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 bu iness plan and enhances the customer experience.

1. FROM SHELF
TO SALE
,
Every retailer wants to maximize profits,
but getting there relies on a dedicated SKU
"rationalization" plan.
BY DAVID BISHOP
owerinventory costs, less of the obstacles encountered by retail-
L clutter, more room for ers who have actually lived through
emerging opportunities SKU rationalization.
and fewer out -of-stocks on These two divergent perspectives
top-sellers are often the underscore the various challenges -
phrases tossed around when retailers and opportunities - retailers work
talk about leveraging SKU rationaliza- through when tackling SKU rationaliza-
tion to drive stronger performance. tion. And it's not that SKU rationaliza-
On the other hand, words like com- tion isn't worth the effort, but rather it's
plexity, continuous, commitment, cost beneficial to understand early on how it
and conflict usually capture the essence fits with current strategies, aligns with
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28 nacsonline.com MAY 2010

2. J
III
.
available resources, supports the bu i- chain offered only around 2,000 SKUs
ness plan and enhances the customer per store, and Balvor documented that
About the Survey experience. 19percent - or 385 of the SKUs on aver-
The NACS/Balvor SKURational- To help frame SKU rationalization age - contributed a whopping 80 per-
ization Survey was fielded in cent of the total unit sales for the store.
from that perspective, NACS and Balvor
late February and early March
examined the topic from the convenience Analysis further revealed that 95, and
2010. A total of 133 conve-
retailer's point of view via a SKU ratio- even 98 percent, of a store's unit sales
nience retailers - representing
more than 22,000 stores - re- nalization survey. A total of 133 conve- were generated from only 50 to 65 per-
sponded to the online survey. nience retailers - representing more cent of the SKUs, respectively. (See
Balvor completed follow-up than 22,000stores - participated. chart 2.)
telephone interviews with a It's percentages like these that moti-
sample ofthose respondents to Why Rationalization vate retailers to undertake a SKU ratio-
capture further insights. While the majority of convenience re- nalization initiative. But you shouldn't
tailers stock between 2,501 and 3,500 rush out and ban the low-volume prod-
SKUs per store (see chart 1), the average ucts from your store. Low-volume prod-
number of SKUs carried at any specific ucts still add value, even though it's less
point in time lands at slightly more than clear how.
3,000, according to the NACS/Balvor "In some categories -like grocery-
Survey. And, while this range of assort- we learned that we cut way too much
ment is dramatically less than larger- after analyzing sales," said John
store formats, there's still plenty of room Schaninger, vice president of marketing
for convenience retailers to improve at Whitehouse Station, New Jersey-
their offering. based Quick Chek. "The cuts impacted
Consider one recent retail analysis: A customer perceptions about the store-
CHART1 CHART2
Average Number of SKUs Offered per Store Contribution to In-Store Sales
(Percent of Retailers) (Percent of SKUsGenerating)
80%ofUnitSales 95% of UnitS ales 98%ofUnitsales
1,500 or Less 1,501 to 2,500 2,501 to 3,500 3,501 or More
(Source: Salvor LLC analysis based on 13 weeks of SKU·level data
(Source: NACS/Salvor SKU Rationalization Survey arch 2010) across 8 convenience stores, 4Q09)
30 nacsonline.com MAY 2010

