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How should grocers decide which SKUs to bring back?
By John Haggerty, Supply Chain Consultant and a Contributing Editor for Frozen & Refrigerated Buyer
Through a special arrangement, presented here for discussion is a summary of a current article from Frozen & Refrigerated Buyer magazine.
If the estimates are even close, COVID prompted more SKU rationalization in one year than the grocery industry accomplished in a decade talking about it.
These cuts drove efficiency in manufacturing, logistics and store operations, but many delisting decisions were made on the fly, in crisis situations.
First to go were items with lower volume, redundancy, low perceived value and little in the way of uniqueness. Rick Stein, VP of fresh foods at FMI, said, “In a pandemic, it’s easy to justify eliminating the fourth and fifth size of anything.”
Now that we appear to be on the path to the “new normal,” taking the time to study SKU curation will help keep some of the gains made. This requires understanding total costs and profits at the SKU level, and the use of advanced analytics. So, what now?
Joe Watson, VP of member engagement for the Produce Marketing Association, stated, “The greatest value will be solution-based, addressing meals, snacks, convenience and healthy lifestyles.”
Given the trend toward online buying, profitability must be measured with as much granularity as possible. Ideally, that would take us down to the SKU level, but we’ve been conditioned to look at cost per case and cost per mile.
In recent years, some self-distributing retailers have in fact migrated away from case-level to SKU level cost accounting, but this requires collaboration and synchronization involving all departments, including logistics.
There’s a significant opportunity for retailers to optimize SKU effectiveness via cost-to-serve analytics, especially when coupled with dynamic pricing strategies, said Barb Renner, vice chairman and U.S. consumer products leader at Deloitte.
Cost-to-serve analytics can rapidly establish benchmarks for SKU performance and profitability by store and region.
SKUs should also be measured against each other for comparison. A high-functioning integrated supply chain plan for new SKU introductions will reduce conflicting departmental goals by showing costs and profits by SKU and their impact on the entire organization. And data-driven analytics can uncover surprises, like hidden costs, risks and opportunities.
Discussion Questions
DISCUSSION QUESTIONS: What recommendations do you have around rebalancing SKU assortments following the pandemic-driven rationalization in 2020? Which analytical or common sense approaches should guide which SKUs get returned, retired or newly added?
Poll
BrainTrust
Dr. Stephen Needel
Managing Partner, Advanced Simulations
Suresh Chaganti
Consulting Partner, TCS
Some of the SKU rationalization during the pandemic year was forced on grocers by manufacturers (branded or private label), making decisions about which products deserved limited resources. And the need to improve online fulfillment during a period of huge growth also led to some tough decisions.
Do grocers really want to take a step backward to the days of too many choices and customer confusion? (Yes, there are a few items I miss on my weekly shopping trip, but there is still more than enough to choose from.) A handful of food retailers (Aldi comes to mind) already benefited from extreme SKU rationalization long before COVID-19.
In the CAGNY 2021 presentation this year, SKU rationalization was a favorite topic among the CPG companies – they talked about cutting anywhere from 30 percent to 54 percent of their SKUs. More than the economical reason, I suspect the key reason for doing that was the supply constraint they faced due to rising sales during the pandemic – they could focus on smaller SKUs available to more people and hence avoid customers switching to competitors (e.g. 12-pack of toilet paper could get into more hands than the 24 or 26 packs). As those constraints ease off, economic factors should kick in while re-introducing SKUs.
Analytically, you should be testing new assortments but, of course, that’s how I make my living. Short of that, give shoppers more REAL choice and less duplication. I don’t need five brands of field peas and three sizes of any one are probably enough. Give me a base brand and a private label. Each item you put on a shelf should be able to stand up on its own unless the business is variety-driven. I’m thinking Sparkling Ice, where variety of flavors is key – but how many categories are like that? Keep in mind that product availability is still an issue in many categories, even those you might not expect (like small cans of cranberry sauce, Publix).
Common sense would dictate that grocers first determine if they can conduct business profitably and without losing market share by working with the “rationalized” SKU assortment. Grocers can also test bringing back certain items in sort of a last-dropped-first-brought-back cadence. Grocery chains are in a good position now with little time and breathing room to test scenarios, but realizing that as consumers venture out to eat in restaurants, they will eat fewer meals at home.
