SKU Rationalization Reshapes Retail Shelves
By Tom Ryan
In a bid to
simplify choices for recession-weary consumers, retailers across channels
are trimming SKUs on their shelves. Industry execs and analysts predict
that assortments over the next year or so will be reduced at least 15 percent.
An article in The Wall
Street Journal points
out that the move follows years in which broader selections were being
pushed as consumers were spreading their grocery-shopping trips around
to two or three stores. By 2008, nearly 47,000 distinct products filled
a typical food retailer’s shelves, up more than 50 percent from 1996, according
to the Food Marketing Institute.
But now retailers
are finding that budget-conscious shoppers want to simplify shopping trips
and are homing in on familiar products.
“All that go-go
1990s where we were adding items in and adding items in, and people wanted
more, more, more, more choice… just didn’t pay off,” Catherine Lindner,
Walgreen’s divisional vice president for marketing development, at a recent
conference, told the Journal.
Looking at store shelves, “People say, ‘Whoa, you’re bombarding me. Help
me figure out what I need.’”
Other benefits
for retailers include lower labor costs, fewer out-of-stocks and an increase
in their ability to squeeze vendors for better deals. Cutting excess inventories
also carves out more room for in-house brands.
For vendors,
the rationalization will mean the one or two dominant brands in a category
win space at the expense of third tier or lesser brands, according to the
article. With more limited shelf space, vendors will have to focus more
on their most profitable items.
“Everyone thinks
what they have is the most important thing,” John Fleming, Wal-Mart Store’s
chief merchandise officer, told the Journal. “We
try to show them…that if we eliminate something, a customer might want
to buy more of one of their other products, because we will make the presentation
better and make the category easier to shop.”
Procter & Gamble
Co.’s departing P&G chief executive A.G. Lafley at a recent investor
conference touted the advantages his company would gain from the move toward
shelf simplification.
“We generally
end up with share and sales growth, and it’s all, of course, a lot more
profitable and returns a lot more cash,” said Mr. Lafley. “It benefits
the leaders in the industry and it disproportionately benefits P&G.”
But Jim Craigie,
CEO of Church & Dwight Co., the maker of Arm & Hammer baking soda
and Aim toothpaste, is skeptical that cutting assortments will help stores’
sales. “If a retailer makes cuts on brands that are strong, have had lots
of innovation and marketing support, they’ll lose sales,” he told the Journal. “If
a consumer goes to a shelf looking for that product and can’t find it,
they will go to another store.”
Discussion
Question: Is the ongoing SKU rationalization healthy or unhealthy for retail
sales? What options do vendors have to protect shelf space?
Runaway SKU counts in many retailers have become an issue long before the current recession, but tough times may impose the sort of inventory discipline that was long overdue. There is simply not enough space in the four walls of an existing store for the sort of brand extensions and other SKU proliferation discussed in the article. Stores’ increased emphasis on their own brands has only added to the clutter.
The P&G exec makes a valuable point, and another way to put it is, “Sell what you own.” Given the longstanding 80/20 rule (20% of SKUs drive a disproportionate amount of sales), the bottom 15% probably contribute a very low proportion of total sales. They also make the shopping experience more difficult for customers and take up shelf space or floor space that should be dedicated to higher in-stocks of the most wanted goods.
There is always a role for a retailer willing to offer more SKU assortment, but that job is best filled by category killers or web-based retailers. For most general merchandisers, apparel stores and food/drug stores the “less is more” strategy makes a lot more sense.
The WSJ spotlight notwithstanding, this is not new news. Maybe the raw number of new product launches being up is new. And data are more available and reports more analytical, too. But that’s it. Sure, stores are bigger now, but not twice as big as ten years ago.
SKU rationalization is a process that retailers must use in their normal course of business because manufacturers, as a group, have a hard time discontinuing items or targeting distribution. It’s just not part of a manufacturer’s business model.
I think you can get a sense for the overall success of a retailer by their SKU rationalization techniques.
How many versions of Crest are out there today? I think they’re spawning. You can see overwhelmed customers looking through the choices for their old reliable.
In many ways, brand extension is a manufacturer’s way of keeping up with the Joneses. And we know how successful that has been over the years. Cutting SKUs is an ongoing process and could help manufacturers innovate once again, instead of copying their competitors.
