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.
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.
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.
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.
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.
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.
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 firstname.lastname@example.org.