How retailers can increase their efficiency and sales
Do you know the feeling when you’re at your local grocer and it has run out of jalapeño chili ketchup? You want to make a scene, but at the very last moment you pull yourself together, abandon your half-filled basket in the middle of the shopping aisle, and leave the store to drive five minutes to the next store to do your shopping there. Don’t know that feeling? Well, me neither. And that’s exactly the point.
Most retailers — and not just grocers — have expanded their range to biblical proportions. I recently heard that since the 1980s, the number of SKUs has tripled. And sales? Well, in most categories they have gone up since then too, but they certainly haven’t tripled.
In times when retail sales in general (and store-based sales in particular) are under pressure, bold measures need to be taken, and rigorously cutting your assortment should be one of them.
Some large retailers have already announced drastic cuts in their assortment. As part of a new strategy, Makro announced in June that it will cut its assortment by more than half, from 65,000 to 32,000 SKUs. A little more than a year ago, Tesco revealed its plans to cut its assortment from 90,000 to 65,000 SKUs (which could still be considered conservative given that Tesco sells 98 types of rice, compared with Aldi’s six).
The main argument against assortment rationalization is a fear of losing sales: losing the revenues from items that are discontinued, or — even worse — losing shoppers entirely if their “favorite” product is no longer available. Research and our experience suggest that this risk is often grossly overestimated. Trials have shown that the majority of customers do not even notice a significant reduction of SKUs. And other customers will simply switch to alternatives that are available.
Another downside is in supplier negotiations. Assortment proliferation in most categories is driven by manufacturers launching line extensions and innovations that are — at best — only incremental improvements compared with the “original” product. As most producers tend to copy the range of their competitors — and the range of retailers’ private brands or private labels — the number of SKUs grows quickly.
Lots of benefits
Counterbalancing these (supposed) risks are several reasons that cutting your assortment is a good idea:
It reduces the costs and complexity of a number of business functions including buying, category management, space management, and presentation management.
It simplifies planograms and makes it easier for shoppers to navigate the shelf, which in turn gives retailers more control over how shoppers navigate the shelf and what products they consider and end up buying. Trials and studies have shown that reducing choice by as much as 50 percent for some categories reduces the decision-making time, which leads to more efficient shopping, increased conversion, and more satisfied shoppers.
On the operations side, cutting your assortment simplifies warehousing operations, store replenishment, and shelving processes and leads to cost reductions.
It frees up space, de-clutters the store, and makes for a generally more shopper-friendly shopping experience — stores with wider aisles and lower shelves generally have better customer experience.
It helps improve the accuracy of demand planning and minimizes the risk of out-of-stocks or excess stock — stock turns should improve dramatically.
And finally, perhaps a bit more far-fetched, there have been studies that link the number of facings to low-price perception. When you free up shelf space and extend the number of facings per product, shoppers get an impression of large-volume buying by the retailer, which suggests that it is able to offer products at lower prices.
In aggregate, these benefits lead to better profit margins or (what drove Tesco’s decision) lower prices for customers.
Well, why not?
Supermarkets stock about 20,000 SKUs on average (ranging from 2,000 for a typical discounter to 100,000 for hypermarkets), while an average household buys a repertoire of 400 products, which is only 2 percent (!) of a “typical” supermarket range. Large DIY and electronics retailers stock tens of thousands of SKUs. We estimate that drugstores stock at least 100 times more SKUs than a typical customer buys in a year.
The Pareto charts I’ve seen suggest that the top 50 percent of SKUs typically account for roughly 80 percent of sales and gross profit. Cutting the bottom 50 percent would not result in a loss of 20 percent of gross profit, but less, as most shoppers will buy an alternative product (what’s wrong with regular ketchup?). A more sophisticated analysis that takes into account substitution patterns will help to identify SKUs that can be cut with the lowest risk of losing sales (which might not necessarily be the SKUs with the lowest sales).
What about online?
What about removing 50 percent of SKUs from stores, but still offering them online? That’s definitely a possibility, but the benefit case is likely not to be as good as complete rationalization. It will not result in capturing the full benefits outlined above, but it will suffer most of the downside. In addition, traditional multichannel retailers that offer their slow-moving SKUs only online are not likely to present a competitive proposition (lowest price and fast delivery) against online pure-play specialists, and their action may complicate supply chains, as products get picked up or returned in-store.