September 2009
SKU Rat is Coming, Do You Know Where You Stand?
By Paul Weitzel
The Benefit
Better holding power on big brands. Fewer out-of-stocks and lost sales. Sections that are easier to
shop. Fewer unsaleables and returns. Less store labor and more than $100,000 per store in freed-up
capital. These are the key benefits of getting assortment right and eliminating a large amount of
duplication and underperforming sections in our stores. Retailers who continue to struggle in this
current economic climate and other leading chains who are looking to put some distance between
themselves and their competitors see an opportunity to do a better job with rationalizing assortment
to improve their current financial position.
This issue of Competitive Edge looks at the SKU rationalization movement and how this is likely to
impact retailers, suppliers, and categories.
Momentum is Building
Have you heard that we are officially out of the recession? Don’t
tell that to retailers who are on the front line. From large chains to
small independents, the economy has negatively impacted samestore sales by several percentage points and retail executives don’t
see a turnaround anytime soon. Some retailers are starting to sell
off underperforming units while others are looking to cut store
operating costs. One cost reduction strategy that is getting a lot of
attention is SKU rationalization.
I’m now getting calls on a weekly basis from CPG companies
returning from important customer meetings with serious concerns
that they may be losing a brand to SKU Rat. We’re not talking
about a few SKUs. CPG companies are facing the possibility that
they may lose an entire line and this isn’t happening only at
Walmart.
All retailers have to take control of their store operating expenses
and there are only a handful of expenses that are variable and can
be reduced. In addition to labor, assortment and inventory is an
area that they can attack today to reduce costs. In the past,
reducing assortment was not considered an option. However, this
is a different retail environment and reducing store-level
assortment will become an increasingly viable option for retailers.
SKU Rat is playing out along several fronts. Walmart is planning on
slashing assortment levels 15% to 18% as part of their new
Win/Play/Show category strategy. Their goal is to rebalance
© Copyright 2009 Willard Bishop. All rights reserved.
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Momentum is Building
(Cont.)
assortment and have more variety in categories they can win in
and less in categories that are significantly more challenging.
` Win Categories – Categories that generate high growth, are
large in size, and are credible with Walmart shoppers. These
are the categories where Walmart will lead in assortment,
prices, and advertising and merchandising.
` Play Categories – These categories have some, but not all, of
the characteristics associated with Win categories. For
example, they may be credible with shoppers and are large,
but they may not offer strong growth opportunities for
Walmart. These generally are not the destination categories.
` Show Categories – These categories are the direct opposite
of the Win categories. They lack growth, size/scale, and
Walmart tends to be less credible in these categories with
shoppers. The categories that get flagged with a Show label
will experience a significant decline in assortment and number
of brands.
By focusing more on the categories they can win, Walmart will shift
inventory to more productive space and drive down working capital
and inventory carrying costs in other areas of the store that are
less productive.
Other chains are looking to reduce costs by improving their packout
levels. For example, Kroger is moving from 1.2 cases on the shelf
back up to a 1.5 case pack rule. In addition, they are in
discussions with suppliers to reduce case pack sizes so they can
meet the 1.5 case pack rule with fewer shelf facings. The goal is to
improve in-stock positions of power SKUs and lower store labor
costs. They expect to experience fewer shelf “touches” and fewer
trips to the backroom to deal with backstock inventory and
reworked product that, in the past, could not fit on the shelf.
Small Box formats in the 15,000 to 25,000 square foot range will
continue to emerge and create new opportunities with a limited
assortment lineup. While retailers are still fine tuning this express
store, we expect this format will emerge as a viable offering for
retailers looking to offer a convenient shopping experience. Some
of these stores will represent net new real estate but others will
take the place of closing stores. With limited shelf space, fewer
brands end up making it on the shelf.
Lifestyle stores and stores interested in creating greater excitement
on the perimeter will continue to shrink center store space by 15%
to 20% to make room for expanded theater. While the economy
will slow this trend, we do expect a portion of retail stores to
continue pursuing an expanded perimeter strategy in an effort to
strengthen their store loyalty.
All of these trends will have a direct impact on product assortment.
While we expect to see less variety, it’s the complete elimination of
brand lines that’s getting everyone’s attention and is
unprecedented in the 20+ years that I’ve been consulting in the
grocery industry.
© Copyright 2009 Willard Bishop. All rights reserved.
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Why This is Real
Over the years, our industry has come together at conferences and
talked about the need to reduce product duplication and get to
optimal assortment levels on a store-by-store basis. We have
completed study after study that has shown that consumers like
sections that are easier to shop and, more often than not, they
cannot tell when we reduce assortment levels in a category. And,
trading partners have gone through extensive efficient assortment
training. We even have very sophisticated tools and analytical
methodologies today to adjust assortment store-by-store.
But what’s different this time around is retailers are feeling severe
financial pressures that are forcing them to act. The long-term
economic outlook is not good and many companies are forecasting
no growth over the next five years. If retailers see very little sellside opportunities, they will need to act to reduce their operating
expenses, and one clear way is to reduce their working capital.
