R&FF Retailer Cover Story: Whither SKU Rationalization?

Discussion
Jun 23, 2006
Warren Thayer

By Warren Thayer, Editor, Refrigerated & Frozen Foods Retailer; Contributing
Editor, PL Buyer, Stagnito Communications

Thom Blischok begins this tragicomic tale of inefficiency in the precise and
methodical manner that is his trademark.


“A few years ago, we did an analysis of the convenience food and drink category
for a combination supermarket and drug chain,” he says. “There were 4,267 SKUs,
and we looked at a random sampling of 25 stores for 32 weeks. We studied daily
POS and market basket data — 16 million baskets in all. And you know what?”


We’re totally caught up in this by now. “No, what?”


“Over the full 32 weeks, 72 percent of those 4,267 SKUs didn’t sell a single item. Not one.” He pauses, letting us assimilate this bizarre factoid before continuing.


Blischok, president of Global Retail Solutions and Strategic Consulting for Information Resources, Inc., Chicago, and a recognized futurist and retail thought leader, has seen pretty much everything in his career. This story isn’t particularly surprising to him, but we have to confess stunned astonishment. We ask what happened next.


“We helped them redesign everything, cut back drastically on SKUs, and substantially increased the productivity of facings,” he says. “Sales shot up, and in post-exit interviews with customers, they all said, ‘My God, you’ve increased your assortment!'”


This last part does not surprise us. We’ve learned from a variety of studies in recent years that assortment is more about perception than reality. But as retailers struggle with “assortment” while simultaneously trying to max out profit per foot of shelf space, things have a nasty habit of going south.


In fact, Blischok figures today’s supermarkets are over-SKUd by about 25-30 percent. And why is that?


“It’s the conflict between retailers and manufacturers,” he says. “The manufacturer says, ‘Take all my products and let’s be partners.’ The retailer says, ‘Open your wallet and let’s be partners.’ It’s a constant tug of war, involving trade dollars and allowances vs. shelf space.”


You won’t find many retailers today who will say, with a straight face, that
they aren’t carrying too many SKUs. SKU rationalization — or, as Blischok prefers
to call it, SKU optimization — is high on priority lists everywhere. Trouble
is, it gets screwed up. A lot.

For the complete story and interview with Thom Blischok, go to the R&FF
Retailer website
.

Moderator’s Comment: Where do SKU rationalization efforts
go wrong? And what can be done to improve the situation?


It’s a very complex issue. Just lopping off the bottom
20 percent of SKUs isn’t the answer. As Bill Young of Concept Shopping points
out, “The best way I can think of to use loyalty card data in planogram decisions
is to make sure not to delist items that appeal to certain top shoppers. Then,
minimize stocking cost by putting these important but slow moving items only
in the stores where they are needed. This minimizes costs and prevents your
best customers from visiting your competitors to get some of their favorite
brands.” You also have to do your homework on consumer decision trees, and price
elasticity.

Warren Thayer- Moderator

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25 Comments on "R&FF Retailer Cover Story: Whither SKU Rationalization?"


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Don Delzell
Guest
Don Delzell
14 years 8 months ago
SKU Optimization is a must for most retailers. Many of our panelists have pointed out important issues to consider in going through the process. Simple metrics do not capture the complexity of the analysis. Market basket implications, seasonal variation, strategic differentiation, and soft money contribution are real and important variables. Beyond those, some of which can be built into a multi-phasic analysis, is the need to conduct the process within local market groupings. True SKU Optimization is meeting the demand and needs of your target consumer segments in a better and more profitable way than your competition. It’s the essence of CRM….and this cannot be done in the rear view mirror. Yet it must be done in the rear view mirror. Allowing customer shopping behavior to dictate assortments without full understanding of why the behavior is as it is will lead to poor results. Eliminating a SKU on the basis of its velocity or volume ignores such cause and effect variables as price, competition, placement on the shelf, in stock rates, promotional support, and so… Read more »
Bernice Hurst
Guest
14 years 8 months ago

Not sure I can add anything constructive to so many well informed comments but one thing I learned as a small retailer was that there was no sense stocking something just because one customer had asked for it. If that happened, I talked to other customers to find out if anyone else would want it. This is a bit like Ryan’s theory about Mrs Jones, I think – you really cannot try to provide every single SKU that every single customer may want to occasionally buy. There are times when it pays to think small but not too small.

