Retailers like Giant-Carlisle are using data-driven techniques to tackle the highly complex challenge of SKU rationalization
For many reasons, the time is right for SKU rationalization, said Jim Hertel, managing partner, Willard Bishop, Barrington, Ill.
With conventional supermarket operators under continuing pressure from Wal-Mart Stores and limited assortment outlets, a growing number of conventional operators are cutting SKU counts to reduce out-of-stocks, increase sales and boost efficiencies, Hertel observed during a workshop on shopper-centric assortment earlier this month at the Food Marketing Institute Show in Las Vegas.
Consumers are thought to benefit as well from streamlined assortments. “There's anecdotal evidence that when you add so much variety, it makes shopping categories difficult,” Hertel said. Moreover, the lingering effects of the great recession have kept many consumers interested in private label rather than a wide variety of branded items.
Though they may sometimes be the target of SKU rationalization, CPG firms are generally supporting it, according to a survey of sales vice presidents at 25 companies conducted by Willard Bishop. “Ninety percent of the salespeople say it's the right thing to do,” commented Hertel. “They say, ‘We're pushing it because it will make room for our power items that are out-of-stock all the time and have to be continuously replenished, and we're trimming our own portfolios and seeing productivity enhancements.”
Still, not everyone is on board with SKU rationalization. Some retailers prefer to “compete on variety,” said Hertel. Indeed, breadth of choice may have an impact on the perceptions of some consumers. “You can't just carry the No. 1 brand and the store brand — you may also need the No. 2 and No. 3 brands so that consumers feel they have a choice,” said Alex Sodek, vice president, Decision Insight, Kansas City, Mo., a research firm that conducts virtual store simulations to determine the effect of merchandising changes. In some cases, retailers hold onto SKUs because they are receiving slotting fees, noted Hertel.
Others point to Wal-Mart Stores, which ended up cutting too many products and bringing back about 300 items that customers still wanted. Moreover, some slow-moving products targeted for removal may possess the ability to drive companion sales — something that can only be discerned through basket analysis. Suffice to say, SKU rationalization, at its best, is a highly complex endeavor requiring considerable analysis, a measure of art and a dollop of luck.
Still, Hertel said, “from our perspective, the times today reward productivity enhancements, which support SKU rationalization.”
In recent months, major retailers from Wal-Mart to Supervalu have taken on well-publicized SKU rationalization programs. In March, DemandTec, San Mateo, Calif., announced that Target selected its NextGen Assortment Optimization software service to tailor and localize assortments.
SKU rationalization/assortment optimization efforts often focus on slow-moving items. But Giant Food Stores, Carlisle, Pa., a division of Ahold, is also addressing high-velocity categories where demand can exceed expectations and leave out-of-stock conditions that diminish shopper satisfaction.
In March 2009, the chain, which operates 179 stores under the Giant Food Stores and Martin's Food Markets banners, selected 20 categories to undergo SKU rationalization. These included categories, such as frozen vegetables and cooked chickens, that have experienced growth as shoppers turned to meal preparation during the recession.
Giant's program focused primarily on brands; private label “performs a specific role in each category's assortment and usually is not affected by SKU optimization,” said Dan Glei, senior vice president of grocery for Giant, who described the company's SKU rationalization process at the FMI workshop with Hertel.
How much to cut in each category — the $64,000 question, said Glei — was not based on a preconceived notion, such as an across-the-board 15% reduction. “I'm absolutely astounded when I hear proclamations of a percentage [SKU cut] across the entire business,” he said. Rather, Giant looked at each category individually, relying on data to make decisions. The data also determined the geographical reach of the cuts.
“We focus a lot on process and data,” said Glei. “We take as much emotion out as possible, though you never do it completely.”
Glei acknowledged that some items were exempt from SKU rationalization because of their importance to a small but valued group of customers — symbolized by the mythical “Mrs. Smith.” These are products that will “cause you a world of hurt with your shoppers if you go after them,” he said. One example is Cope's dried sweet corn, a traditional Pennsylvania Dutch treat. “It's a holiday item,” said Glei. “It doesn't sell a lot, but try to do without it.”
While Giant is mindful of Mrs. Smith, “at some point you have to make a decision and be prepared to adjust and move forward,” Glei said. The more seamless the process, “the less Mrs. Smith notices.”
