Optimize The Assortment

Executed correctly, SKU rationalization within the prepackaged deli meat space can help retailers maximize profitability and enhance the store brand assortment.

Whether they are merchandised in the refrigerated meat case, right next to the deli or in both areas, prepackaged lunchmeats and other deli meat items are convenient alternatives to their counterparts, which necessitate a visit to — and usually a wait at — the service deli. And that convenience factor could be a big reason why 56 percent of retailer respondents to the International Deli-Dairy-Bakery Association's (IDDBA) recent "Consumers in the Deli" study said the percentage of sales coming from the self-service deli has increased during the past two years. And nearly half (49 percent) of retailer respondents also said they had expanded retailing space here during the same timeframe, notes Alan Hiebert, education information specialist for Madison, Wis.-based IDDBA.

"Consumers find self-service more convenient that full-service," he said, while noting that consumers still believe the full-service deli offers more freshness.

Despite the expansions, the selling area for prepackaged deli meats is still small in comparison to many other departments. But retailers could squeeze more profitability out of this space by engaging in strategic SKU rationalization that also makes room for more store brand items.

Although prepackaged deli meats generate more than their fair share of true profits relative to share of space in store, only 50 percent of SKUs generate 95 percent of sales here, notes Jackie Gray, senior project manager for Willard Bishop, a Barrington, Ill.-based retail consulting firm. This reality suggests a "fair" amount of unnecessary duplication.

"In this case, there are a large number of smaller, perhaps regional brands playing in the packaged deli area, but only a handful of key brands generating the majority of sales and profits," Gray says.

Not so easy

SKU rationalization here can be a complicated task, however. Although too many choices can overwhelm shoppers and actually hurt sales, too few could send some shoppers to other stores — permanently — in search of their favorite products, Hiebert says.

"SKU rationalization is not as simple as looking at product sales and assigning shelf space accordingly," he notes. "In the perishable realm, shelf life needs to be taken into account, as do overall expectations for the department at both the store and corporate level."

Each store needs to understand its particular shoppers and the neighborhood in which it is located, Hiebert adds.

"Store-level analysis of loyalty card data can be a good first step, but real understanding may require more in-depth customer surveys," he maintains.

Gray notes that within the packaged deli meat arena, lunchmeat is the most inefficient, "generating 10 percent less profit than its share of space." With such a wide variety of brands, flavors and packaging types in this area, retailers really need to understand shopper needs to make the best SKU optimization decisions. It's also worth noting that shoppers appear to be somewhat brand-sensitive when it comes to lunchmeat.

"Willard Bishop generates a 'Top Shopper' study which looks at key shopper behavior in typical grocery," Gray says. "By understanding what is important to these shoppers — those who generate 80 percent of the retailer revenue — retailers can make better assortment and merchandising decisions based on their core customer."

Jim Wisner, president of Libertyville, Ill.-based Wisner Marketing Group, agrees that shopper research is called for. Retailers essentially need to determine how willing their shoppers are to substitute one lunchmeat or another prepackaged meat product for another during promotions and how resistant they are to change when it comes to their preferred brand.

"You really need to look at the data to understand that and know where you have an opportunity to cut back," he says.

Retailers also might find room to expand store brands in growth categories such as lunchmeats and Lunchables-type meal component kits, Wisner says, by engaging in SKU rationalization in over-SKU'd, more traditional packaged deli meat items.

"But in some items, like hot dogs, you get into stronger brand loyalties," he adds. "So there's going to be a battle for space. … As more private label goes in, there's probably going to have to be some trimming of secondary brands, some of which were originally introduced as value alternatives, if you will, in the first place."

Retailers might want to trim a few national brand and/or regional brand bacon SKUs to make room for more lunchmeat and component-type products — and more store brand bacon products — however.

"Not only do store brand bacon SKUs account for 30 percent of bacon sales, but half of the top 10 most shopped bacon SKUs — shopped by top shoppers — are store brand bacon SKUs," Gray notes. "So while bacon as a whole appears to have surplus variety, the private label SKUs are very important to retailers' key shoppers."

Packaging shakeup needed

For his part, Mark Russell, director of business management for West Liberty Foods of West Liberty, Iowa, believes retailers could boost sales of their own-brand prepackaged lunchmeats not only by eliminating "me-too" items, but also by concentrating on store brand innovation and differentiation. And both efforts are as applicable to the products' packaging as they are to the products themselves.

In Russell's view, the prepackaged lunchmeat category is "stale and standardized." The retail meat cases, he says, are filled with a lot of Oscar Mayer Deli Fresh trays and Hillshire Farms tubs that are surrounded by a few national and regional branded items — as well as a growing assortment of store brand items — and mainly packaged in tubs and zipper packs. And closer to the deli, he sees similar treatment, with most deli prepackaged lunchmeats encased in 10-ounce or 16-ounce trays or variants of the re-closable tub.

There are "too many 'me too' items trying to find a niche while being packaged, and therefore looking, exactly like the competition," Russell contends. "Store brands and regional brands need to differentiate their products with superior-performing and more environmentally friendly packaging options such as semi-rigid multi-seal packages."

Although Wisner believes the lunchmeat tubs still have a place, especially because they boast a reuse functionality that some consumers value, he says the convenience aspect in relation to packaging sealability is critical.

"It does enhance the value of the product," he stresses, "and I think it does make a difference in terms of product selection."