Retailers who have a strong price reputation like Walmart are in a
better position to leverage reduced assortment than many other
grocers whose shopper value equation is based on variables other
than price. Supermarkets who count on expanded assortment as
part of their shopper value equation will need to be smarter about
the SKU Rat approach they take. The opportunities are definitely
there, but straight across-the-board cuts will not work. Nor does it
make sense just to cut the big categories that take up a lot of
space.
Retailers lose money today on 25% of the categories and more
than half of the SKUs in the center store. We have conducted total
store analyses for Safeway, Kroger, Ahold, and SUPERVALU and we
consistently see the challenges big box supermarkets face. Even
well-run stores and strong centralized category management
programs have not been able to slow down the insatiable appetite
suppliers have for space. In many cases, we simply slice the pie
thinner when line extensions and non-value-adding SKUs make
their way on to the retail shelf. There is a huge cost for adding
new items that lack real innovation. It affects supply chain
efficiencies and reduces consumer/shopper satisfaction. Getting
space at all cost is a thing of the past and retailers are beginning to
drill deeply into the dead zones and non-value-added sections of
the store to free up capital and eliminate costs.
Where Do Your Categories
and Brands Fall?
So, the big question is: Do you know where you stand? Do you
know your Variety Score, and are your categories and brands
vulnerable to SKU Rat?
To determine category and brand vulnerability, it’s important to
look at key leading measures that, taken together, put clarity on
real contribution to space and retailer ROI. The leading measures
we look at and questions we answer are:
` Variety (Consumer) – What do we need to meet consumer
demand?
` Profitability (Money) - How much money do we make?
` Productivity (Shelf) - How productive is the space?
© Copyright 2009 Willard Bishop. All rights reserved.
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Where Do Your Categories
and Brands Fall? (Cont.)
` Working Capital (Inventory) - What is the inventory costing
and what is the ROII?
` YAGO (Growth) - Is the category growing or declining?
Developing a score for each of these leading measures and then
understanding how they, in totality, compare across categories and
brands produces a clear roadmap to prioritizing SKU Rat decisions.
It helps to ensure that productive pieces of real estate inside the
store are not affected before unproductive pieces of real estate.
Based on our Variety Scoring system, here are some of the top
food categories that may be vulnerable to SKU Rat.:
` Bottled Water
` Carbonated Beverages
` Cookies
` Ethnic/Specialty
` Fabric Softener
` Frozen Poultry-Meat
` Mexican
` New Age Beverages
` Salad Dressing
` Vinegar
Source: Willard Bishop 2009 Total Store SuperStudy™
Some of the top non-food categories vulnerable to SKU Rat include:
` Adult Nutrition
` Baby HBC
` Bath
` Cosmetics
` Diet Aids
` Grill Accessories
` Lawn & Garden
` Pet Supplies
` Skin Care
` Soap
Source: Willard Bishop 2009 Total Store SuperStudy™
© Copyright 2009 Willard Bishop. All rights reserved.
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Looking Ahead
Thirty years ago, stores turned 12.5 times a year. Today, stores
still turn 12.5 times a year. That means we’ve made no real
progress in improving inventory levels in the past 30 years. This is
a big area that we can improve on and a few traditional grocers are
beginning to put in place the mechanisms to improve payment
terms and reduce shelf inventory so they can get the cost of their
payables covered, just like Walmart. Expect less assortment and
lower store inventory levels in the next several years as grocers
look to reduce costs.
SKU Rat is usually a difficult discussion to have on the supplier
side. The thirst for more items and more shelf space is always
strong and rarely can suppliers reduce this thirst. Company
business models are built on growth and growth is hard to come by
without adding new products and lines. However, significant
opportunities can be had by getting out in front of the SKU Rat
movement.
Put yourself in a position to not only know where you stand, but
more importantly, develop a strategy to help retailers make space
more productive. Those companies that do are finding they can
win fair share of shelf and actually improve their overall financial
position. They are also in a stronger position to navigate through
these turbulent times.
Next Steps
To learn more about your category Variety Score and what strategies you should develop to defend or
promote SKU Rat across your categories, contact Paul Weitzel at (847) 756-3717, or
paul.weitzel@willardbishop.com.
For more information on Willard Bishop’s 2009 Total Store SuperStudy™, please contact Jackie Gray at
(847) 756-3718 or jackie.gray@willardbishop.com.
Willard Bishop’s Product Offers:
Total Store SuperStudy™ - The Total Store SuperStudy™ is the most
comprehensive information on total store performance in the supermarket
industry today. The study is completed every two years and provides visibility
into the performance of every category and sub-category across three leading
supermarket chains, delivered through a robust online web application.
Private Brand Performance Gauge™ - The Private Brand Performance Gauge™ helps you
understand the profitability of private brands, by category, so you can drive category performance and
better understand the potential impact of private brands on your business. Delivered through a white
paper and a set of analytic scorecards.
To learn more, contact Jackie Gray – 847-756-3718 – jackie.gray@willardbishop.com
If you wish to gain access to past Competitive Edge publications, please visit our website at
www.willardbishop.com and click on "Downloadable Insights," and log-in or register.
© Copyright 2009 Willard Bishop. All rights reserved.
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