But overall, Giant takes a conservative approach to SKU removal and considers “transferability of demand” from a deleted item to a substitute, Glei said.
Glei said that SKU rationalization has not been part of the job descriptions of Giant's category managers and merchandisers, so the chain had to figure out how to “mainstream it into the business.” In addition, to avoid conflicts of interest around individual SKUs, Giant's compensation and rewards system is structured so that category managers are not rewarded for specific actions but for “a total team-driven approach,” he said.
Hertel noted that unless a retailer is disciplined, there may be a tendency for “backsliding” to the original inflated SKU count.
To facilitate its SKU rationalization analysis, Giant has leveraged a number of tools, including Nielsen panel and scan data. The panel data show “how shoppers shop across channels and at competitive retailers,” Glei said.
Giant makes use of internal scan data to determine the geographical breakdown of SKU changes. It also leverages a robust frequent shopper data program called consumer-centric retailing that allows the chain to examine consumers of specific categories like meat and analyze brand switching. Glei cautioned that shopper data can be compromised by the effects of promotions.
Space-management software from JDA Software, Scottsdale, Ariz., is an important tool that lets Giant redeploy category space, though Glei said the chain removed space from only one category. “If you have products that don't sell, you have to deploy category space more effectively.” A bigger issue for Giant was maintaining in-stock levels for popular items, he noted.
Giant does its SKU rationalization work in collaboration with suppliers, who received feedback about item changes. “We provided an environment for review [by suppliers],” said Glei. “That doesn't mean we would change our mind, but at least suppliers got their day in court.”
In conducting category reviews, Giant used “a very straightforward set of processes” and went through each of the 20 categories in 26 hours on average, said Glei. An important step was communicating to store operations so that changes could be implemented seamlessly.
Glei provided results for three of the 20 categories that underwent SKU analysis. For example, in frozen vegetables, a highly productive category, SKU count was cut from 217 to 188, a 13% drop; the category's profits, unit sales and shopper count went up, while dollar sales were flat. Prior to the change, Giant had found that “on many weekends, we just couldn't hold the space between stock-ups because the items were so productive,” he said. “This is a category that a lot of consumers are trying to get into, and we shifted the mix towards the value consumers are looking for.”
In the shelf-stable juice category, the SKU count dropped from 260 to 256. While unit sales were up slightly, profits, dollar sales and the number of shoppers fell. These results correlated with Nielsen panel data indicating that juice is a challenging category. “The sugar content is making juices a less attractive choice for many parents,” said Glei. “There's a consumer issue that we're challenging our supplier partners to dig into.”
SKUs in the fully cooked chicken category were trimmed from 69 to 63, resulting in gains in profits, dollar and unit sales and shopper count. “This is a category consumers are embracing,” Glei said.
Glei stressed that assortment optimization is not a “once and done” affair but something that “needs to become part of the culture and looked at on a regular basis.” Category managers should be actively involved in the process and “own the results.”
A new item, for example, has to be judged on whether it will add value to the assortment. “Is it going to allow me to achieve objectives from a shopper standpoint and financial performance?” Glei said.
While major retailers are orchestrating their own SKU rationalization programs, numerous CPG companies are getting involved in the process, either internally or in concert with retailers.
Pittsburgh-based Heinz, for example, conducted an item optimization study that resulted in a white paper entitled, “Developing a Winning Item Optimization Strategy.” The study, which encompassed not only Heinz's products but areas such as dairy, meat and general merchandise, analyzed 100 categories and identified “hot spots” particularly suited for assortment optimization.
Heinz has also worked with research firm Decision Insight on SKU rationalization. In a project with Wal-Mart, Heinz employed a virtual shopping exercise to determine the impact as key SKUs were added and removed in five ketchup category assortments. The result was the number of SKUs was cut from eight to six, while two “upside-down” bottles and at least one smaller size were retained. The effect of this change was an increase in revenues for both Heinz and the category, said Decision Insight's Sodek, adding that Heinz also reduced its production costs. For the shopper, the ketchup category “became easier to shop,” he said.
Some observers question the ability of a manufacturer to objectively serve as a “category captain” for a retailer and make recommendations about changes for an entire category. But Sodek contended that if a CPG firm only helps its own brand, “retailers realize it and don't pick their solution.”