A new study by the Nielsen Co. sheds considerable light on the complexities and pitfalls of SKU optimization programs for retailers.

SKU optimization, Nielsen, SKU reduction, SKU rationalization, Consumer 360 Conference, Stuart Taylor, grocery retailers, product assortments, SKUs, inventory, Greg Jacobson, Bill Simon, Walmart, Walgreens

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Retailers warned to choose carefully in cutting SKUs

June 16th, 2010

LAS VEGAS – A new study by the Nielsen Co. sheds considerable light on the complexities and pitfalls of SKU optimization programs for retailers.

The report, presented at Nielsen’s Consumer 360 Conference here, cautions that SKU optimization should be carried out as a careful strategic process that balances the interests of retailers, manufacturers and consumers.

According to Nielsen, about 42% of grocery retailers decreased their product assortments in 2009 by an average of about 5%, while one-third maintained the status quo. Somewhat surprisingly, 22% actually boosted their assortments by 3% on average. The net outcome, though, was an overall assortment reduction of just 1%.

The report analyzed 32 product categories and found that 23 experienced an average decrease of 2% in the number of SKUs offered. The most heavily impacted were cookies (-8%), bottled water (-6%) and shampoo (-4%). The biggest winners included shower gels (+6%), yogurt (+6%) and carbonated soft drinks (+3%).

Retailers cited a variety of reasons for the programs. For instance, 75% stated they are looking to improve merchandising opportunities, while 71% are seeking better control of inventory. About 60% claim they are trying to reduce shopper confusion while 52% are attempting to lower costs and increase profitability. Finally, 48% acknowledged they are trying to make room for more profitable store brands.

The biggest hazard lies in taking a chain-saw approach to SKU reduction. More than 90% of the retailers who claimed to have reduced their assortments made their decisions through a simple process of eliminating flavors, pack sizes and other variables within brands, while almost 70% set their sights on third- and fourth-tier brands, often with the goal of expanding private label offerings.

The Nielsen study warns that retailers should consider the interaction of products when making assortment decisions, focusing on nonincremental items when making cuts.

“Reduced assortments are definitely here to stay, and the message to retailers is to choose carefully when it comes to deciding which products to trim,” said Stuart Taylor, vice president of custom analytics for Nielsen. “In many cases, strategically reducing assortments can result in an improved customer experience and greater profitability. Cut the wrong product, however, and the potential customer backlash could be costly.”

In fact, more than half of consumers surveyed by Nielsen indicated they would be likely to change stores if they notice a decrease in assortment. However, the merchandise-reduction programs of such major chains as Walmart, Walgreen Co. and Supervalu Inc. have not, apparently, caught the eye of most of their shoppers. Only 7% of consumers polled by Nielsen reported a noticeable drop in product variety.

The Nielsen report explores the implications of such moves in terms of consumer response. For example, 7% of personal care shoppers said that when they find a store does not have the item they want, they will leave it without buying anything in the category, and will often take their entire shopping trip elsewhere.

Walmart executives have vividly described the impact of removing one item. During an investors’ conference in March, Bill Simon, executive vice president and chief operating officer of Walmart Stores U.S., noted that eliminating a slow-moving $1 item can lose an entire shopping basket worth $60 to $80. Consequently, the retailer has added back about 300 items it had culled from its shelves.

Similarly, Walgreens has backtracked on SKU-reduction moves that eliminated nearly 50% of SKUs that it classified as impulse or convenience items, often in such categories as hardware or automotive. It has returned several hundred eliminated products to the shelves of stores that derived a higher percentage of sales from the eliminated items.

Nonetheless, Nielsen predicts that SKU rationalization will continue, with economy brands being targeted as private label expansion is considered. To be successful, however, the report concludes that retailers will have to relinquish their historical approach of examining SKU rankings at the category level and instead focus on a more strategic, ongoing approach that balances incremental opportunities across departments, categories, segments and brands.

“Success is no longer about having the most products; it’s about finding the right mix of products,” said Taylor. “Retailers should be focused on offering the products their customers want most and making it as easy as possible to find and purchase those products.”