SKU Rationalization Done RightFebruary 13th, 2011 | Posted by in Uncategorized
Washington D.C. – In what has become a seasonal ritual, the Girl Scouts set up shop in front of our office building in March to sell their fabled mix of cookies. Mysteriously missing was one of my favorites: Dulce de Leche. No worries, more money to buy Thin Mints, my thinking went.
It was only after a colleague forwarded a Wall Street Journal article highlighting innovative changes being made in this year’s cookie line-up that I realized how much grocery and convenience retailers could learn from the Girl Scouts.
Girl Scouts and SKU Rationalization
It turns out the girl scouts are in the midst of reducing their assortment. But it is the way in which they are going about the SKU rationalization effort that is truly admirable. To quote from the article:
A dozen councils testing the cutbacks with licensed baker Little Brownie Bakers, which is owned by Kellogg Co., hope to streamline sales, speed up cookie delivery and, ultimately, increase profits.
In other words, the girl scouts are trying the changes before implementing them full scale. This is common sense. For most retailers, correct and profitable SKU rationalization is harder than for the girls scouts. The girl scouts’ test will be focused on one key question: when we reduce assortment, what happens to the sales of the remaining cookie types, ideally vs. a control group. Reducing assortment in some (test markets), but not all parts of the country (control markets) should inform the decision about whether to reduce the cookie assortment. For retailers, SKU rationalization needs to go a few steps further and it requires transaction level (T-Log) data, which is not always easy to analyze. Luckily, a growing number of tools are making analysis of this data easy and actionable.
SKU Rationalization for Retailers
For retailers, an understanding of product loyalty and the profiles of baskets is crucial to determining how shoppers may respond to the de-listing of an item and the resulting total economic impact. Understanding total economic impact goes beyond individual product profitability measures such as GMROI. It encompasses two criteria about any product on the shelf that can be learned from the T-Log data:
- Product Loyalty – There are a number of important factors to consider regarding product loyalty:
- How loyal are customers to each product? Have they demonstrated a willingness to substitute with competing products, or do customers who buy this product always return for the same SKU?
- How does that product loyalty picture look among the grocer’s highest value shoppers (most frequent and/or highest spending)?
- Basket Profiles – Similarly, choosing to reduce SKUs that are more commonly included in higher shopping baskets reduces the total value the customer brings to the store. Important questions to consider include:
- Is this product typically included in higher value baskets?
- Is this product a “driver” of the trip, or more frequently an afterthought?
Answering the above questions should inform which products are candidates for SKU rationalization. As the girl scouts teach us, the final step is to try the changes in a small, low-risk test before rolling them out everywhere. Only by testing the changes can retailers measure and understand customer response and adjust their product assortment accordingly in a full scale rollout.
Learn how APT’s Test & LearnTM software platform helps convenience retailers and grocers make decisions with confidence by downloading a white paper on SKU Rationalization.