From Shelf To Sale

By David Bishop

Lower inventory costs, less clutter, more room for emerging opportunities and fewer out-of-stocks on top-sellers are often the phrases tossed around when retailers talk about leveraging SKU rationaliza­tion to drive stronger performance.

On the other hand, words like com­plexity, continuous, commitment, cost and conflict usually capture the essence of the obstacles encountered by retail­ers who have actually lived through SKU rationalization.

These two divergent perspectives underscore the various challenges —and opportunities —retailers work through when tackling SKU rationaliza­tion. And it’s not that SKU rationaliza­tion isn’t worth the effort, but rather it’s beneficial to understand early on how it fits with current strategies, aligns with available resources, supports the busi­ness plan and enhances the customer experience.

To help frame SKU rationalization from that perspective, NACS and Balvor examined the topic from the convenience retailer’s point of view via a SKU ratio­nalization survey. A total of 133 conve­nience retailers —representing more than 22,000 stores —participated.

Why Rationalization
While the majority of convenience re­tailers stock between 2,501 and 3,500 SKUs per store (see chart 1), the average number of SKUs carried at any specific point in time lands at slightly more than 3,000, according to the NACS/Balvor Survey. And, while this range of assort­ment is dramatically less than larger-store formats, there’s still plenty of room for convenience retailers to improve their offering.

Consider one recent retail analysis: A chain offered only around 2,000 SKUs per store, and Balvor documented that 19 percent —or 385 of the SKUs on aver­age —contributed a whopping 80 per­cent of the total unit sales for the store. Analysis further revealed that 95, and even 98 percent, of a store’s unit sales were generated from only 50 to 65 per­cent of the SKUs, respectively. (See chart 2.)

It’s percentages like these that moti­vate retailers to undertake a SKU ratio­nalization initiative. But you shouldn’t rush out and ban the low-volume prod­ucts from your store. Low-volume prod­ucts still add value, even though it’s less clear how.

"In some categories —like grocery —we learned that we cut way too much after analyzing sales," said John Schaninger, vice president of marketing at Whitehouse Station, New Jersey-based Quick Chek. "The cuts impacted customer perceptions about the store —not just the category." The insight prompted the chain to reevaluate the cuts. Schaninger explained, "We want to ensure that our customers are com­fortable visiting our stores, knowing that we’ll have some type of selection available."

So, while there’s room for improve­ment, retailers need to be careful not to eliminate products that may negatively influence the store’s overall positioning.

Less Is Sometimes More
After reviewing a sales ranking report, it’s a relatively easy question to ask: "What’s the value of so many low-selling products?" However, the answer is sur­prisingly complex, highlighting some of the challenges that retailers face in the midst of SKU rationalization.

Brad Griffin, vice president of oper­ations and marketing at Cheers Food and Fuel, based in Paducah, Kentucky, sees SKU rationalization as a way "to build loyalty with our customers." In fact, over the last several years, their 11-store chain has brought back prod­ucts based on customer feedback for just that reason.

"We put signs at the checkout that read, 'Did you find everything?’ and we trained our cashiers to ask the question when ringing up the sale," Griffin indi­cated. "If the customer mentioned something, the cashier would write a note in the book, which we reviewed monthly." Since Cheers didn’t scan, this tactic was critical to getting customer feedback, but it’s a technique that even scanning retailers could employ to complement a sales data analysis.

Cheers Food and Fuel’s motivation is similar to that of other convenience retail­ers, as nearly 90 percent of survey respon­dents agreed that they offer many low-volume SKUs to "serve valued customers that shop the store(s)." (See chart 3.)

But loyalty is not the only driver for holding on to low-volume SKUs. Just over three-quarters of retailers surveyed agree that many lower-volume SKUs are often carried to offer more complete variety. However, according to Tony Noonan, director of marketing at Mount Olive, North Carolina-based Handy Mart Convenience Stores, it’s less clear what "variety" means to any given retailer.

Noonan offers more SKUs from a particular beverage manufacturer not because of a contract requirement, but because he wants to ensure he offers consumers enough variety. "When look­ing at the sales numbers, I realized that 40 percent of the SKUs drove 90 percent of the sales." It was eye-opening and concerning to him.

If having too many SKUs causes a top-seller to go out of stock, then both the manufacturer and the retailer stand to lose a sale, explained Noonan. In this case, "everyone would benefit if we sim­ply removed some slower sellers and gave more facings to the top ones," he said.

So in this context, variety means en­suring that the products your customers want most are always available before determining how much more choice is possible.

