,

FROM SHELF

TO SALEEvery retailer wants to maximize profits,

but getting there relies on a dedicated SKU"rationalization" plan.

BY DAVID BISHOP

Lowerinventory costs, less

clutter, more room foremerging opportunitiesand fewer out -of-stocks ontop-sellers are often the

phrases tossed around when retailerstalk about leveraging SKU rationaliza-tion to drive stronger performance.

On the other hand, words like com-plexity, continuous, commitment, costand conflict usually capture the essence

28 nacsonline.com MAY 2010

of the obstacles encountered by retail-ers who have actually lived throughSKU rationalization.

These two divergent perspectivesunderscore the various challenges -and opportunities - retailers workthrough when tackling SKUrationaliza-tion. And it's not that SKU rationaliza-tion isn't worth the effort, but rather it'sbeneficial to understand early on how itfits with current strategies, aligns with

IIIIIIIIIIIII!IIIIIIII!~IIII~~

III

About the SurveyThe NACS/Balvor SKURational-ization Survey was fielded inlate February and early March2010. A total of 133conve-nience retailers - representingmore than 22,000 stores - re-sponded to the online survey.Balvor completed follow-uptelephone interviews with asample ofthose respondents tocapture further insights.

J

.available resources, supports the bu i-ness plan and enhances the customerexperience.

To help frame SKU rationalizationfrom that perspective, NACS and Balvorexamined the topic from the convenienceretailer's point of view via a SKU ratio-nalization survey. A total of 133 conve-nience retailers - representing morethan 22,000stores - participated.

Why RationalizationWhile the majority of convenience re-tailers stock between 2,501 and 3,500SKUs per store (see chart 1), the averagenumber of SKUs carried at any specificpoint in time lands at slightly more than3,000, according to the NACS/BalvorSurvey. And, while this range of assort-ment is dramatically less than larger-store formats, there's still plenty of roomfor convenience retailers to improvetheir offering.

Consider one recent retail analysis: A

chain offered only around 2,000 SKUsper store, and Balvor documented that19percent - or 385 of the SKUs on aver-age - contributed a whopping 80 per-cent of the total unit sales for the store.Analysis further revealed that 95, andeven 98 percent, of a store's unit saleswere generated from only 50 to 65 per-cent of the SKUs, respectively. (Seechart 2.)

It's percentages like these that moti-vate retailers to undertake a SKU ratio-nalization initiative. But you shouldn'trush out and ban the low-volume prod-ucts from your store. Low-volume prod-ucts still add value, even though it's lessclear how.

"In some categories -like grocery-we learned that we cut way too muchafter analyzing sales," said JohnSchaninger, vice president of marketingat Whitehouse Station, New Jersey-based Quick Chek. "The cuts impactedcustomer perceptions about the store-

CHART1

Average Number of SKUs Offered per Store(Percent of Retailers)

CHART2

Contribution to In-Store Sales(Percent of SKUsGenerating)

(Source: NACS/Salvor SKU Rationalization Survey arch 2010)

1,500 or Less 1,501 to 2,500 2,501 to 3,500 3,501 or More

80%ofUnitSales 95% of UnitS ales 98%ofUnitsales

30 nacsonline.com MAY 2010

(Source: Salvor LLC analysis based on 13 weeks of SKU·level dataacross 8 convenience stores, 4Q09)

CHART3Why Stores Offer Many Low-Volume SKUs

(Percent of Retailers Agreeing)

(Source: NACS/Balvor SKU Rationalization Survey, March 2010)

Beeligible for additional monies from supplier

not just the category." The insightprompted the chain to reevaluate thecuts. Schaninger explained, "We wantto ensure that our customers are com-fortable visiting our stores, knowingthat we'll have some type of selectionavailable."

So, while there's room for improve-ment, retailers need to be careful not toeliminate products that may negativelyinfluence the store's overall positioning.

Less IsSometimes MoreAfter reviewing a sales ranking report,it's a relatively easy question to ask:"What's the value of so many low-sellingproducts?" However, the answer is sur-prisingly complex, highlighting some ofthe challenges that retailers face in themidst of SKU rationalization.

Brad Griffin, vice president of oper-

ations and marketing at Cheers Foodand Fuel, based in Paducah, Kentucky,sees SKU rationalization as a way "tobuild loyalty with our customers." Infact, over the last several years, theirIt-store chain has brought back prod-ucts based on customer feedback forjust that reason.