James Tenser
Guest
14 years 8 months ago

A hot-button topic, to be sure. I’d have to say I’m in the camp that believes in using demand-based models to support rational decision-making in this area. Assortment breadth is interrelated with pricing, which is interrelated with store brand programs, which is interrelated with loyalty, which is interrelated with competitors’ actions.

All of these factors, and more, influence consumer purchase behavior and attitude. It’s a multidimensional matrix of metrics that no human being can successfully navigate unassisted. Rules of thumb are worthless. Empirical, data-driven models can provide decision support that retailers sorely need.

Trade promotion is explicity designed to distort the retailer’s decision processes in these areas with the lure of upfront dollars. From the retailer’s point of view, if they also influence consumer purchase behavior and loyalty as a side effect, that’s a bonus. Absent of a reliable model, what choice does the category manager have but to take the cash?

Ken Kubat
Guest
Ken Kubat
14 years 8 months ago

Since I’m “late to the party” this morning, and the specific topic has already been more than adequately addressed by my RW BrainTrust colleagues, I’m just going to make a general observation about the enabling technology and offer a couple of great reference books for those who may be interested in learning more about “How” to implement business optimization strategies …

Steady advances in agent-based technologies and real-time Event Driven Architectures (EDA) have brought “optimization goals” within reach of us business types, whether the desired optimization is focused on assortment, space, pricing or distribution. An excellent resource for understanding key underpinnings of optimization is David Luckham’s book, “The Power of Events.” Luckham articulates the technical fundamentals of Complex Event Processing (CEP), an approach that is focused on data capture, pattern recognition, and event notification/response. A more business-oriented overview of the same topics/technologies is well covered in a book titled “The Power to Predict” by Vivek Ranadive.

Happy reading … it’s the weekend!

Camille P. Schuster, PhD.
Guest
14 years 8 months ago

Rationalization is more than looking at which SKUs sell the most. First, you need to know your most valuable consumers and what’s important to them. Second, you need to know which consumers are so loyal to which products that they will leave your store and shop somewhere else to buy them. Third, you need to know who the opinion leaders are among your consumers because they talk to a lot of people about products and your store – what do they buy and talk about? Fourth, you need to look at the sales per sq. ft. of the items you stock. After the triangulation, then you can make products your consumers want to buy available to them. Rationalization of SKUs is not just about looking at sales data.

John Lofstock
Guest
John Lofstock
14 years 8 months ago

I agree with many of the comments here that slotting fees and ad fees play an important role in what items are carried. But consider that many convenience store chains have used scan data to rationalize that product assortment over the past few years and on-store sales continue to climb. While there are some external factors contributing to this, the sentiment among consumers is that stores are cleaner, brighter and safer places to shop. Bigger isn’t always better. Consumers shop smartly. Retailers need to sell smartly as well.

Ryan Mathews
Guest
14 years 8 months ago

SKU rationalization goes wrong for three reasons: (1) marketers are addicted to line extensions — check out the toothpaste set; (2) retailers are still greedy and will let in (or let back in) products for which there is no sustainable demand; (3) it’s the “Mrs. Jones problem” — too many retailers want to still be all things to all people, so if Mrs. Jones — and only Mrs. Jones — wants something in stock, it gets stocked.

Scott Sanders
Guest
Scott Sanders
14 years 8 months ago

Couldn’t agree with Scott Alcalde more. Not only are there slotting considerations, but there are also trade funds and ad fees to consider. Until more supermarkets measure their buyers and category managers holistically, instead of primarily on slotting, trade, and ad money “buckets,” they’ll never inspire their organizations to change.

