Retailers Increase Focus on SKU Rationalization

MARK HAMSTRA

Craig Herkert, Supervalu's new president and chief executive officer, learned a valuable lesson early in his career: Supermarkets should be a filter between the supplier and the consumer, not a direct conduit.

In a presentation at the Goldman Sachs Retail Conference in New York last month, he told a story about how as a young buyer at the Jewel banner in Chicago about 25 years ago, one of his early mentors taught him how to “pre-select” products for the consumer to avoid proliferating the shelves with items that don't move. Supermarket category buyers, he was told, must serve as the shopper's agent and reject the products that the shopper is not going to want, no matter how enticing the pitch from suppliers.

“You have to be selective, because [suppliers] are going to come in here and try to make you buy everything,” Herkert was told. “You can't do that.”

Now, as he seeks to get some momentum going at Supervalu, he sees that approach as a key to revitalizing the company's sales by streamlining the company's offerings.

“Frankly, we have to relearn that,” Herkert said. “We have to redevelop that muscle here at Supervalu, about the fact that we need to be selective. We need to simplify for our customers. We need to make it easy for her to shop at our stores.”

Supervalu is not alone in its newfound interest in SKU rationalization, according to analysts. Although weeding out slow-moving items has long been a pillar of category management, a number of factors — including the slow economy and the growth of private label — have brought the strategy back into focus.

It was a big part of Ahold's Value Improvement Program at Quincy, Mass.-based Stop & Shop and Giant of Landover during the last few years and more recently it has gained considerable attention through the Project Impact initiative at Wal-Mart Stores, Bentonville, Ark.

In that program, Wal-Mart is dividing categories into three groups, labeled “Win, Play and Show,” and trimming SKUs from the categories that fall into the latter two groups. As reported in the June 29 issue of SN, analysts estimate that SKUs in the Play category could be cut as much as 30% and those the Show category could be trimmed as much as 80%.

“Everyone is lowering SKUs right now,” said John Rand, director of retail insight, grocery, with Management Ventures Inc., Cambridge, Mass. “In large part it is because retailers are realizing that most of those items don't realize enough value to overcome slow turns.”

Cutting back to the core items that matter the most to the consumer in each category helps clear up the clutter, and, as Herkert emphasized, makes the shopping experience easier, trims inventory and makes the stores easier to manage.

“That story has been clear in every kind of analytical literature on the subject for the last 25 years, but action has been lacking at least in part because manufacturers were willing to support their items — regardless of whether they had a consumer-defensible position — because their marketing departments didn't want to lose items and share of shelf,” said Rand of MVI.

Now that retailers have taken control of the process, he said, they are forcing suppliers to accept that fewer SKUs can be more efficient for everyone.

“The manufacturers wouldn't do this on their own,” Rand said. “All the category management processes we went through for the last 20 years never reduced SKUs, because it was driven by the manufacturer community, and they could never come to that conclusion, except with regard to a competitor. They could never do it for themselves.

“So, the manufacturers lost their decision rights over this, and the retailers took it back.”

And although it may be “causing a lot of angst,” Rand said, it is being accepted because suppliers do see cost-saving value in generating more volume out of fewer items.

DRIVING SALES

Marty Weintraub, vice president at Toronto-based Karabus Management, a subsidiary of PricewaterhouseCoopers, said his firm has noticed a stronger emphasis on what he calls SKU optimization during the last several months. This can be attributed in part, he said, to a need for retailers to grow their top lines.

“It's all about sales,” he said. “One of the reasons you are seeing a focus on this is that a lot of grocers are hitting the wall with sales growth because they are cycling through some of the inflation [from a year ago]. A lot of grocers are focusing on cost reductions, but there's only so much you can cut. Once you have cut all you that you can, you are back to focusing on sales, and if a retailer can get the assortment right, sales go up.”

Weintraub agreed that retailers have been talking about the concept for a long time and have always maintained that they were optimizing their SKUs, “but when you really dig down deep, they really weren't doing enough.