3. What Is SKU
CHART3
Rationalization?
Why Stores Offer Many Low-Volume SKUs
(Percent of Retailers Agreeing) SKUrationalization is "a process by
which a retailer selects the SKUsin each
category that will maximize profit and
size of the market basket, while taking
into account the store's customer
profile, unique competitive position-
ing, and store size," according to a
workshop on the topic at last year's
NACSShow ("How Many IsToo
Many? Making Your Product Selection
Work for You").
Look to Walmart for a good example
of SKUrationalization in practice. Its
"win, play, show" merchandising
strategy increases assortment to
capture more market share in catego-
ries designated "win" or "play," since
they are more important to its growth
plan. "Show" categories experience
Be eligible for additional monies from supplier SKUreductions since these are consid-
ered low in importance to the depart-
(Source: NACS/Balvor SKU Rationalization Survey, March 2010)
ment and with low growth prospects.
In a similar way, convenience retailers
not just the category." The insight ations and marketing at Cheers Food are fine-tuning what products they
prompted the chain to reevaluate the and Fuel, based in Paducah, Kentucky, offer in stores. According to the NACSI
cuts. Schaninger explained, "We want sees SKU rationalization as a way "to Balvor survey, 60 percent ofthe retailers
to ensure that our customers are com- build loyalty with our customers." In indicated that SKUrationalization
fortable visiting our stores, knowing fact, over the last several years, their within their business is associated with
that we'll have some type of selection It-store chain has brought back prod- "offering the correct mix of products."
available." ucts based on customer feedback for And, even though less than 5 percent
So, while there's room for improve- just that reason. believe it means "reducing the absolute
ment, retailers need to be careful not to "We put signs at the checkout that number of products carried," that
eliminate products that may negatively read. 'Did you find everything?' and we doesn't imply that there aren't oppor-
influence the store's overall positioning. trained our cashiers to ask the question tunities to improve productivity in
when ringing up the sale," Griffin indi- select areas ofthe store.
Less Is Sometimes More cated. ..If the customer mentioned Convenience retailers -like
After reviewing a sales ranking report, omething, the cashier would write a Walmart - determine the correct
it's a relatively easy question to ask: note in the book. which we reviewed assortment mix based on several key
"What's the value of so many low-selling monthly." ince Cheers didn't scan, this factors and metrics, which isa continu-
products?" However, the answer is sur- me ic w critical to getting customer ous process of measuring, modifying
prisingly complex, highlighting some of f ack, bu it' a technique that even and monitoring how customers respond
the challenges that retailers face in the - ~"1"" retailer could employ to com- to changes in the selection.
midst of SKU rationalization. data analysis.
Brad Griffin, vice president of oper- rs Food and Fuel's motivation is
MAY 2010 NACS Magazine 31

4. Ninety percent of similar to that of other convenience retail- consumers enough variety. "When look-
ers, as nearly 90 percent of survey respon- ing at the sales numbers, I realized that
survey respondents dents agreed that they offer many low- 40 percent of the SKUs drove 90 percent
offer many low- volume SKUs to "serve valued customers of the sales." It was eye-opening and
that shop the store(s)." (See chart 3.) concerning to him.
volume SKUs to serve But loyalty is not the only driver for If having too many SKUs causes a
valued customers holding on to low-volume SKUs. Just top-seller to go out of stock, then both
over three-quarters of retailers sur- the manufacturer and the retailer stand
that shop the store.
veyed agree that many lower-volume to lose a sale, explained Noonan. In this
SKUs are often carried to offer more case, "everyone would benefit if we sim-
complete variety. However, according ply removed some slower sellers and
to Tony Noonan, director of marketing gave more facings to the top ones," he
at Mount Olive, North Carolina-based said.
Handy Mart Convenience Stores, it's So in this context, variety means en-
less clear what "variety" means to any suring that the products your customers
given retailer. want most are always available before
Noonan offers more SKUs from a determining how much more choice is
particular beverage manufacturer not possible.
because of a contract requirement, but
because he wants to ensure he offers What Stays, What Goes
Although few retailers agreed that they
carried low-volume SKUs inorderto "be
eligible for additional monies," it's evi-
CHART4
dent from retail discussions that this oc-
How Often Do You Use the Following When
casionally does influence assortment
Making Assortment Decisions?
decisions.
(Always or Most of the Time)
In terms of approaches, two schools
of thought dominate: the buy-side fo-
cuses on getting as many rebates as pos-
sible, and the sell-side searches for new
ways to better satisfy the customer.
John Zikias, vice president of market-
ing at Louisville, Kentucky-based
Thorntons, says that the convenience
and petroleum retailing chain falls in
the latter. He believes that "you'll al-
ways make more money selling the
right items as opposed to squeezing an-
other 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
Internal Wholesaler Syndicated Market Purchase Consumer
much profit over time. Doingwhat's best
sales shipment sales data basket decision tree panel data
data data data research for their customers will.
However, with some categories it's
(Source: NACS/Balvor SKU Rationalization Survey, March 2010)
32 nacsonline.com MAY 2010

