Chains Continue to Rationalize SKUs

Discussion
Jun 16, 2010
George Anderson

By George Anderson

Wal-Mart cut SKUs. Not too long after, it added a whole
bunch back. Despite some evidence that consumers do not take kindly to having
their favorite brands taken off the shelf, more than 40 percent of retailers
plan to cut SKUs this year, according to Nielsen.

A number of high-profile retailers
including Ahold, Kroger, Supervalu and Walgreens have engaged in SKU rationalization
programs in recent years. While there is no doubt that many stores carry
more products than consumers buy, the question is — which ones should go?

One
of the findings of the Wal-Mart effort, according to RetailWire sources,
is that brand loyal consumers don’t always trade for an alternate product in
the store and at times walk — away not only from buying items in a given category
but also the store.

Nielsen’s findings were in line with this view, showing,
for example, that seven percent of shoppers looking for a personal care item
would leave one store to go and find the product at another location.

"The message to retailers is to choose carefully when it comes to deciding
which products to trim," Stuart Taylor, vice president of custom analytics
at Nielsen, said at the company’s Consumer 360 conference.

Discussion Questions: Do you think that SKU rationalization efforts at retail
in recent years have been successful or have they gone too far? What effect has
SKU rationalization had on the ability of retail businesses to differentiate
from one another?

[Editor’s Note] A July 2009 poll of RetailWire readers found 75 percent
thought ongoing SKU rationalization efforts at retail were "very" or "somewhat
healthy" for the business. Only 22 percent of respondents thought retailers
were going too far.

Please practice The RetailWire Golden Rule when submitting your comments.

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23 Comments on "Chains Continue to Rationalize SKUs"


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Dr. Stephen Needel
Guest
10 years 10 months ago

Some have worked and some have gone too far. Among our clients, those who were successful often tested deeper cuts than what they had planned, saw that it was too deep, and backed off a bit. We always encourage our clients using our VR system to push the edges of the envelope, because testing is so much cheaper than executing.

Derek Smith
Guest
Derek Smith
10 years 10 months ago

SKU rationalization is often necessary and appropriate, whether it is to simplify the offering, to make room to introduce new categories, or to swap out products. As you point out, the tough question is “what SKUs should go?”

Too often, retailers find themselves without sufficient analysis to determine which SKUs are truly incremental (if you remove the SKU, you lose the sale) and which SKUs have transferable demand (if you remove the SKU, demand transfer to another SKU). Of course, the condition is not binary–the real question is to the extent to which a SKU is incremental.

With proper demand modeling and assortment optimization techniques, retailers can accurately measure these factors before making a SKU rationalization decision. Increasingly, retailers can measure these factors for different shopper segments, looking at how important an item is for the top shoppers or the targeted segment.

Target’s March 22nd announcement related to DemandTec’s Assortment Optimization solution is a validation of this approach and the importance of applying analytics to the SKU Rationalization process.

Steve Montgomery
Guest
10 years 10 months ago

The concept of SKU rationalization is not inherently “a bad thing.” Like most concepts, the devil is in the details. One store may drop 1,000 SKUs and be fine, where another may drop half as many and alienate its customers. Some of the first questions that should be asked is how many SKUs are you carrying, what are they, and how are they selling by store?

To do this is requires that the retailer has this basic information. That combined with market basket analysis can help determine how important are the selected SKUs on a by store basis. Most retailers know which categories carry the highest levels of brand loyalty. Those would be the ones with which the retailer should take the most care.

David Biernbaum
Guest
10 years 10 months ago
SKU rationalization often goes way too far and its results will backfire on the retailer, medium and long term. 1. Rear view mirror analysis and decision-making creates certain “sameness” to every store. Every retailer starts to carry exactly the same assortment of products based on sales of the past. 2. When all stores have the same assortment the end result will be loss of profits because “price” is the only remaining factor of differentiation. This is a pretty erroneous result, wouldn’t you agree? 3. SKU rationalization often overlooks specialty and niche items because they get compared as UPC codes in how well they perform against everyday high-velocity, commodity brands. 4. Specialty brands that get eliminated were often destination items that bring consumers to the stores in the first place. There is so much more to be said about this. I highly recommend the recent study that came out in Drug Store News; “The 7 Sins of SKU Rationalization.” This is a “must” read for all retailers and manufacturers. Or, feel free to e-mail me at… Read more »
David Biernbaum
Guest
10 years 10 months ago

Following up on my earlier post here is the link to the Drug Store News report, “7 Deadly Sins of Sku Rationalization.

Doug Stephens
Guest
Doug Stephens
10 years 10 months ago

The difficult part of this analysis is discerning between a drop in volume due to a restriction in selection versus a drop due to a decrease in overall demand.

Studies have actually shown quite consistently that a reduction in choice can often lead to an increase (not a decrease) in sales. In other words, too much choice is a bad thing. I point to the work of Prof. Barry Schwartz, who is highly regarded on the subject.