Mark Barnhouse
Guest
Mark Barnhouse
14 years 8 months ago
I think there’s another reason why stores are over-sku’d: they’ve grown too large (just like dinosaurs), and they have to fill up that space with product! We all remember the 30K-40K sq. ft. grocery stores of our youth. They had Coke, Pepsi, Tab, RC Cola, Diet Rite, and all the other flavors of soda, plus the private label sodas. Somehow, it all worked, and during the average stock-up shopping trip, our mothers (and fathers) found just about everything they were looking for. Of course, tastes have become more sophisticated, and society has become more complex and multicultural. But were retailers to return to a smaller footprint (which may become necessary anyway in the future, when all that space costs too much to heat), I think consumers would be just as happy–or even happier–with the choices available to them. A smaller footprint would make sku rationalization even more important, of course–but perhaps the money saved by not operating such large stores could go to weaning the operators off of slotting fees, and sku rationalization could become… Read more »
Kai Clarke
Guest
14 years 8 months ago

As many of my colleagues have discussed, this is more about SKU maximization than rationalization. The core of this is following up on the good details necessary to control inventory and maximize one’s profit (i.e. minimize the exposure to slow moving inventory). With today’s data, this only involves data mining and implementing a firm set of guidelines which cuts slow moving SKUs, reduces prices to move them out and introduces new SKUs at a regular interval.

Karin Miller
Guest
Karin Miller
14 years 8 months ago
Increasing space productivity through SKU optimization is one of my passions, albeit with fashion products. In my case, I am combining the data with upcoming product trends to make recommendations. Whether I am working on a planogram for a mass merchant or allocating the space in a specialty catalog, I start with these goals in approximately this ranking (order may change based on product/retailer): 1) Maximizing gross margin dollars in the given space 2) Minimizing inventory impact (by several measures) 3) Creating an attractive presentation 4) Offering products at the appropriate price point and stage of product/fashion cycle for the retailer/consumer 5) Finding the best solution for what will become obsolete inventory Certainly an 80/20-type rule often applies. However, I have never seen anything close to “70% of SKUs not selling with 16MM baskets.” In my world, I don’t ever remember the data revealing a single SKU that had not sold a single unit, even in cases with a much lower volume of transactions. Yes, many of the other factors mentioned in the article come… Read more »
Herb Sorensen
Guest
14 years 8 months ago

Just do it! There’s plenty of know why, and of know how. The reality is that there are three competing interests in the store: the manufacturer (where all the money in big chunks comes from); the retailer (who referees and holds title to the milieu); the customer (whence all the real money comes, but just in very small per shopper increments). Only the manufacturer and retailer think about this business day and night, so the customer always gets the short end of the stick. After a while, hearing about “customer focus,” gets really tiresome. Like saying it somehow contributes to the solution. The very fact that this outrageous SKU proliferation is a fact, should shame retailers from ever even mentioning “customer focus.” Once again, confirmation of the old saw: “When all is said and done, there is a great deal more said than done.”

Mark Burr
Guest
14 years 8 months ago
The discussion is great. The insight into the issue is terrific. I’d add just one thought – if in fact retailers knew their mission, had a process, and stuck to it, proliferation wouldn’t likely be an issue. Unless, of course, it is possible to make a decision to go down the road of proliferation. At the heart of the discussion lies many of the issues that we discuss nearly daily. Most importantly, the major thing lacking is real understanding of your customer. Throughout its existence, Costco has maintained roughly the same store size, roughly the same SKU count (amazingly low – in the 4,000 – 5,000 range as I understand it), and continues growth in all categories. In particular, their position as a food retailer continues to grow. They continue to expand sales per foot, sales per customer, and same store sales. Based on the discussion, one might think that it would be entirely impossible. Certainly, they represent the fact that it is possible. Even more key is that a high percentage of the SKUs… Read more »
Dr. Stephen Needel
Guest
14 years 8 months ago

We see the SKU reduction issue as one that requires an understanding of the role each SKU plays in the category. That role may be a big seller, a variety-perception creator, a niche filler, and so forth. Products that are simply a “me too” or “more of the same” are not needed. Manufacturers should be expected to show the retailer what an SKU does for the them (and for the manufacturer). We’ve repeatedly shown in our research that SKUs can be reduced (even to the tune of a 25% reduction) with gains, never mind no losses, at the brand and at the category level.

