Making Sense of SKU Rationalization

For all the fire and fury surrounding SKU rationalization, retailers and manufacturers are moving forward with efforts to fine-tune and balance the process of cutting items while preserving variety.Nearly everyone agrees that there are too many stock-keeping units (SKUs) in stores. And nearly every manufacturer agrees on what SKUs to eliminate: "not mine."A recent white paper from H.J. Heinz Co., Pittsburgh, cited a SymphonyIRI stat that 88% of center store items don't sell a single unit on a given day per store. The Heinz white paper, prepared with Kantar Retail, Fairfield, Conn., also found that retailers in the food, drug and mass channels could realize as much as $25 billion -- industry wide -- by implementing assortment optimization.There are so many items on the typical store shelf now that popular products are out of stock, customers can't find what they want, and retailers are losing sales, says Bill Cassidy, H.J. Heinz director, category development and category business planning."You want to make the shopping experience easier and faster. Help the shopper navigate a very complex store, so that when they leave, they feel satisfied and they keep coming back and building the basket," he says. "There is a correlation: The faster you can find your item in a section, the more money you will spend in a particular store."Walmart Makes WavesThe current focus on "SKU rat," as it is widely called by supporters and detractors, arrived in February of this year when it was reported that Walmart had cut all but one national brand -- Ziploc -- from its storage bag category, replacing Glad and Hefty with its Great Value store brand. This was among hundreds of other deletions done at the same time, sources say, and some of the decisions were reversed a month later when the retailer found that it had lost business.This was enough to draw national attention to the process of eliminating SKUs from store shelves, and it was followed by reports that nearly every major retailer was aggressively pursuing it, from Supervalu to Macy's. In the January "Trends Report" by Shopper Marketing and the In-Store Marketing Institute, which was conducted before the news about Walmart was disclosed, manufacturers ranked the most aggressive retailers around SKU rationalization. Walmart led with 71.2% of the votes, followed by Home Depot at 58.9%, Costco at 53.3%, and Walgreens at 50%. In the food channel, Kroger was voted most aggressive at 30.6%, followed by Safeway at 26.5%, and Supervalu at 20.4%. Others in single digits included Ahold, Food Lion, Publix and H-E-B.Supervalu is pursuing a refinement of SKU rationalization focusing on the elimination of unnecessary sizes and package counts, but not brands. "We are trying to make it very easy for customers to shop our stores," says Haley Meyer, spokesperson for the Eden Prairie, Minn.-based retailer. "Part of that includes making sure that the products on our store shelves are clear and easy to find, and that there are not too many similar sizes." Among the categories Supervalu is addressing are toilet paper, toothpaste and cereal, Meyer notes. According to media reports, Supervalu is trimming items in 10 food categories by 20%, and multiple sources confirmed to Shopper Marketing that the company is not cutting brands.Today's SKU rationalization differs from related efforts in the past in that "it is more process driven," Meyer says. She declined to name the software used by the company. "This is a more scientific approach to regularly looking at the category to ensure that only the most relevant items are on the shelf." A form of rationalization "was in place before, but we are just putting a fine point on it."In other examples, Ahold's Giant Food Stores looked at 20 categories to rationalize, including frozen vegetables and cooked chicken, according to Supermarket News. The magazine also reported that Target hired DemandTec to use its NextGen Assortment Optimization software to customize assortments.It's More Like SKU OptimizationLike Supervalu, retailers have always had to delete items once shelf space ran out and new items came in, but in recent years the process has become more sophisticated, using software tools that go beyond simple movement or sales data."Effective SKU rationalization practices require a more scientific and collaborative approach, rather than one that reduces the assortment to just two manufacturer brands and the store label," says Michael Kantor, CEO, Promotion Optimization Institute, Bardonia, N.Y. "I see smart retailers using assortment optimization as a strategy for getting better at responding to shoppers' needs." In the past, the best practice for SKU rationalization was to rank/order products based on dollar sales, and cut the lowest-ranked items when space was needed, says Daniel Schmitz, category advisory services team leader, Clorox Co., Oakland, Calif. That was easy, and at the time, it was the best available tool, he adds."Now there is a more modern approach to SKU rationalization where you are looking at the incremental value of items, not the total value of items. And there are tools to help you get at those numbers," he says, citing Kantar Retail's RichMix as an example."It is also a more shopper-based approach," Schmitz says. "You want to maintain variety, and you want to decrease duplication."He says the goal is to find the balance point. "It is easy to cut too deep or not deeply enough. Retailers and manufacturers need either some type of software or insight support