“It's one thing to go in on a one-off vendor basis, or look at a category here or a category there, and say, ‘Hey, we need to rethink what we are putting on the shelf,'” he said. “It is a whole different thing to say, ‘Hey, we are going to look at what the total store stands for, look at the category roles and the category strategies, and then have that output drive what SKUs should be on the shelf.'”

Retailers' increasing focus on serving the needs of the shopper, rather than on the opportunity to obtain promotional money or slotting fees from vendors, has been a driving force in the focus in SKU optimization, he said.

Although funding from vendors is important, Weintraub suggested that retailers take a step back and look at all the dollars that are available to support a category over the course of a year, rather than focusing on each specific opportunity to obtain such funding as it presents itself.

“Trade funds come in several different buckets, and I always like to think about the total bucket of dollars,” he said. “As far as how you get them, you worry about that later. You can get yourself in a bind from the beginning if you focus on where the trade money is coming from.

“While you may have gotten some money today, you are hurting yourself in the long term because perhaps you may not be carrying what the shopper wants to buy. If you are always focused on those promotions funds — and all grocers are, for good reason, because it helps fund promotional activity — it has to be done right.”

PRODUCT NOT MOVING

Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va., said the increased emphasis on SKU reduction is driven in part by economic pressures on the shopper.

“The catalyst now is that there's a lot of product that's not moving,” he said. “What's a retailer to do if they are stuck with a product that's not moving? Your first inclination, independent of anything else, is to get rid of it.”

He also said the moves can be an effective lever to wring costs out of procurement, by either pressuring vendors to lower their pricing, or by making the whole supply chain more efficient.

“What Wal-Mart may have discovered before the grocers is that it is a good way to bring down prices,” Wolf said. “When you have less SKUs, as a supplier, the cost of production goes down, because volumes go up on what's left, and when the cost of production goes down, the retailer can share in a lot of that.”

Private-label proliferation is also playing a role in the elimination of some SKUs from branded manufacturers, he explained. As store-brand volumes and SKU counts rise, the products are crowding out those branded products that were “on the bubble.”

Weintraub of Karabus Management pointed out that retailers who optimize their assortments holistically may find that some categories can be better served with less private label, and others with more.

“The retailers that do really well go through on a category-by-category basis, and decide that in some cases the manufacturer might get negatively affected by more store brands, but they might be able to make up for that in other categories, where private label is not the answer,” he said. “The solution could be to negotiate better pricing, or promote the product differently, or put it on another place on the shelf, or put it on an endcap — there are many different levers that can be pulled.

“The magic is to go through that very difficult process of going through the entire store category by category and determining what is right for the shopper at that store.”

DROWNING IN WATER

In his presentation at the Goldman Sachs conference, Supervalu's Herkert cited examples of SKU optimization that are taking place at the company.

“I was in one of our stores last week, and we carry eight varieties of 24-pack water. It's water. We have eight different brands of water. And I just find it hard to imagine that our customers demanding of us that I need eight different brands of H2O,” he said.

In addition, he said the pricing was “out of whack” and the large number of SKUs was making it more challenging to stay in-stock.

“I don't think we have to research that one too hard,” Herkert quipped. “I think we need to have a couple of the national brands and our own brand, and then negotiate better and create some winners and losers.”

He also cited cereal as a category that has over-proliferated. While variety of assortment is important, having four different-sized boxes of the same cereal might not necessarily be perceived as variety by the customer, he said.

Herkert cited fabric softener sheets as another category that could use some paring down.

“We have five brands, which may or may not be appropriate — I won't decide; somebody else will — [but] we also have 42 SKUs, and I will tell you that's too many,” he said. “I don't need [consulting firm] McKinsey to come and tell me 42 SKUs of fabric softener sheets is confusing to a customer.”

Rand of MVI said the current focus on SKU rationalization is an “interesting moment” in the history of food retailing.

“The recession has kicked over a lot of dominoes that were probably ready to fall anyway,” he said. “People are getting more efficient, they are looking at their pricing policies, they are looking at their brand as a retailer, and the manufacturers are beginning to understand that more is not always better.”