L(ast)O(ut)F(irst)I(n)..I like it
(Quick Bob, file for a trademark! 🙂 )
Is this about bringing back old SKUs or does it quickly become about “best use of space”? If the pandemic provided us with insights about efficiencies regarding manufacturing, logistics and store operations, why revert to lower levels of efficiency? Are there new uses of space that will help make the total space more productive? Or is the big lesson being learned similar to department stores? Downsize. Recognize how much of the business has shifted to a different channel and execute accordingly.
Not everyone can do a Costco with one size and two brands. But at the same, multiple sizes add no value and introduce needless complexity for everyone. And having them available actually decreases the odds of a customer buying the product. Blame it on the paradox of choice.
The technology is there to understand what incremental value the third or fourth brand in a category is adding or if customers really care about the third or fourth size. It takes an org-level commitment to getting the supply chain and assortment right. These decisions impact multiple departments and functions, and are not easy without executive leadership level sponsorship.
I bet Neil Saunders can answer this question.
With the growth of online grocery, is the center store affected more than the perimeters? My gut tells me yes. If so, that is a big part of your answer.
Absolutely. There is a giant swath of center aisle SKUs that are candidates for some kind of auto-replenishment e-commerce model. That’s been my model for dog food for some time now.
One of the few benefits of the pandemic for grocers, in my opinion, is that they were forced to optimize some of their assortments due to supply chain and availability issues. SKU rationalization has been a hot topic in grocery and mass for a long time. There has been in many companies, however, a reluctance from the merchants to actually implement SKU reduction. In my experience it’s been a “makes sense, just not in my categories” discussion.
Now we’ve learned, due to circumstance, more about where deep assortments make sense and where they can run their business and serve their customers more efficiently with fewer choices and more streamlined presentations.
Which is right? I think this is a perfect exercise for deep analytics and insights that technology can provide. I would hate to see a blanket return to over-assorted shelves. I believe we now have the tools to look at data and find discrete correlations between performance, depth of assortment and location. These tools are moving the needle on assortment planning. I hope to see more retailers start to take advantage of them.
The answer will be different for every grocer based on their business objectives and their general brand promise (i.e Whole Foods is not Costco). Having said that, there are a lot of analytics that can help inform these decisions and take a lot of the guess work out of the equation. Does an item drive price perception? Does it have great financials? Does it offer something unique and incremental that other products in its range don’t? Does it drive affinity and larger baskets or is it more of a cannibalization type of product? Blending the right analytics with solid merchant sense and the right vendor strategies will help grocers figure out which items to keep, which ones to add and which ones to remove for a better overall assortment.
The growth in e-grocery and more automated fulfillment actually means SKU rationalization can evolve. In stores, retailers can focus on data-driven selection: best sellers, differentiated products like private label and solution-based category management to solve shopper needs. Online, broader SKU assortment can meet needs for slow moving or specialty items, especially if automation can help centralize inventory and keep costs to fulfill lower. Finding ways to bring the two together in a seamless way will be a challenge, but can help drive customer loyalty.
The pandemic has put a spotlight on many things. 1.) Physiologically, if we don’t move, we get fat. 2.) Simple is far better than complex. 3.) Habits thought to be hard to break can be overcome.
How does this apply to SKU assortments?
First, items with little movement simply add “fat” to the category. They should be carefully scrutinized and potentially rationalized away. Second, shoppers have reduced their lingering time in the aisles, so reducing clutter can make choices more evident. Third, the old (normal) way of doing things needed a jolt. Complacency was fostered by approaching category management as we always have — a change was long overdue.
I imagine most of us are thinking along similar lines: during the past year, either producers stopped making or retailers stop carrying a lot of marginal lines — some of them what might be called “heritage products” — profits didn’t drop, so why bring them back? Whatever adjustments end up being made to this “rationalization” process will be bottom driven: consumers will complain to retailers, who in turn will communicate to manufacturers — although increasingly this communication is done directly — that this-or-that product is missed. Whether or not it pulls a Houdini and reappears will largely depend on how much communication occurs.