Kevin Sterneckert
Guest
14 years 8 months ago
A timely topic as a RetailWire Webinar will address this very topic on Monday June 26 at 2pm EDT. Click here to register. Daymon Worldwide (the leader in turn-key private label programs) commissioned a study of sku proliferation and pricing to understand how these two activities affect consumer behavior. They partnered with ACNielsen and DemandTec to combine consumer insights, demand science and merchandising expertise. Consumers want choice (or variety), they do not want to be inundated to the point of bewilderment. Just think of the last time you bought a box of cereal…just how many versions of corn flakes do you really need? Duplication is not variety. I agree with Thom Blischok; there is a right way to identify the best assortment for your customers and the right prices to motivate healthy consumer behaviors. Just removing slow moving items will not deliver success; the secret is to combine this with minimizing sku duplication and improved pricing practices. The webinar reveals a repeatable process that retailers can follow to achieve success.
Mark Hunter
Guest
Mark Hunter
14 years 8 months ago
SKU Rationalization is a concept which runs counter to the strategies of a manufacturer that derives their sales from a few specific categories. A manufacturer by nature has to find ways to increase category sales and the historic means used to do this is through line-extensions etc., which are veiled attempts to increase usage occasions. To think manufacturers will deviate from a line-extension strategy is wishful thinking for retailers. Retailers, of course, want to cut SKUs to increase turns and, in turn, increase their ROI. Looking long-term, this means manufacturers will either have to begin covering the cost of inventory held by the retailer and/or look to develop alternate selling strategies, such as opening up their own branded stores or, more efficiently, opening up websites geared to selling full lines of product. All of these strategies have their own merits and weaknesses which means there is room in the retail industry for everyone if they’re willing to develop and execute a strategy that fits their needs and not attempt to apply somebody else’s strategy.
J. Peter Deeb
Guest
14 years 8 months ago

The article in RFF pretty much covers the why; the problem is the how. Even the retailers that are best at using their data have not put the resources against it to really take advantage of the data opportunity. With many retailers, the people responsible for data management are not always totally tied into the day in, day out purchase decisions. In my opinion, this leads to the old “one in, one out” by manufacturer approach and/or the slotting money drug taking over execution. Rarely is the strategy bad; generally the execution is not tied in to how the individual decisions affect the overall plan.

Gene Hoffman
Guest
Gene Hoffman
14 years 8 months ago

Apparently, all of the RetailWire panelists believe the average supermarket is over SKU’d. With so much expert support for that conclusion, that might well be the only correct estimate. But why does everyone seem so sure?

Many shoppers have a pet product or two. When a store doesn’t carry it, although it may not be profitable, does a consumer go to another store who carries that item and possibly establish a new shopping relationship?

If a man’s legs should be long enough to touch the ground, the proper number of SKUs should be the number that appeals to the majority of a supermarket’s repeat customers. But who’s the best judge of that; operators or observers?

Scott Alcalde
Guest
Scott Alcalde
14 years 8 months ago

SKU rationalization is a great idea but it is usually too political of a process. The retailers will always have a “slotting” bucket to fill which accounts for millions of dollars a year for each category in profits. The larger suppliers will always leverage their size to launch new items, regardless if they are the right thing for a particular retailer or region of a retailer. Add to this the sacred cows of the store and you have a process that is designed to fail before it begins. True SKU rationalization should be done based on sales, with very little to no allowance for items that are particular to a region. Unfortunately the way retailers are addicted to the profits from slotting, we may never see this happen and will continue to see major retailers offer 50,000 items or more in their stores.