"We put signs at the checkout thatread. 'Did you find everything?' and wetrained our cashiers to ask the questionwhen ringing up the sale," Griffin indi-cated. ..If the customer mentionedomething, the cashier would write a

note in the book. which we reviewedmonthly." ince Cheers didn't scan, thisme ic w critical to getting customerf ack, bu it' a technique that even- ~"1"" retailer could employ to com-

data analysis.rs Food and Fuel's motivation is

What Is SKURationalization?SKUrationalization is "a process bywhich a retailer selects the SKUsin eachcategory that will maximize profit andsize of the market basket, while takinginto account the store's customerprofile, unique competitive position-ing, and store size," according to aworkshop on the topic at last year'sNACSShow ("How Many IsTooMany? Making Your Product SelectionWork for You").

Look to Walmart for a good exampleof SKUrationalization in practice. Its"win, play, show" merchandisingstrategy increases assortment tocapture more market share in catego-ries designated "win" or "play," sincethey are more important to its growthplan. "Show" categories experienceSKUreductions since these are consid-ered low in importance to the depart-ment and with low growth prospects.

Ina similar way, convenience retailersare fine-tuning what products theyoffer in stores. According to the NACSIBalvor survey, 60 percent ofthe retailersindicated that SKUrationalizationwithin their business isassociated with"offering the correct mix of products."And, even though lessthan 5 percentbelieve it means "reducing the absolutenumber of products carried," thatdoesn't imply that there aren't oppor-tunities to improve productivity inselect areas ofthe store.

Convenience retailers -likeWalmart - determine the correctassortment mix based on several keyfactors and metrics, which isa continu-ous process of measuring, modifyingand monitoring how customers respondto changes in the selection.

MAY 2010 NACS Magazine 31

Ninety percent ofsurvey respondentsoffer many low-volume SKUs to servevalued customersthat shop the store.

similar to that ofother convenience retail-ers, as nearly 90 percent of survey respon-dents agreed that they offer many low-volume SKUsto "serve valued customersthat shop the store(s)." (See chart 3.)

But loyalty is not the only driver forholding on to low-volume SKUs. Justover three-quarters of retailers sur-veyed agree that many lower-volumeSKUs are often carried to offer morecomplete variety. However, accordingto Tony Noonan, director of marketingat Mount Olive, North Carolina-basedHandy Mart Convenience Stores, it'sless clear what "variety" means to anygiven retailer.

Noonan offers more SKUs from aparticular beverage manufacturer notbecause of a contract requirement, butbecause he wants to ensure he offers

CHART4How Often Do You Use the Following When

Making Assortment Decisions?(Always or Most of the Time)

Internalsalesdata

Marketbasketdata

Consumerpanel data

Wholesalershipment

data

Syndicatedsales data

Purchasedecision tree

research

(Source: NACS/Balvor SKU Rationalization Survey, March 2010)

32 nacsonline.com MAY 2010

consumers enough variety. "When look-ing at the sales numbers, I realized that40 percent of the SKUsdrove 90 percentof the sales." It was eye-opening andconcerning to him.

If having too many SKUs causes atop-seller to go out of stock, then boththe manufacturer and the retailer standto lose a sale, explained Noonan. In thiscase, "everyone would benefit if we sim-ply removed some slower sellers andgave more facings to the top ones," hesaid.

So in this context, variety means en-suring that the products your customerswant most are always available beforedetermining how much more choice ispossible.

What Stays, What GoesAlthough few retailers agreed that theycarried low-volume SKUs inorderto "beeligible for additional monies," it's evi-dent from retail discussions that this oc-casionally does influence assortmentdecisions.

In terms of approaches, two schoolsof thought dominate: the buy-side fo-cuses on getting as many rebates as pos-sible, and the sell-side searches for newways to better satisfy the customer.John Zikias, vice president of market-ing at Louisville, Kentucky-basedThorntons, says that the convenienceand petroleum retailing chain falls inthe latter. He believes that "you'll al-ways make more money selling theright items as opposed to squeezing an-other nickel out of a supplier."

Even though Zikias acknowledgesthat it's generally easier for categorymanagers to walk into the boss' officewith a big check, he tries to emphasizethat that approach may not generatemuch profit over time. Doingwhat's bestfor their customers will.

However, with some categories it's

1/

III~I220 6

111111111111a 495220 6

If having too manySKUs causes a top-sellerto go out of stock. thenboth supplier and re-tailer could lose a sale.

34 nacsonline.com MAY 2010

.IJJll

critical for retailers to comply with man-ufacturer contracts to remain competi-tive, but that's different than deciding tocarry an extra number of SKUs becausea supplier incentivizes you to do so.