SKU management/rationalization has been around a long time (remember the 80/20 rule). Today there is additional pressure to maximize the return on investment in not only inventory, but all aspects of the business. If you can invest less in building, labor, inventory, etc. and still generate the same profit, doesn’t it seem logical to do so?
There are several companies that can forecast the impact on sales and margin by concentrating on the items that are selling. They can also predict the number of facings you need for each SKU and what happens when you add or subtract items/facings. When done on a store-by-store basis, you minimize the possible negative impact of not having what sells in that market.
One the other hand, we drive 30 miles to a Woodman’s (know to have just about every SKU made) just across the Wisconsin border because it is the only place we can find a particular item. While we are there we generally spend $150 – $200 pantry loading on longer life items.
I believe that if a vendor wants to protect their SKU they need to demonstrate why it belongs. Who buys it? What is unique about this segment of customers? Are they more frequent customers? Do they have larger market baskets, etc?
There needs to be a mantra for new and existing companies bringing new items to market; does the world need another one? We have been inundated with more of the same just in a different size or shape. The real innovation will be for companies to come up with a new formula, new delivery systems and new taste profiles that are “better than” and be willing to identify what items (including their own) that need to be replaced. Think US car makers…how many cars were introduced on the same platforms that were really the same car? They have gone out of business.
The other issue for manufacturers will be the realization that stores are getting smaller and they are going to need to address case packs as part of their marketing solution. Less is definitely going to be more.
SKU rationalization, particularly in the grocery channel still holds promise for better efficiency while still satisfying consumers. The recession has sparked trial and repeat in store brands and as these items gain share in categories the 2nd and 3rd tier brands should lose items as retailers look to maximize efficiency and profits. There are many categories in stores today with store brands and at most, 2 national or regional competitors. Some small categories are already operating with store brands and one other line.
Unique offerings still have to be considered but consumers don’t want or need 7 varieties of Italian dressing on the shelf.
The shelf is a scary place these days, especially in HBA. It seems the only way to get market share these days is to over-saturate the category with sub lines. Vanilla bean mocha latte Scope?
SKU rationalization is always good–SKU reduction is not necessarily good or bad. Reducing SKUs for the sake of reduction is irrelevant to shoppers. Rationalizing, where you give the shopper the products they want, is always a good idea and has been around at least as long as category management has been around.
I have pursued and completed significant research over the last several years on this very topic. My research shows that an average fast moving consumer goods retailer (grocery is a prime example) can remove between 15 and 18% of the actual SKU counts of a given category, in almost every category, while at the same time improving revenue and profit.
The reality of the situation is that there simply is far too much duplication on the shelves. As an example, seven versions (brands) of red ketchup in a 24oz squeeze bottle does not offer consumers differentiated choice, it’s duplication. Consumers do want variety and choice; however, most consumers define this differently than most retailers.
The challenge of the situation is simply this…how do you identify true duplication, and subsequently, how do you accurately remove this duplication? There are a number of retailers who are engaged in the practices that were tested in the research that I led. They are all quietly achieving significant success. This is not a one time exercise; these activities should become part of the business process of determining the products that occupy shelf space at a given location.
If you have interest in the research, findings and invented processes, let me know and I’ll point you in the direction of the white paper that was created from the multi-million dollar research.
SKU rationalization is misguided. This doesn’t mean that it is wrong, but it is taking a sledgehammer to a fly. The real problem is not the massive number of SKUs–the long tail–but the failure to distinctly feature the big head, those top selling items shoppers are most likely looking for. This is the single greatest abdication of salesmanship on the part of both retailers and brands: the failure to tell the shopper which of these large number of items they should buy. It should be obvious that the one most people should buy is the one(s) that most other people do buy. But it is not made obvious to the shopper, because the brand and retailer blithely stir the big head into the long tail in their continuing misguided belief that the shopper enjoys a “treasure” hunt.
So SKU rationalization is misguided, not because it is necessarily wrong, but because it continues to ignore the real problem. It is also misguided because it largely ignores the ATTRACTIVE force of the massive display. The massive array (including the long tail,) is what attracts shoppers to the store, where they naturally tend to buy only the big head. Personally, I buy a few books a month, and often at Amazon. I figure anyone carrying 50 million books probably has the one I want. But at least they have the grace to tell me what other people are buying. “Go thou and do likewise!”