Ed Dennis
Guest
Ed Dennis
14 years 8 months ago
SKU reduction is a great idea. I don’t see why they have all that Spanish food in there; I never need it! I also don’t need wheat bread and 100s of other items in my supermarket but we all know that catering to individual need will put a retailer out of business. It’s true that many SKUs don’t turn as often as needed to justify their place on the shelf but slow moving SKUs often are the key to a successful business. Suppose a high value customer spending over $300 per month buys a low turn SKU once a month. Will this shopper change her loyalty if the SKU is eliminated – I don’t know – do you? With the loyalty programs that many chains have in place, they should be able to determine which low turn SKUs are being purchased by high value customers and which aren’t. If a SKU is being purchased 4 times a month by a customer who is spending less than $10 per month, then it’s a goner; but if… Read more »
Dan Nelson
Guest
Dan Nelson
14 years 8 months ago

SKU optimization runs counter to retailer and supplier economics and history. Retailers must accept measuring SKU productivity across the entire store, and do so store by store. Right now, retailers’ planogram changes are by department, and scorecard category buyers on topline and profit goals for that department. The depth of analysis needed to planogram a store, and to offer store by store variation is daunting. Let’s also not forget the financial realities of slotting monies that are part of every retailer’s financials.

Most suppliers still live with the adage that share of shelf translates to share of category, so line extensions take up share of shelf at the expense of competitors’ products and what shoppers really want to buy. This is accomplished by “buying your way” on to the shelf with slotting and heavy intro merchandising allowances.

Bishop and Assoc did a Grocery “Super Study” that provides some key insights into this issue, and it is worth review.

Art Williams
Guest
Art Williams
14 years 8 months ago

Any SKU reduction or assortment optimization must be done from the consumer’s perspective, not the manufacturer’s or the retailer’s. You must have:

1. An accurate consumer decision tree for the category.

2. Syndicated data for the selling area and nationally to see trends.

3. Store level SKU data.

4. Software to compare and analyze this data.

5. Decision makers who can apply this data and make common sense decisions and implement them.

When this is done properly, it increases sales, improves consumer satisfaction with the category, reduces store and warehouse inventory and improves all the financials.

Why isn’t this done everywhere all the time? Good question!

Mark Lilien
Guest
14 years 8 months ago

In sku rationalization, computer software can only take you so far, then experienced people need to make decisions. Even among experienced people, opinions may differ. Complicating the situation: retailer/supplier politics; ad allowances; slotting fees; store labor scheduling availability to make changes; and most people’s great reluctance to bet their career by making bold moves. The easiest solution for any sizable chain: set aside a few test stores where bold moves can be tried versus more subtle changes.

Eliott Olson
Guest
Eliott Olson
14 years 7 months ago

The market share leader is usually the variety leader.

Art Sebastian
Guest
Art Sebastian
14 years 7 months ago
SKU Optimization is a must for retailers today…however this is just the tip of the ice berg. Retailers must look at SKU Optimization, shelf strategy, aisle merchandising, total store layout, and overall sales floor branding. Getting back to SKU’s…in order to effectively optimize your SKU set within a given category you must have these three resources: 1: A true Consumer Decision Tree that drives the category in your marketplace and is tied to your overall marketing plan 2: Syndicated data so you can analyze your RMA vs. your CRMA 3: Qualified merchandising savvy CM’s to make the “call” You will also need to understand the incrementality of each item. Each SKU has certain attributes that affect the incrementality as well as transferable demand. The days of just discontinuing the “bottom 20%” or living off the pareto curve are OVER. Retailers must become more scientific about their approach towards SKU optimization. We all know it can happen…when I was with Albertsons we developed a strong program partnering with our suppliers to demonstrate this mind set (of… Read more »
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