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If having too many critical for retailers to comply with man- they languish on the shelf and have a high
ufacturer contracts to remain competi- retail value - such as cigarettes.
SKUs causes a top-seller tive, but that's different than deciding to
to go out of stock. then carry an extra number of SKUs because Measuring Performance
a supplier incentivizes you to do so. Convenience retailers mainly rely on in-
both supplier and re- The risk associated with skewing too terna~ sales data to make decisions about
tailer could lose a sale. much to the buy-side is that while you product assortment. For those that
may make a little more on the front end, it don't, it's typically because they don't
may end up costing you more if the prod- scan and therefore depend heavily on
ucts fall out of code or get stolen because their distributors for data. (See chart 4.)
When making decisions about
which products to remove, 85 percent
Proceed of the convenience retailers surveyed
with Caution! use unit volume as the most common
internal data metric. "Volume per out-
Be careful notto eliminate
let selling" is a specific volumetric that
SKUsthat:
retailers rely on as it helps to highlight
• Shoppers perceive as not the value associated with products that
having an acceptable substi-
sell well but have limited distribution.
tute.
Although transactional data helps
• Support your store's unique retailers understand cross-category
competitive positioning. purchase patterns, only 20 percent of
• May have low demand, but those surveyed use this kind of data
strong appeal with key shop- most of the time or always as part of
per segments. their rationalization process. One po-
tential consequence of not using mar-
34 nacsonline.com MAY 2010

6. products back into the category. With the
category usually merchandised in a
TABLE 1
stand-alone, freezer chest, it's difficult to
What Would You Do With the Free Space
shift the space to another category. How-
If You Removed Existing SKUs From ... ? ever, it's still possible to use a smaller fix-
(Percent of Retailers - Top Two Responses) ture, ifit makes sense.
Give more space Use spaceto add new Shift space to What this insight reinforces is that
to top-sellers in products in the another SKU rationalization should, at mini-
the category category category mum, take into account the role of the
category to the business, including cur-
52% 59% 49% rent strategies, growth potential and
Cigarettes Salty Snacks General possibly the presence of important man-
u facturer contracts.
Merchandise
50% 55%
Customer Demand
Beer Candy 48%
Managing assortment decisions is only
Health & one element of the marketing and mer-
Beauty Care chandising mix. Beyond selecting the
(Source: NACS/Balvor SKU Rationalization Survey, March 2010) right products to offer, you need to en-
sure availability by minimizing out-of-
stocks with proper space allocations,
ket basket data: a retailer discontinues this tactic with cigarettes and beer. build demand by effectively promoting
a low-volume product with strong ap- Whether fast-selling or larger cubed and communicating the deal, offer a
peal to a key shopper segment. items - or both - retailers want to en- good value by pricing competitively
And while insights into how custom- sure availability to prevent losing item where it matters most, place products
ers shop help identify and protect sales, or customers, to the competition. in the right locations to drive higher
unique items that have no acceptable conversion rates - the list goes on.
substitute in the store, only a few conve- • Add more new products in moderate- As Quick Chek's Schaninger stated,
nience retailers leverage purchase deci- share categories. Salty snacks and can- "There's many things that you need to
sion tree research since that data is not dy are the top categories retailers would do right, which is why retailing is not
generally available to most. inve t in when expanding assortment. easy."
Most retailers understand the impor- "Don't try to do too much all at once.
Store-Level Execution tance of new products in driving catego- Apply the crawl, walk, and run approach,"
If the ultimate consequence of SKU ra- ry growth in these two areas. recommended Zikias, who added, "Fac-
tionalization is to maximize profits, tor in your strategies and positioning into
then how retailers apply it to different • Shift space away from low-share cat- the process so it supports where you're
parts of their business will vary, which is egories. In categories such as general trying to take the bus iness,"
what our surveyed convenience retail- merchandise and health and beauty care, In the end it's about satisfying the
ers also indicated. retailer are most likely to give more needs and wants of the customers who
What would convenience retailers space to an existing category or to make walk through' your doors while still
do with the open space gained by re- room to test new category offerings. making the profit you're expecting to
moving existing products from various make.I~~.
categories? (See table 1.) Based on the Unique category attributes provide
survey, retailers are likely to: the exception. For instance, while pack- David Bishop specializes in convenience
aged ice cream/novelty is a low-share retail and is the managing partner at
• Increase facings for top-selling SKUs ca egory vith relatively low growth Balvor LLC, a sales and marketingfirm
in high-share categories. More than p _ - in convenience, most retailers located in Barrington, Illinois. He can be
half of the retailers surveyed would u e w - any freed up space to add new reached at davidbishop@balvor.com.
MAY 2010 NACS Magazine 35
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