The risk associated with skewing toomuch to the buy-side is that while youmay make a little more on the front end, itmay end up costing you more if the prod-ucts fall out of code or get stolen because

Proceedwith Caution!Becareful notto eliminateSKUsthat:

• Shoppers perceive asnothaving an acceptable substi-tute.

• Support your store's uniquecompetitive positioning.

• May have low demand, butstrong appeal with key shop-per segments.

II Ia 495220 6

they languish on the shelf and have ahighretail value - such as cigarettes.

Measuring PerformanceConvenience retailers mainly rely on in-terna~ sales data to make decisions aboutproduct assortment. For those thatdon't, it's typically because they don'tscan and therefore depend heavily ontheir distributors for data. (See chart 4.)

When making decisions aboutwhich products to remove, 85 percentof the convenience retailers surveyeduse unit volume as the most commoninternal data metric. "Volume per out-let selling" is a specific volumetric thatretailers rely on as it helps to highlightthe value associated with products thatsell well but have limited distribution.

Although transactional data helpsretailers understand cross-categorypurchase patterns, only 20 percent ofthose surveyed use this kind of datamost of the time or always as part oftheir rationalization process. One po-tential consequence of not using mar-

TABLE 1

What Would You Do With the Free SpaceIf You Removed Existing SKUs From ...?(Percent of Retailers - Top Two Responses)

Usespaceto add newproducts in the

category

Give more spaceto top-sellers in

the category

55%Candy

Shift spacetoanothercategory

52%Cigarettes

50%Beer

59%Salty Snacks

(Source: NACS/Balvor SKU Rationalization Survey, March 2010)

ket basket data: a retailer discontinuesa low-volume product with strong ap-peal to a key shopper segment.

And while insights into how custom-ers shop help identify and protectunique items that have no acceptablesubstitute in the store, only a few conve-nience retailers leverage purchase deci-sion tree research since that data is notgenerally available to most.

Store-Level ExecutionIf the ultimate consequence of SKU ra-tionalization is to maximize profits,then how retailers apply it to differentparts of their business will vary, which iswhat our surveyed convenience retail-ers also indicated.

What would convenience retailersdo with the open space gained by re-moving existing products from variouscategories? (See table 1.) Based on thesurvey, retailers are likely to:

• Increase facings for top-selling SKUsin high-share categories. More thanhalf of the retailers surveyed would u e

49%General

Merchandise

48%Health &

Beauty Care

this tactic with cigarettes and beer.Whether fast-selling or larger cubeditems - or both - retailers want to en-sure availability to prevent losing itemsales, or customers, to the competition.

• Add more new products in moderate-share categories. Salty snacks and can-dy are the top categories retailers wouldinve t in when expanding assortment.Most retailers understand the impor-tance of new products in driving catego-ry growth in these two areas.

• Shift space away from low-share cat-egories. In categories such as generalmerchandise and health and beauty care,retailer are most likely to give morespace to an existing category or to makeroom to test new category offerings.

Unique category attributes providethe exception. For instance, while pack-aged ice cream/novelty is a low-shareca egory vith relatively low growthp _ - in convenience, most retailersw - any freed up space to add new

products back into the category. With thecategory usually merchandised in astand-alone, freezer chest, it's difficult toshift the space to another category. How-ever, it's still possible to use a smaller fix-ture, ifit makes sense.

What this insight reinforces is thatSKU rationalization should, at mini-mum, take into account the role of thecategory to the business, including cur-rent strategies, growth potential andpossibly the presence of important man-u facturer contracts.

Customer DemandManaging assortment decisions is onlyone element of the marketing and mer-chandising mix. Beyond selecting theright products to offer, you need to en-sure availability by minimizing out-of-stocks with proper space allocations,build demand by effectively promotingand communicating the deal, offer agood value by pricing competitivelywhere it matters most, place productsin the right locations to drive higherconversion rates - the list goes on.

As Quick Chek's Schaninger stated,"There's many things that you need todo right, which is why retailing is noteasy."

"Don't try to do too much all at once.Apply the crawl, walk, and run approach,"recommended Zikias, who added, "Fac-tor in your strategies and positioning intothe process so it supports where you'retrying to take the bus iness,"

In the end it's about satisfying theneeds and wants of the customers whowalk through' your doors while stillmaking the profit you're expecting tomake.I~~.

David Bishop specializes in convenienceretail and is the managing partner atBalvor LLC, a sales and marketingfirmlocated inBarrington, Illinois. He can bereached at davidbishop@balvor.com.

MAY 2010 NACS Magazine 35

;