The fact that sales are declining for some retailers post rationalization may have more to do with an overall re-calibration of demand on the part of the consumer and nothing at all to do with line reduction.

Ron Margulis
Guest
10 years 10 months ago

Things haven’t gone well with many efforts to rationalize store assortment. Proof of this is seen in the near constant stream of companies delisting and then relisting items. Walmart just relisted 400 items, and if Walmart isn’t getting this right, it’s easy to imagine that most other retailers are having a hard lime with it.

Part of the problem is that there are still too many gray hairs in the buying (sorry, category management) side of the retail business who insist they know the customer better than any technology solution. The other part of the problem is that they are often correct–most of the tech solutions out there fall far short of what they promise.

Bill Robinson
Guest
Bill Robinson
10 years 10 months ago
SKU Rationalization is a very promising discipline in retailing. Unfortunately, most retailers don’t have the tools to properly evaluate the three most important factors in selecting which items stay and which go: Assortment and Balanced Performance Metrics, and Testing. For that, a good business intelligence system is required. You have to look at SKUs in the context of assortment. Assortments are groups of SKUs that make sense to a shopper. They usually represent a good, better, best approach that might include multiple brands and a range of quantity offers. Within an assortment there are A performers, B performers, and so on. Over time if the assortment has a disproportionate number of A performers, the assortment is too thin. If there is a consistent pattern of low performers, the assortment is too wide. If there is a pattern of overstock, the assortment is too deep. Consistent lost sales: too thin. Most retailers don’t have a rigorous method of measuring lost sales or overstocks, nor a consistent method of measuring item performance. This raises the question: what… Read more »
Ryan Mathews
Guest
10 years 10 months ago

We’re looking at this the wrong way.

Is SKU rationalization a good idea, in principle? Of course.

Do we have a consistent way to measure success? Of course not.

Successful retailing is all about getting the right products on the shelf and–by extension–the wrong ones off the shelf. If three customers complain, so be it. If three thousands complain, somebody made a bad mistake.

We need to look at the total supply chain cost of carrying an SKU and balance that against customer demand, market conditions, category competition, retail brand positioning and dozen of other criteria.

And, the process never ends. Sure some items may be re-listed and some may, in fact, end up being de-listed several times. It’s called keeping up with the market.

Warren Thayer
Guest
10 years 10 months ago

On the whole, SKU rat has been good in bringing about efficiencies, better use of space and higher profit. Some retailers boot it by just cutting from the bottom, rather than doing the analysis. But with so many factors to consider, it’s easy to see how analysis paralysis can set in, and it does very frequently. There’s still dead wood on the shelves, but it varies widely by chain.

Someone I interviewed last month said the complaining about SKU rat generally comes from vendors (who have had SKUs cut), while retailers sing its praises. The ultimate judge, of course, is the consumer.

Ron Larson
Guest
10 years 10 months ago

Early work on selection reduction showed if you go too far, your sales fall. Category management, as many use it, tends to be biased in favor of larger brands and often leads practitioners to recommend over facing major brands. The sales losses (from reduced variety) that result are never seen.

Gene Hoffman
Guest
Gene Hoffman
10 years 10 months ago

Stores operate in a world today where more individual fingerprints are pressing for them to carry specifically preferred SKUs, thereby enlarging the consumer “demand” universe in the marketplace.

Rationalizations are frequently many splendored obsessions. Consumers rationalize that their stores should carry their preferred item(s). That seems logical. Stores rationalize that they can’t offer too many items that don’t carry their own weight on the shelf. That also seems logical. This makes the situation akin to a tug-a-war that continually pulls in different directions and creates the controlling reality, particularly as alternative retailers offer many of those preferred items.

I can’t say if SKU rationalization efforts at retail have gone too far–but as long as the economy is “iffy” and alternate retailers are available and emerging to satisfy specific wants, the SKU rationalization process will continue–right or wrong.

Peter Fader
Guest
10 years 10 months ago

It’s kind of funny (or should I say sad?) that we’ve been talking about SKU rationalization for nearly 20 years now–but proliferation has continued pretty much on a non-stop basis since then. I think it’s a concept that’s as interesting and valuable as it’s ever been, but we should also face the gritty reality of a trend that is likely to continue….

Ben Sprecher
Guest
Ben Sprecher
10 years 10 months ago

Some great comments here, but everyone’s missing one key question: *who* is buying the items in question?

To be overly simplistic about it, if deciding between dropping item A or B, the item that matters most to the shoppers who matter most to your store is the one you should keep.

We worked with a retailer that had an ultra-premium olive oil that was one of the slowest moving SKUs in the store. However, all of the shoppers who purchased that oil were in the top 2% of spenders in the store. Without that knowledge, the retailer would have happily eliminated the item for one that moved somewhat more units, and would have given the most important shoppers in their store a reason to take some business elsewhere.

