Rethink Assortment

In a recessionary environment, retailers are moving away from SKU proliferation to SKU optimization.

How does a retailer measure consumer affection for its products? One person's invaluable box of tea might be another's forgotten shelf clutter. The complicated process of SKU rationalization attempts to analyze the merits of adding, retaining or deleting items from a retailer's merchandise assortment, without losing customers in the process.

According to a recent study by The Nielsen Co., New York, more than half of U.S. consumers said they are likely to shop elsewhere if they notice a reduced product assortment. However, 40 percent of retailers stated they plan to reduce their product assortment by up to 10 percent this year.

Fashioning the right product assortment is a challenge that even mighty Walmart struggled with recently. In February, the Bentonville, Ark.-based mass merchandiser announced it had posted a higher-than-expected sales decline in the fourth quarter of fiscal 2009 — 1.6 percent instead of its anticipated 1 percent — most likely because of its ambitious SKU rationalization and store remodeling project. Some of Walmart's customers took their business elsewhere, complaining that in many categories, the categories, the retailer was stocking only one or two national brands, along with its Great Value store brand.

Walmart executives listened to customers' concerns and, a month later, announced that the retailer would be adding 300 to 400 general merchandise products back into the mix. During an investor conference call in March, Bill Simon, executive vice president and chief operating officer of Wal-Mart Stores U.S., said the company learned that cutting a slow-moving $1 item could cost an entire shopping cart worth $60 to $80.

Make best use of space

So why are so many retailers eager to tamper with product assortment today?

"Clearly the major reason is economic pressure right now," says Chris Allan, founder and chief strategy officer of Quantum Retail Technology, a provider of retail software solutions with offices in London and Minneapolis. "When times are good, retailers can overlook assortment errors."

Now, if a retailer adds a new product, it's worth asking if another one should be removed.

"It becomes a logistical nightmare to find shelf space for all the products, and a replenishment nightmare to keep them all stocked," notes Paula Rosenblum, managing partner of Miami-based Retail Systems Research.

In a recessionary environment, it is harder to expand business, so stores have to be even more efficient with their product turnover. When too many items are on the shelf, there's inadequate shelf-holding power and the fastest-turning, most popular items are frequently at highest risk of going out of stock. Shoppers become frustrated if what they want to buy is out of stock — or isn't visible because of shelf clutter.

"There's a growing body of research that shows that when it comes to categories on the shelf, shoppers prefer having fewer items rather than more items," says Jim Hertel, managing partner of Willard Bishop, a food retail consulting company based in Barrington, Ill. "The real trick is being able to discriminate between the items that are truly adding value and those which are just taking up space. When items are on the shelves to 'add variety' but no one buys them, they are taking shelf capacity from better-turning items and adding to visual clutter."

By reviewing — and cutting — product assortment, retailers can decrease out-of-stocks, get more productive use out of their space, create a more attractive and less-cluttered offering and increase sales with a more targeted, localized product mixture.

"We have increased the productivity of certain HBC categories 10 percent or more by altering the mix of products on the shelf," notes Dave Fields, managing director, Ascendant Consulting LLC, based in Ridgefield, Conn.

Create the right mix

Fields says a good category manager starts with strategy before diving into the numbers. He or she asks and answers key questions: What role do we want an aisle, a category, a brand or a product line to play? Why is a product in the mix in the first place? Are we offering breadth or depth to our shoppers?

The answer to these questions will depend on the retailer's consumer base, the competitive environment and overall store strategy.

"Far too many category managers think myopically — focused on their own little piece of the pie — and therefore sub-optimize the aisle or store," Fields says.

Some retailers, on the other hand, run into trouble when they treat every store in their chain the same. They end up with a misleading analysis, poor results and unexpected consequences.

Retailers especially need to consider how their shoppers think about a particular category.

"That will determine everything, from how many SKUs, to whether it should be on promotion versus permanent display, to what low-productivity products must be retained," Fields says.

Retailers should analyze comprehensive data to determine who is buying a particular item and how important those shoppers are to the retailer's total business. Once they have outlined a specific customer segment, they then will be able to focus promotions on the right customer groups and behaviors. Kroger is one retailer known for making great use of its comprehensive, nuanced shopper data, notes John Rand, director of retail insights for Cambridge, Mass.-based Kantar Retail.

"If you're an everyday low-price retailer, then promotions are fine, but you don't want to give discounted prices to consumers who don't buy anything outside your category, while regular customers don't benefit from the merchandising and pricing strategy," Allan adds.

Retailers also need to evaluate products within the context of the roles they play. According to Ascendant Consulting's "Consumer Products SKU Rationalization" white paper, many items on the shelf, in general, might be interchangeable to consumers (which is why SKU rationalization is possible). The risk, however, is to remove a slow-moving but unique item that is important to key big basket shoppers, who will then start shopping at other stores to find that one niche product.

If a product is there to drive traffic but isn't very profitable, it is still accomplishing its role, Allan notes.

Manufacturers can provide needed information about their promotions' effectiveness, secondary placements for products and consumer demographics that can lead to changes in the store planogram, says Hanna Hamburger, director of Archstone Consulting, Stamford, Conn.

"On a biannual basis, planograms should be reviewed by different stores and markets, such as urban vs. rural, and then find a way to differentiate with your competitors," adds Dave Sievers, principal with Archstone Consulting.

An easy place to start inventory cuts is on unnecessary item sizes, Rand notes. Also, some categories might have items that aren't performing well because they have passed out of consumers' favor or are being purchased within other channels. He says Stop & Shop, for example, reduced its paper goods section in terms of item count and section size because its shoppers were buying these items at club stores and other outlets.

"It's easy to do SKU rationalization poorly and hard to do [it] really well," Rand notes. "Every time a category gains or loses, the category manager should look at his store's strategic review."

Private label vs. brands

Increasingly, store brands are taking an expanded role in retailers' new assortments during today's economic struggles.

"Typically, they are among the fastest-turning and most profitable items in the set and have disproportionate appeal to big-basket shoppers," Hertel says. "Plus, as more retailers develop premium store brands, they'll need space for them on shelf."

However, retailers will have to demonstrate that their store brand is equal to or better than the national brand equivalent (if it has one) to earn and keep consumers' trust.

"I am constantly reminded of the famous Publix BOGO program: Buy a national brand and get a store brand of the same item free," Rosenblum says. "The goal there was to build trust. Costco has systematically built trust in the Kirkland brand as well."

Consumers will stop caring about names, as long as they are getting value. Today's store brand programs have a higher quality, greater value and better positioning than in the past. For retailers, this reality calls for new skills in advertising, innovation and sourcing, which national manufacturers have traditionally dominated, Sievers says.

"So the challenge to retailers is to weigh the competing advantages of private label — offering value to consumers, leveraging the spending from national brands and bringing in higher margins — with the strain put on the manufacturer relationship," Sievers says.

Retailers' private label programs certainly stand to gain from effective SKU rationalization initiatives. Cleaner, less cluttered shelves, after all, can better position store brands against the top national competitors — instead of four to five undifferentiated brands — and boost sales of the entire category.

When too many items are on the shelf, there's inadequate shelf-holding power and the fastest-turning, most popular items are frequently at highest risk of going out of stock.

'Far too many category managers think myopically — focused on their own little piece of the pie — and therefore sub-optimize the aisle or store.'

Increasingly, store brands are taking an expanded role in retailers' new assortments during today's economic struggles.

Cleaner, less cluttered shelves can better position store brands against the top national competitors — instead of four to five undifferentiated brands — and boost sales of the entire category.