SKU Rationalization Goes Mainstream

There has been a lot of talk in recent months (and even longer) about ‘SKU rationalization’ – the practice by retailers of reducing the number of items they carry. Talk began a while back, but this is another idea that has gained momentum as a result of the recession (fewer SKUs mean less inventory), and the talk seems to be turning increasingly into action.

The subject is beginning to get more mainstream attention, as exemplified by this Wall Street Journal article. The article covers a number of subjects related to reduction of assortments, and summarizing it wouldn’t do it justice, so I’ll recommend that you read the whole thing. I’m just going to quote a few passages that raise particular points salient to trade promotion and channel marketing.

First a few facts:

Pharmacy chain Walgreen Co. is cutting the types of superglues it carries to 11 from 25. Wal-Mart Stores Inc. has decided that 24 different tape measures is 20 too many. Kroger Co. has tested stripping out about 30% of its cereal varieties.

In the next year or so, these and a few of the other largest retailers are expected to slice the assortment of products in their stores by at least 15%, industry executives and analysts say.

There really are too many choices in some product categories – later in the article, it is mentioned that there are 88 varieties of Pantene in a typical Target. As a consumer, it makes it difficult for me at times to find what what I want. And certainly it adds to the complexity (and cost) of running a store.

The effect on smaller vendors

SKU rationalization is likely to benefit the largest players in each category. If you reduce the number of cereals 30%, for example, Kelloggs and General Mills are likely to suffer fewer cuts than smaller suppliers

… the shift to fewer items could lead to a shakeout on the shelf, in which No. 1 and No. 2 brands win more space, and therefore sales, from No. 3 and lesser brands.

Household-products giant Procter & Gamble Co. has been touting shelf simplification as an advantage. "We generally end up with share and sales growth, and it's all, of course, a lot more profitable and returns a lot more cash," said departing P&G Chief Executive A.G. Lafley at an investor conference last month. "It benefits the leaders in the industry and it disproportionately benefits P&G."

Campbell Soup Co., which is dominant in canned soup, expects to gain about 10% to 15% more shelf space at large retailers this fall, said a spokesman, mostly for its top three sellers: condensed tomato, chicken noodle and cream of mushroom.

This supports the corollary to the Two-Per-Channel Theory (that we’re coming down to only two significant players in each channel), which holds that two retailers in each channel will mean that there will be only two major suppliers in each product category.

Increasing retailer power

Retailer power is a factor in almost everything that happens in channel marketing these days, and SKU rationalization is no exception:

More consolidated than ever, the retail industry is systematically wielding its newfound leverage to reduce variety. Among the advantages, retailers say, are lower labor costs, fewer out-of-stock items and an increase in their ability to squeeze vendors for better deals.

I know that last line will send a chill down many a supplier’s spine, but it just makes sense that a process that eliminates 20%-30% of SKUs in a category will be an occasion for spirited bidding among the incumbents to avoid being among the departed.

As always, private label is a factor

Something else that seems to be a factor in every discussion these days is private label, and its role here is pretty obvious – the store’s own brands are not going to be among the items removed from the shelves. To the contrary, they are getting more space, which further reduces the amount of space for marginal products.

Big retailers also have grown more adept at creating profitable private-label brands, giving them another incentive to remove competing name-brand products. Wal-Mart recently relaunched its own Great Value brand, which includes some 5,000 items. Target said Thursday it has begun rolling out a reformulated line of private-label household goods, renamed up & up, to which it added laundry detergent, cotton balls, baby food and about 100 other items.

One final note – the article concludes with ways some suppliers are managing to keep their products on shelves (other than just paying more). All the examples could be classified under one heading: Information. The suppliers had data to support their arguments for why the retailers should continue to stock their products. If you don’t have that data, you’d better get it.