What Stays, What Goes
Although few retailers agreed that they carried low-volume SKUs in order to "be eligible for additional monies," it’s evi­dent from retail discussions that this oc­casionally does influence assortment decisions.

In terms of approaches, two schools of thought dominate: the buy-side fo­cuses on getting as many rebates as pos­sible, and the sell-side searches for new ways to better satisfy the customer. John Zikias, vice president of market­ing at Louisville, Kentucky-based Thorntons, says that the convenience and petroleum retailing chain falls in the latter. He believes that "you’ll al­ways make more money selling the right items as opposed to squeezing an­other nickel out of a supplier."

Even though Zikias acknowledges that it’s generally easier for category managers to walk into the boss’ office with a big check, he tries to emphasize that that approach may not generate much profit over time. Doing what’s best for their customers will.

However, with some categories it’s critical for retailers to comply with man­ufacturer contracts to remain competi­tive, but that’s different than deciding to carry an extra number of SKUs because a supplier incentivizes you to do so.

The risk associated with skewing too much to the buy-side is that while you may make a little more on the front end, it may end up costing you more if the prod­ucts fall out of code or get stolen because they languish on the shelf and have a high retail value —such as cigarettes.

Measuring Performance
Convenience retailers mainly rely on in­ternal sales data to make decisions about product assortment. For those that don’t, it’s typically because they don’t scan and therefore depend heavily on their distributors for data. (See chart 4.)

 

When making decisions about which products to remove, 85 percent of the convenience retailers surveyed use unit volume as the most common internal data metric. "Volume per out­let selling" is a specific volumetric that retailers rely on as it helps to highlight the value associated with products that sell well but have limited distribution. Although transactional data helps retailers understand cross-category purchase patterns, only 20 percent of those surveyed use this kind of data most of the time or always as part of their rationalization process. One po­tential consequence of not using mar­ket basket data: a retailer discontinues a low-volume product with strong ap­peal to a key shopper segment. And while insights into how custom­ers shop help identify and protect unique items that have no acceptable substitute in the store, only a few conve­nience retailers leverage purchase deci­sion tree research since that data is not generally available to most.  

 

Store-Level Execution
If the ultimate consequence of SKU ra­tionalization is to maximize profits, then how retailers apply it to different parts of their business will vary, which is what our surveyed convenience retail­ers also indicated.

What would convenience retailers do with the open space gained by re­moving existing products from various categories? (See table 1.) Based on the survey, retailers are likely to:

  • Increase facings for top-selling SKUs in high-share categories. More than half of the retailers surveyed would use this tactic with cigarettes and beer. Whether fast-selling or larger cubed items —or both —retailers want to en­sure availability to prevent losing item sales, or customers, to the competition.
  • Add more new products in moderate-share categories. Salty snacks and can­dy are the top categories retailers would invest in when expanding assortment. Most retailers understand the impor­tance of new products in driving catego­ry growth in these two areas.
  • Shift space away from low-share cat­egories. In categories such as general merchandise and health and beauty care, retailers are most likely to give more space to an existing category or to make room to test new category offerings.

Unique category attributes provide the exception. For instance, while pack­aged ice cream/novelty is a low-share category with relatively low growth prospects in convenience, most retailers would use any freed up space to add new products back into the category. With the category usually merchandised in a stand-alone, freezer chest, it’s difficult to shift the space to another category. How­ever, it’s still possible to use a smaller fix­ture, if it makes sense.  

What this insight reinforces is that SKU rationalization should, at mini­mum, take into account the role of the category to the business, including cur­rent strategies, growth potential and possibly the presence of important man­ufacturer contracts. 

Customer Demand
Managing assortment decisions is only one element of the marketing and mer­chandising mix. Beyond selecting the right products to offer, you need to en­sure availability by minimizing out-of­-stocks with proper space allocations, build demand by effectively promoting and communicating the deal, offer a good value by pricing competitively where it matters most, place products in the right locations to drive higher conversion rates —the list goes on.  

As Quick Chek’s Schaninger stated, "There’s many things that you need to do right, which is why retailing is not easy."  

"Don’t try to do too much all at once. Apply the crawl, walk, and run approach," recommended Zikias, who added, "Fac­tor in your strategies and positioning into the process so it supports where you’re trying to take the business."  

In the end it’s about satisfying the needs and wants of the customers who walk through your doors while still making the profit you’re expecting to make.  

David Bishop specializes in convenience retail and is the managing partner at Balvor LLC, a sales and marketing firm located in Barrington, Illinois. He can be reached at davidbishop@balvor.com.