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Limiting Assortments Likely to Help Private Label

October 5, 2009
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Finding the right assortment always has been a goal. But thanks to the economic downturn, retailers intent on improving their financial position are taking a fresh look at SKU rationalization.

According to the September issue of Competitive Edge, a monthly newsletter from Barrington, Ill.-based Willard Bishop, assortment and inventory are two of only a handful of operating expenses that retailers have control over, making them a prime target for cost-cutting measures.

"In the past," the report said, "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."

Led by Walmart, with a Win/Play/Show strategy that is expected to result in a 15 to 18 percent reduction in assortment, SKU rationalization offers several benefits, including better holding power on big brands, fewer out-of-stocks and lost sales, sections that are easier to shop, a reduction in store labor and, perhaps most important, more than $100,000 per store on average in freed-up capital.

To determine which categories are most vulnerable to SKU rationalization, Willard Bishop created a scoring system that measures five key variables, including the importance of variety in a given category, category profitability, productivity of the space, working capital/cost of inventory, and category growth.

According to the company, food categories most susceptible to SKU rationalization include bottled water, carbonated beverages, cookies, ethnic/specialty foods, frozen poultry-meat, Mexican foods, new-age beverages, salad dressing and vinegar. Non-food categories open for SKU rationalization include fabric softener, adult nutrition, baby HBC, bath products, cosmetics, diet aids, grill accessories, lawn and garden care, pet supplies, skin care and soap.

How will private label alternatives hold up under such scrutiny? Although it depends on the category, Paul Weitzel, Willard Bishop managing partner and author of the report, told PL Buyer he expects most store brands to survive SKU rationalization initiatives, thanks to their longer margins and higher penny profits.

"But if a private label SKU isn't adding any value, it shouldn't remain on the shelf," he remarked, adding that best-in-class retailers understand that even store brands must support the chain's overall strategy.

To give store brand products a better shot at remaining on the shelf, Weitzel recommended that private label manufacturers focus on developing truly innovative products that do not duplicate what's already available from the national brands. He also suggested they consider trimming their assortments as well, eliminating items that don't add value or drive profitability.

"In many cases," the report said, "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."

Yes, Weitzel admitted, SKU rationalization can be painful, as entire brand lines are eliminated from some categories. But store brands that make the cut are likely to enjoy even better sales post-purge.

"Private label should thrive in a world where there are fewer brands and fewer SKUs," he explained, adding that everyone left standing will get a bigger piece of the pie. "And, sections will be easier to shop, and shelf-holding power should improve."

The challenge, he concluded, is to find just the right balance.

"We need to understand what shoppers really want and make sure we don't bombard them with all the other stuff they don't want. … We also need to make sure that there are no negative consequences from the cumulative effect of cutting too many SKUs across too many categories. Shoppers still like choices. We can never forget that."

To read the report in its entirety, go to http://www.willardbishop.com, click on "Downloadable Insights" and either log-in or register. For more information about Willard Bishop's category scoring system, contact Weitzel at 847-756-3717 or paul.weitzel@willardbishop.com.

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