Wal-Mart is a huge account. I have no doubt there will be ripple effects felt from SKU rationalization. I think in the past, manufacturers assumed that if Wal-Mart carried one product, they’d carry the main of their line. No more.
If you can accept the premise that Wal-Mart is not a grocer, but rather a mass merchant who sells grocery, then this all becomes clear. Depending on the strategy du jour, they will continue to pursue the price sensitive customer who isn’t particularly brand loyal. This works for them and apparently is successful. When they try to attract the more affluent customer, then their strategy is less successful. The basket size is impacted and the movement of better margin higher ticket product tends to suffer as the customers with more disposable income shift their purchase habits. If nothing else, Wal-Mart knows their customers. They will continue to do what they do best in order to drive growth.
A conventional retailer’s best defense against the superstore is variety, brands, solid differentiation and destination categories. Along with that and no less important is recognition of each customer as an important factor in their business. Customer service, providing what the customer wants to shop for and a pleasant shopping environment, will win the day.
These are two separate approaches to the business and combining the two (trying to be both) can be hazardous to stockholders.
As previously pointed out by several others, this is a far-reaching phenomenon that will have lasting effects on the market. But is it the retailer’s fault that they can’t put every item available on the shelf and that they are interested in differentiating themselves through multi-tiered private label offerings that generate stronger profit? Absolutely not.
I believe the responsibility is on the manufacturers to demonstrate not only why their product deserves space within the finite footprint of the store, but what differentiates their product so that it provides the consumer a true choice. There have been too many cases where a “me-too” product was introduced to a category and was placed on the shelf without bringing new, incremental sales to the category. These are the items most at risk. SKU rationalization has been going on for quite some time and perhaps the economy and a focus on shopper convenience has accentuated it of late, but products must EARN shelf space through demonstrated performance. If an item brings no new value to the category, no new choice to the consumer and no new profit opportunity to the retailer, it will not survive. And perhaps its launch should have been initially questioned.
SKU proliferation is over. Survival of the fittest is today’s retail mantra.
In “Misguided Bobbing of the long Tail” I discussed this issue at some length. This is NOT simply a merchandise selection issue, but should more properly be seen as a Long Tail/Big Head issue. I didn’t say that bobbing the long tail was wrong, but that it could easily be misguided. The reason is that the fundamental role of the long tail is NOT to SELL, but to attract. Just as the primary purpose of the big head is to SELL.
Big head stores, like Lidl and Aldi knocked the ball out of the park with a total of 400 and 700 SKUs in the entire store. Stew Leonard preceded them with a 2000 SKU store selling $100 million per year, in comparison to the anemic $15-30 million of the competition. However, Stew swelled from an initial 800 SKUs to that 2000, just as all other big head stores have found that addition of SKUs makes the store more attractive.
There is a lot more to this, but none of these stores really focus on SELLING, but as self-service operators, they focus on the shopper making PURCHASES. This mindset locks them into focusing mostly on trying to match merchandise to the huge diversity of shoppers. Diversity = long tail. But this is at the stupendous cost of ignoring the commonality of shoppers. Commonality = big head. Another way of saying this is, the long tail attracts shoppers, but they mostly buy the big head.
Will Walmart improve their sales by pruning the long tail? Probably. Could they improve sales a lot more by focusing on how to sell the big head (what shoppers mostly want to buy,) without sacrificing the long tail that draws them to the store? Absolutely.
BTW, Costco does a fair job of selling the big head–with a modest long tail. But many of the selling principles that could be applied elsewhere, are already on public display at Costco and Stew Leonard’s. Let he that has eyes to see, SEE!
Contrary to the last discussion on this topic, Pactiv will probably end up more profitable with the Wal-Mart PL business than with the Hefty food bag business. That sounds counter-intuitive, but (1) the PL at Wal-Mart is bigger than their food bag business was; (2) they don’t have to compete on a regular basis with two significant CPG companies; and (3) they can go back to their pre-Wal-Mart panic advertising levels which will deliver tens of millions to the bottom line.
On the branding front, brand managers take note. Even modest size supermarkets carry over 25,000 SKUs. Only several hundred make a real difference to the shopper. Each of those other tens of thousands must be there for a reason. The reason isn’t that the graphics are great or the advertising is heavy. There is only one reason…the product must be meaningful.
In the category that is taking up so much discussion space there is very little meaningful difference. MEANINGFUL is the word to be emphasized. This category has been innovating beyond comprehension for the last 30 plus years. And be assured, most of that innovation was far from MEANINGFUL. The objective was always to generate more SKUs, not to make a better product.
I was with Hefty back in the ’70s. When I arrived, the entire waste and food bag category was covered by no more than 10 SKUs each by Hefty and Glad. By the dawn of the ’80s, that number had probably tripled and today…60 or more?