Hallelujah! Really, it’s about time. I look at all the mega-SKUs out there now and think “pre-recession thinking,” especially from CPG companies. That may be true, but more importantly, from a consumer perspective, nothing works better than clarity. Apple is such a great example of that; clean, simple store design and graphics, single SKUs out for interaction = $4000 a square foot: home run.
John Fleming is right. When retailers and CPGs understand the true incrementality of each marginal SKU, then they can make good decisions. The problem is that most retailers and CPGs really don’t know what portion of sales of a given SKU are incremental. Nor do they understand what other products attach to a given SKU that wouldn’t attach to the substitute. These are tricky questions, that require transaction-level market basket analytics rather than traditional broad measures like Unit Volume, Category Share, or GMROI.
This is a very tricky question…and as always in retail, the answer is “It depends.”
Do we need to choose between 35 different flavors of Tide? Probably not. But in other verticals, like books, apparel, jewelry, electronics, Do-It-Yourself and others, slow moving SKUs serve to fill out the assortment.
I can think of a couple of retailers who lost my business because they rationalized my favorite item out of their assortment. One stopped carrying a unique perfume. I’m sure not a lot of people bought it, but I know when I went I bought other creams and emollients. Now I use different perfume and never even set foot in that store. A warehouse store nearby has stopped carrying a brand of spinach pie I like and it has significantly reduced the number of trips I take there.
So…I think it’s a slippery slope that a retailer should embark upon with caution and thoughtfulness. Think about the book industry–which has built an entire distribution philosophy around “slow movers.” It just depends.
The question is what kind of SKU rationalization? If retail is removing the “more of the same” kind of SKUs that as others point out lie in the bottom 5-15% of sales, then yes this is healthy. However, too often what is also lacking is real choice. Again and again we see multiple, similar items at the same price or configuration offered. This is not choice, but rather confusion for the consumer and slow moving inventory in most cases.
On the other hand, if SKU rationalization is paired with rethinking choice for the consumer then it is very healthy. While most retailers will not think to add SKUs in this environment, it is critical to maintain differentiation and choice for consumers. The answer is not all or nothing, rather it means making real merchandise decisions.
This is the ebb and flow of SKUs. SKU rationalization has popped up, sometimes under different names several times in the last 35 years. Oh, the panic that ensues when retailers buy into the fashion of the day. “No more than two national brands, a price brand and private label.” The orders come down from leaders.
And each time the retailers have cut SKUs, only to start adding more. It is a process that retailers must go through. But, it is one that could be entirely eliminated if retailers truly rationalized their SKUs on a daily basis.
The largest CPG companies have gone through a rationalization themselves, but one that is associated with brands and not SKUs. However, the objectives of the CPG companies are not consistent with the objectives of the retailer. The CPG companies want to control shelf space at the expense of their competition. When P&G spends $1 on Crest, they want that dollar to work against the largest number of sales dollars they can generate (read “shelf space”). Consider how bizarre the toothpaste category is. One can buy a toothpaste that whitens, one that freshens breath, one that removes tartar, one that works overnight, or one that does a combination of any two. Or, one that does all of them. And, they all come in flavors. When the purchase is made does the consumer say, “No, I don’t want my toothpaste to remove my tartar and I don’t want it to freshen my breath.” Perhaps, that decision is made only in confusion.
And, shame on the retailer who blindly adds the latest flavors from the big CPG companies at the expense of unique products from others. Often retailers do not understand that what makes them different from their competition is not price or promotion, but the items they carry. They often fail to understand that a consumer can go to any store to buy the leading brands, but the shopper comes to their store to purchase the special products and at the same time buys the leading brands. Without that special product, the customer goes elsewhere.
Leading Brand owners are thoughtfully considering SKU rationalization. It makes no business sense to have slow moving SKUs on the shelves. There is too much on the shelves for shoppers to navigate easily. Marketing dollars are tied up in large inventories–this has to change.
With in-store marketing well established, merchandising is receiving full attention. Store planning has a more consumer centric focus, trying to make the store experience better. Many retailers are starting to renovate with a better path and findability in mind for shoppers.
I agree with Mr. Fleming’s point (from Walmart). Editing SKUs not only benefits the shopper, it benefits vendors/brands by driving sales to fewer items rather than diluting sales across many. Your average dried pasta or peanut butter aisle will tell you that there’s still work to be done!