Lee Peterson
Guest
10 years 10 months ago

My question would be, what SKU rationalization? Or better yet, what SKU reduction? If anything, SKUs have increased mega-fold over the last 10 years, especially in grocery. All the design activity in the grocery segment today has just as much to do with merchandise clutter than it does with irrelevant store design.

Where once there were only a few SKUs in toothpaste, for example, there’s so many choices now that it’s difficult to even count how many SKUs there are! And that’s just one example–that rule has applied to every category of merchandise, as we all know.

Somehow, SKU rationalization has led to increased SKUs–what retail needs is SKU REDUCTION, or put differently, better scrutiny on rationalization for keeping/adding SKU count.

Gene Detroyer
Guest
10 years 10 months ago
SKU rationalization is critical to the business success of a retailer. Profitability in retailing is all about turns and anything that increases turns multiplies the bottom line. However, it seems that all the ideal tools that would permit perfect rationalization don’t exist. Until that time, cutting 1,500 SKUs and then adding back 500 is a big success for the retailer. Why is there a sense that it is a mistake? At the same time the CPG companies tremble at the thought of SKU rationalization. Certainly golden puffy double stuffed iced cookies would not belong on the shelf in a rational world. And, let’s not talk about partnerships between the vendors and the retailers. Their objectives with regard to rationalization are diametrically opposed. It is nice talk, but there is no party that is looking for a win-win. The name of the game for the retailer is not to cut items, but to carry the right item mix. Different retailers will focus on different mixes depending their positioning. It is their perimeter and their specialties that… Read more »
Mark Burr
Guest
10 years 10 months ago
Category managers (buyers, puchasing clerks, deal makers, slot allowance maximization specialists, what ever you wish to refer to them as) are compensated by measurements. The most basic being sales and gross profit. Interestingly, both are produced by the consumer. It is possible to produce a higher gross profit both in dollars and percentages on fewer sales. But, is that the objective? SKU rationalization on the basis of category manager goals can create just that. This, in combination with ever increasing private label brand exposure and sales in nearly all categories, is impacting the entire process. The results? Lower sales, higher profit margins, and in some cases higher profit dollars. All the while, Costco gains 8-12% same store sales increases on a base of fewer SKUs to begin with–but the ones that the consumer wants. Okay then, how do you do it? Maybe relying solely on Nielsen data might not be the right answer. Some significant time in the actual aisles by the category managers might help. Then again, they might be exposed to the consumer.… Read more »
Ed Rosenbaum
Guest
10 years 10 months ago

SKU reduction is an ongoing effort to find a replacement for what you take off the shelves. It is going to take time and some experimentation to make these determinations. Publix is doing it in South Florida. There are stores within a few miles carrying different brands. Why? Because one sells in one location and not the other.

I am in favor of reducing the choices available enabling us to make quicker decisions; thus limiting the time we spend in the stores. There is nothing wrong with that.

William Dupre
Guest
10 years 10 months ago

There are basic guides to evaluating reducing items. Item movement is often the major factor in a reduction decision. SCOP used profitability and category growth in the process. When creating the decision tree the lowest level was always what would make a shopper switch purchases and not switch stores.

Jewel just reduced SKUs and now can’t find any alternatives in many categories, so off to Dominick’s I go.

Art Williams
Guest
Art Williams
10 years 10 months ago
We all know why the retailer wants to reduce SKUs but the secret is to reduce duplication and not variety. It is O.K. to reduce having so many different sizes of the same thing, but when you reduce the low volume items that are true variety, you risk losing customers. Let me give a current example. There are a lot of duplicate items and sizes of pickles. One of the slower varieties is no sugar bread and butter slices. They have begun to disappear from local grocery shelves. Complaints to store managers produce the usual “the buyers delisted the item and I can’t get it any more.” Don’t you just love chain stores? A small localized chain, Woodmens, prides itself on carrying more variety than most stores. Guess who is now shopping for pickles there? And while you are there, they seem to have a lot of othere things that neighboring stores have recently delisted. And their prices aren’t too bad either. If a no sugar jar of bread and butter pickles will cause a… Read more »
Herb Sorensen
Guest
10 years 10 months ago

In my paper, “The Misguided Bobbing of the Long Tail,” I make no effort to address what the exact length of the long tail should be, but simply point out that self-service retailers, particularly, totally mismanage the big head, which is where the money is to be made. As long as you use the long tail to “hide,” or dilute, the big head – standard, stupid practice – it really doesn’t matter how many pennies you lose out there in long tail country, while you flush major opportunity – dollars – in big head city.

Vikram Ketkar
Guest
Vikram Ketkar
10 years 10 months ago

Why can’t the merchandisers introduce items in their assortment if they are really something different? Often I have seen consumers just overwhelmed by the choice of goods with apparently no difference. Can there be some education on the [shelves] that makes it easier for a customer to make a choice depending on his budget, taste, inclination and sense of adventure?

John Crossman
Guest
John Crossman
10 years 10 months ago

This really goes to leadership. SKUs do work when done right. Leaders must stay on top of it and make sure it is part of overall successful plan.

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