in order to make good decisions."Heinz' Cassidy says it's all about utilizing the right methodology. "You can't just pick and choose a low-velocity SKU. You have to understand what the inherent value of that SKU is to shoppers. Is there high loyalty, or is there low loyalty? If I take it away, will that demand transfer to another product that I offer on the shelf? If not, now I risk losing that particular shopper to another store that may have that variety, and then I lose them for that total basket." Retailers target a reduction between 5% and 25% of the SKUs in-store, he says. "This is not going away. This is where they can find money. This is all about cash flow. That, combined with shopper satisfaction and shopper loyalty, make it easier [to cut SKUs]."The Heinz white paper, "Strategic Assortment Initiative: Developing a Winning Item Optimization Strategy," identifies "hot spots" around the store most in need of optimizing and proposes using Transferable Demand Modeling with the proprietary AssortMan tool to address it. Transferable Demand Modeling calculates what happens when an item is removed from a section, Cassidy explains.He uses the milk category as an example. If one were to just look for a slow mover to delete, they would soon identify chocolate milk, but there is no replacement for chocolate milk in the category. If a customer wanted 2% milk and it wasn't available, they might pick up 1% or skim milk. "I would be hurting sales by getting rid of chocolate milk, even though the overall sales rate would be lower than pulling out something that had a higher sales rate, say 2% or 1% milk," he says.Ultimately, the solution to the proliferation of SKUs on store shelves is collaboration. The retailer and the manufacturer must share insights and act upon those insights in a collaborative fashion, Cassidy says. "There are a lot of sacred cows out there. You have to get beyond that and do what is right for the category, and do what is right for the store. Without collaboration, it's kind of a moot point."SKU Rat CriticsSKU rationalization still has vocal critics, some arguing that the end result is a sameness of shelf sets in various categories."The SKU rationalization process being used by many retailers is already producing results that are erroneous," says David Biernbaum, a business development and field marketing consultant for CPGs at David Biernbaum Associates, Chesterfield, Mo."The process is based largely on volume, velocity and UPC rankings, which results in almost every retailer carrying the same brands, the same SKUs and the same overall assortment," he says. "Once price differentiation is all that remains, then profitability and margins decline." By eliminating the specialty items, niche brands and destination brands with slower volume and velocity, the retail chain loses its best, highest-spending consumer, Biernbaum says. "The allure of the specialty brand is lost, and so the shopper comes in strictly to compare prices on all the high-volume commodities. The opportunity to purchase higher-margin items is lost."Each chain seems to approach SKU rationalization differently, says Tom Buddig, executive vice president, Carl Buddig and Co., Homewood, Ill., a packaged lunch meat manufacturer. "In most cases, the house brands are not evaluated by the same standards."Buddig says when a chain pits brands against each other in a winner-take-all bidding war, the consumers are pushed aside. "Retailers seem to be looking for the top two or three brands, and their house brands. There may not be a place for new brands or category items." SKU Rat ProponentsAsk Mike McMahon, senior vice president, integrated customer marketing at Omaha, Neb.-based ConAgra Foods, and SKU rationalization has been around for years. "We've been working through what we've called 'portfolio optimization' for a couple of years. You want to make sure that you have the best items with the right number of facings to ensure that you have a limited number of out-of-stocks, and then you want to make sure, based on the shopper dynamics in the category, that you have the right variety," he says.Recently, ConAgra has "spent a lot more time from a shopper insight point of view understanding the shopability of the various categories we are in," he says. The manufacturer wants to make sure stores have the highest velocity items, with the most facings and space on the shelf.Answering the knock that SKU rat leads to sameness in stores, McMahon says: "There are going to be regional differences. There are going to be strategy differences. For some retailers, strategy might be all about variety." Cassidy gives other examples: One retailer may focus on store brands, while another will manage around health and wellness. A third store may not get rid of a brand entirely but eliminate two of the five sizes. "There are a lot of SKUs on the shelves that are not particularly additive to the category," says Clorox' Schmitz, "and when shoppers are faced with a reduction in a certain set of SKUs, they will happily choose a different item from the remainder of the set."But there are also those items that have a significant loyalty; therefore, they are incremental to the category. When shoppers who are looking for those particular items no longer find them on the shelf, they can take a number of actions, one of which is to defer the purchase, and to look for those items and potentially other related items at a different retailer."

Making Sense of SKU Rationalization

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