Executive Briefings

Silver Lining: Is the Recession Bringing an End to SKU Madness?

Anyone who has ever stood in the toothpaste aisle of a Wal-Mart or Target store knows what a confusing experience it can be. Which of those several dozen kinds of Crest toothpaste do you want? The one for sensitive teeth? With extra whitening? Tartar protection? Baking soda? Paste or gel? Fresh mint or cool mint? Or how about multicare? Consumer choice is all well and good, but this is a shopper's nightmare. And it's just as tough on the manufacturer's supply chain managers. Every one of those items requires an accurate demand forecast and "perfect" order fulfillment. The same goes for a host of consumer products, from cookies to razors to pet food. The emergence of the big-box retailer over the past couple of decades has created acres of shelves that must be filled with product, giving birth to a new age of variety.

Now, that picture appears to be changing. According to a recent article in the Wall Street Journal, mega-retailers such as Wal-Mart are cutting back sharply on SKU assortments within key product categories. They're looking to save money by simplifying their offerings and reducing inventories, even as they make room for more private-label merchandise. From a consumer's standpoint, that's good news. Who really needed all those different kinds of toothpaste? And if the change leads to lower prices, who can complain, other than the marketing geniuses who spend their time dreaming up new variations on mundane products?

It's good news for supply chain managers, too, says Diane Berry, CEO of the Vendor Compliance Federation (www.vcfww.com). They'll have an easier time figuring out what to put on the shelf, and the change is likely to prompt companies to "take a very detailed review of all the different types of [a] product, and the different costs associated with manufacturing," she says. What's more, manufacturers could be prompted to offer fewer but more specialized products that are better tailored to regional consumer tastes. A recent VCF conference found analysts worrying about the encroaching "commoditization" of the retailing experience, with stores in every part of the country carrying exactly the same array of products.

SKU proliferation arose in part because retailers assumed that the more choices they offered consumers, the more they would sell, says Bob Houk, executive director of Trade Promotion Management Associates (TPMA, www.tpmaww.com). All well and good, he says, "but at what point do you reach a point of diminishing returns, cannibalizing sales and increasing your costs?" Another reason for the trend was the higher slotting fees that manufacturers give merchandisers for displaying additional products. Finally, there's the motivation among suppliers to monopolize retail "real estate" and drive marginal products off the shelf.

But there's a downside to SKU rationalization, especially for sellers of branded merchandise. Houk says retailers are likely to fill at least some of the space with more private-label goods, sales of which have grown steadily in recent years due to their lower price points. Smaller manufacturers, too, will have an even tougher time competing against a Procter & Gamble or Unilever for shrinking display space. If a store limits its offering to one or two variations of a given product, there's less of a chance that one of the surviving suppliers will be a small player. "As you cut back on SKUs," says Houk, "you're probably also going to cut back on vendors."

Of course, everything goes in cycles, so we can expect to see some increase in product variety when the economy finally recovers, as merchandisers look for new ways to attract the jaded consumer. And there's only so much cutting that retailers can do. But Berry thinks that some of the recent changes in product mix might last longer than the current recession. In a down economy, consumers get used to saving money, and won't immediately return to their old ways when things begin to get better, she says. Meanwhile, private labels will continue to grab more market share, as big-box retailers seek higher profit margins and consumers shop for bargains. "We're getting a pretty solid increase in private label this time," says Houk. "My expectation is that it won't go back to what it was."

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Anyone who has ever stood in the toothpaste aisle of a Wal-Mart or Target store knows what a confusing experience it can be. Which of those several dozen kinds of Crest toothpaste do you want? The one for sensitive teeth? With extra whitening? Tartar protection? Baking soda? Paste or gel? Fresh mint or cool mint? Or how about multicare? Consumer choice is all well and good, but this is a shopper's nightmare. And it's just as tough on the manufacturer's supply chain managers. Every one of those items requires an accurate demand forecast and "perfect" order fulfillment. The same goes for a host of consumer products, from cookies to razors to pet food. The emergence of the big-box retailer over the past couple of decades has created acres of shelves that must be filled with product, giving birth to a new age of variety.

Now, that picture appears to be changing. According to a recent article in the Wall Street Journal, mega-retailers such as Wal-Mart are cutting back sharply on SKU assortments within key product categories. They're looking to save money by simplifying their offerings and reducing inventories, even as they make room for more private-label merchandise. From a consumer's standpoint, that's good news. Who really needed all those different kinds of toothpaste? And if the change leads to lower prices, who can complain, other than the marketing geniuses who spend their time dreaming up new variations on mundane products?

It's good news for supply chain managers, too, says Diane Berry, CEO of the Vendor Compliance Federation (www.vcfww.com). They'll have an easier time figuring out what to put on the shelf, and the change is likely to prompt companies to "take a very detailed review of all the different types of [a] product, and the different costs associated with manufacturing," she says. What's more, manufacturers could be prompted to offer fewer but more specialized products that are better tailored to regional consumer tastes. A recent VCF conference found analysts worrying about the encroaching "commoditization" of the retailing experience, with stores in every part of the country carrying exactly the same array of products.

SKU proliferation arose in part because retailers assumed that the more choices they offered consumers, the more they would sell, says Bob Houk, executive director of Trade Promotion Management Associates (TPMA, www.tpmaww.com). All well and good, he says, "but at what point do you reach a point of diminishing returns, cannibalizing sales and increasing your costs?" Another reason for the trend was the higher slotting fees that manufacturers give merchandisers for displaying additional products. Finally, there's the motivation among suppliers to monopolize retail "real estate" and drive marginal products off the shelf.

But there's a downside to SKU rationalization, especially for sellers of branded merchandise. Houk says retailers are likely to fill at least some of the space with more private-label goods, sales of which have grown steadily in recent years due to their lower price points. Smaller manufacturers, too, will have an even tougher time competing against a Procter & Gamble or Unilever for shrinking display space. If a store limits its offering to one or two variations of a given product, there's less of a chance that one of the surviving suppliers will be a small player. "As you cut back on SKUs," says Houk, "you're probably also going to cut back on vendors."

Of course, everything goes in cycles, so we can expect to see some increase in product variety when the economy finally recovers, as merchandisers look for new ways to attract the jaded consumer. And there's only so much cutting that retailers can do. But Berry thinks that some of the recent changes in product mix might last longer than the current recession. In a down economy, consumers get used to saving money, and won't immediately return to their old ways when things begin to get better, she says. Meanwhile, private labels will continue to grab more market share, as big-box retailers seek higher profit margins and consumers shop for bargains. "We're getting a pretty solid increase in private label this time," says Houk. "My expectation is that it won't go back to what it was."

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