What about all the brand managers and the associate brand managers? They will be the collateral damage if SKU reduction is implemented.
Manufacturers must demonstrate growth to their shareholders. When R&D doesn’t produce truly innovative new products, the company must resort to increasing SKUs. This becomes the disc (cushion) which protects the corporate vertebrae. The products are not differentiated, as many today have mentioned. However, they are sufficiently different to warrant their own packaging and often their own associate brand managers.
This is an incredibly complex subject. No company can make a decision without understanding how consumers shop individual categories and what the impact of fewer SKUs will have on their behavior.
However, I don’t think this is limited to a recession context. This has to do with maximizing efficiency across the board, for the manufacturer, the retailer and the consumers. If the manufacturer and retailer decision-making process does not account for these three constituencies (in depth), fewer choices in the store will simply reduce the staff in marketing and operations with little, if any, upside for consumers.
As noted by many BrainTrust respondents, the concept of SKU rationalization is hardly a new or revolutionary topic. However, the focus appears to be shifting from the retailer to the customer. Historically, retailers have made money on the buy with little regard to the consumer’s decision-making process. Everyone agrees that less is better. Do we really need another button on the remote?
This latest round of SKU rationalization can benefit by retailers putting themselves in the customer’s place in the aisle and asking how much is enough and what products deserve distribution. When this happens SKU rationalization will become more rational.
SKU rationalization, or narrowing assortments, is the inevitable outgrowth of having to scale back inventories to reflect sales declines. Allowing inventory turn to creep up in this downturn is a hidden drain on precious cash flow.
When sales drop, items and categories that were once viable, that sold enough units to justify the necessary investment in inventory, suddenly no longer make economic sense. These are the items and categories that must be pruned as assortments are narrowed.
There is a lot to be said in favor of SKU rationalization, including reduced overhead, higher sales velocity (i.e., more turns) per product, improved margins, reduced duplication, and simplified planograms. The earlier comments do a great job exploring each of these areas. There is, however, a major risk that is pointed out by Paula Rosenblum: if not done carefully, you may be “rationalizing” away an SKU that matters a lot for your best shoppers.
By way of example, we were working with a retailer that had several SKUs in the Olive Oil category that were selling equally poorly. But, once you asked the question about *who* was buying those few units, the differences were striking. One bottle was bought exclusively by shoppers in the top 2% of spenders in the store. Another was bought by more middle-of-the-road shoppers. A retailer without the loyalty data to ask that question could easily alienate their top shoppers without knowing it.
So, my advice here is “be careful.” Before eliminating a SKU, dig in to find who buys it, and be sure to think twice about eliminating products that keep your best customers coming back to the store.
It’s all about facings. Retailers sell facings to manufacturers. Then, retailers appropriate facings for store brands which raises the value of the remaining facings for manufacturers. Scarcity increases value. It’s a transparent game, the result of which is that manufacturers are forced to decrease SKUs and pay more for those they retain. This is not a customer-driven phenomenon. It’s a retailer-driven profit grab (which is their job, of course). So, please do not attribute fewer SKUs to reduced consumer demand. It’s retailer driven all the way. This is a shelfspace issue, not a shopper issue. Think about it: If the imaginary consumer complaint is “too many choices” while retailers are adding store brands at a record pace, how are these two points harmonized? They aren’t.
I tend toward the view that the consumer is increasingly complex.
In my online company, MyWebGrocer, we see consumers trading on 200-400/HH items over time with replacements and trade-outs running at about 10-15% of these.
The tail end of this list for each household is generally quite distinct. At what point does the frustration from not being able to find items that are valuable to THEM outweigh the convenience of single store buying (caused by the downturn) and or the proximity of the local store?
Further if the trend is toward the 20/80 selection…won’t that make retailers more alike rather than the differentiation they have been striving to achieve in the last few years?
This topic will continue to get attention and spark healthy debate. The real proof will be in terms of consumer response and same-store sales.
If retailers can truly achieve customer satisfaction with fewer SKUs, if consumers are less confused by the shopping experience at shelf, if retailers can begin to differentiate themselves in new and innovative ways, and if manufacturers slow introductions of flavors, sizes and forms that do not bring value then the result of this SKU rationalization will be awesome.
One other thought–who said that all product has to be on the shelf? I believe we will see virtual aisles begin their acceleration and take hold.
Retail is certainly exciting–and evolving!