As was commented earlier, brands do not have rights to exist. Branding certainly has value in helping communicate, but it is the products that are meaningful. We can all list top brands of the ’50s, ’60s and ’70s that no longer exist. In almost every case there is only one reason for their absence. There was no longer a reason for them to exist.
Suppliers in many categories better brace themselves. The SKU reduction by Wal-Mart is not a temporary measure. It is not simply a recessionary response but rather a reaction to the profound, long-term insight that they are selling into a shrinking market and they’re not alone. Any mass retailer who has relied on baby boomers to stoke their sales over the last twenty years is in the same boat. The generation is downsizing and there’s no other consumer group large enough to replace them…not yet anyway.
A fascinating article by my friend Ken Gronbach, author of The Age Curve, predicts a very tough future for our friends at Walmart. I think it holds many of the answers to the discussion question posed.
When consumers and CPGs put all their eggs in one basket, they get what they bargained for….
At a minimum, this creates an opportunity for other retailers, starting with Target, to feature the brands Walmart is dropping as a means of creating differentiation.
This move is a sign of things to come for Tier 2 and 3 brands. Those brands need to focus on 1) programs that will help them drive volume (value to the retailer) and 2) start strategizing on how to best protect themselves and soften the blow if a Walmart-sized retailer decides to drop their product.
With Private Label’s growth and a slow economic recovery we can expect to see more moves like this from Walmart. I have no affiliation with the book, but it is worth referencing since I found the ideas in the book unique and possibly game changing. “Private Label – Turning the retail Brand Threat into your biggest opportunity.” If you have not read it I encourage you to pick up a copy.
The real question is what is the implication for Walmart? I shop where I can fill my needs. I expect many others value a one-stop shop as much as I do. When Walmart discontinues Jiffy Cake Mix, then I have to go elsewhere to buy it. Now Walmart has forced me to enter another retail space because they have made a choice to discontinue a product I use. While in this other retailer that Walmart forced me to enter I find several other items I need. And you know this new retailer is more convenient and a lot of their products are priced the same and even lower than WalMart. I got a great buy on Folgers. It was priced 75 cents less than Walmart. Guess what, my weekly purchases from Walmart have dropped from about $70 to under $40. That 29 cent box of Jiffy Cake Mix has cost Walmart $1,560/yr in retail sales.
How many other households have experienced or will experience a similar set of circumstances? Retailers must remember that they are in the business of satisfying consumers. When decisions are made to satisfy operations or punish a supplier, the boomerang effect most often causes a decrease in sales. Walmart can probably get away with this action in this economy, but how much will they suffer if/when the economy recovers?
Private label is encroaching on branded goods in retail outlets because the products are now just as good.
However, there are some categories that private label does not provide a full range of products.
As to plastic bag category there are significant differences in the brands especially in the resealable component, each brand has done considerable R&D and advertising to build brand awareness. We all have our favorites for a reason (mostly a specific feature.) A few cents saving is meaningless if the bag doesn’t perform as promised.
I personally shop at two grocery stores because they carry different products and different things. Previously I shopped at Wal-Mart because they carried it all. Consumers do have a choice and if Wal-Mart continues to dilute and limit their offerings, consumers will find outlets that carry the products that they like and are willing to pay for.
It is extremely rare to find a national brand that actually has leverage at retail. The vast majority are in fact challenger brands and marketers of challenger brands often times fail to realize that FINANCIAL GROWTH POTENTIAL is the great equalizer between the all-powerful retailer and lesser yoked vendors.
In order to effectively compete, challenger brands must learn to package innovative product offerings together with marketing programs designed to represent at least one of the following four forms of retailer financial growth:
1. Increase overall category demand – Retailers are measured based on year-over-year growth, excluding new store openings. A challenger brand with a plan to increase consumer demand for a good will always have greater leverage than one who simply offers a more robust feature set than the market leader.
2. Increase the attach-rate of high-value complimentary items – Developing a product line and promotional strategy that has the ability to uniquely grow the market basket is sure to maximize the support that challenger brands receive from retailers.
3. Motivate a “trade-up” within the category – What is it about your brand or product line that is sure to entice consumers to give the retailer more of their money? If your answer is “very little,” then remember that retailer margin dollars also serve as trade-up motivation to the retailer when making category assortment decisions!
4. Help a given retailer win the war against another retailer – Successful challenger brands understand the importance of winning with key retailers. Anchoring a new product launch with a sub-set of exclusive products and/or industry-leading, retailer-specific promotions can generate an over-indexing share of category for the challenger brand.
The most difficult thing for brands like Glad and Hefty is viewing themselves as challenger brands when their histories have been more reflective of the rare “power” brand.