P&G estimates that the average shopper spends a mere 2.5 seconds looking for an item but notices only half the items at the shelf. Reducing choice can actually increase sales in a given category, as experienced by Walmart in the UK (candle sales doubled after being reduced by 65 per cent) as well as in Canada (two of five peanut butter lines were dropped yet overall category sales increased). In 2010, P&G cut its assortment of soap and other skincare products by one-third at one retailer. Similarly, at another retailer, P&G reduced its offering of detergents and other fabric-care items by about 20 per cent. Despite the reduction in choice, sales grew in both categories. In a 2007 study, consultant Bain & Co estimates that SKU rationalization efforts can result in up to a 40 per cent sales increase for a retailer while reducing costs by between 10 and 35 per cent.
As Walmart and other retailers have rationalized the number of SKUs they sell (in order to focus on brand leaders and private label) and heightened their demands for genuine innovation and added value in terms of NPD, major CPG vendors have reacted accordingly. A number of them have reined in NPD, others have pledged to shrink the number of lines they offer, while others have gone further still — disposing of entire divisions (eg Sara Lee, Kraft) in order to focus on their areas of strength, brand leadership, authority and expertise.
Outsmarting the elephant As we have seen thus far, SKU rationalization is by no means a straightforward task. It requires a deep shopper understanding and ideally on a store-by-store basis. In order to get closer to achieving this, many retailers today are utilizing technology to learn which products are being purchased by which customers and when, why, for whom, how many etc. Data from dunnhumby, the market research company part-owned by Tesco and behind the retailer’s Clubcard scheme, shows that 85 per cent of shoppers tend to buy a range of products within one category rather than being devoted to one brand. It’s no surprise that retailers are increasingly looking to data to figure out which of those SKUs are interchangeable — therefore removable — and which ones must be kept in.
In fact, Tesco’s partnership with dunnhumby allows it to receive hourly grocery sales data for more than 15 million shoppers within days of purchase. Tesco gathers and analyses four billion pieces of data from shopping baskets every week. And for each SKU that goes through the checkout, 45 different pieces of data are analysed. Was it a brand or private label? Was it on sale or full price? Was it being purchased for self-consumption or for someone else in the household? This enables Tesco to segment its shopper base, tailoring both its marketing and its merchandising efforts to reflect the local demographic. In fact, the retailer’s direct mail redemption rate is an astonishing 98.4 per cent, compared to the industry average of 1 per cent. Customization means increased relevance of offering and promotions, which translates to opportunities for increased revenues as well as the reassurance that you are unlikely to remove important SKUs. Retail is increasingly becoming a scientific, fact-based business.
In his book, Any Colour You Like As Long As It’s Any Colour You Like, Martin Hayward comments:
In 1995, when Tesco Clubcard launched, one of the reasons it was so revolutionary was because the retailer was properly investing in rewarding loyal customers, rather than throwing money at chasing elusive customers it didn’t have. And it works. Over the last 10 years the proportion of Tesco’s growth from existing customers spending more, is greater than growth from new customers. This approach represents a sea change in the way marketing investment is spent.
However, there is a cost associated with all this technology and we know by now that Walmart is not a big fan of costs. Every year, Tesco sends out £500 million of rewards to Clubcard holders. Plus there are costs associated with, first and foremost, a subscription to dunnhumby, keeping the technology up to date, printing and delivery costs of the vouchers and labour costs associated with processing customers’ vouchers. Many would argue that there is a clear and justifiable return on investment, as seen in the financial improvement by dunnhumby’s global clients, including Kroger, Casino, Macy’s and Home Depot.
In fact, Walmart’s competitors in key markets such as the United States, the UK and Canada are increasingly turning to data mining as a means of battling the giant. They can’t always compete on price, so they might as well attempt to outsmart Walmart and drive loyalty by improving the relevance of their product assortment. In Canada, for example, Walmart only got into the food business in 2005 when it opened its first Supercentre. Within five years, Walmart was trading through more than 120 such stores and rapidly expanding into new territories. Considering the opportunity to convert another couple of hundred discount stores to the Supercentre format in Canada, it’s fair to say that price competition will remain fierce in future years. Metro, Canada’s third-largest grocery retailer, has always been overshadowed by larger domestic chains Loblaw and Sobeys, but it has especially felt the pinch since Walmart began its aggressive march into the Canadian food sector. From 2006 to 2009, sales grew by a mere 0.8 per cent on a compounded basis. It was time to break apart from the competition and differentiate. Metro partnered with dunnhumby in 2009 to re-launch its loyalty card scheme and begin analysing shopper data. They have since experienced an increase in basket size, card enrolment and percentage of sales using its loyalty card. All of this has helped to battle Walmart.
CEO Eric La Fleche commented that the scheme affects ‘the assortment we carry, the price we sell for, the promotions we make, the personal offers we can target. That’s the kind of stuff we need to compete in this environment with all the discount stores out there. Not to name the big elephant in the room, but Walmart is a big player.
Going back to the topic of SKU rationalization, data mining in many cases ensures that those important brands do not accidentally get thrown in the bin. In Metro’s case, the data led it to change the way it merchandises bottled juices — from beyond displayed by brand to displayed by flavour. ‘We were able to grow sales and have a clearer, simpler offer for the customer, with less assortment on the shelf. So we’re saving on the cost side... and we’re growing sales and margins’, La Fleche added.
Meanwhile, in the United States, Kroger, Walmart’s largest competitor in the grocery sector, has also used dunnhumby to reduce SKUs effectively in certain categories. In his book, Martin Hayward describes how one of dunnhumby’s very first tasks was to streamline the retailer’s range of 60,000 SKUs. The company identified 10 categories that could benefit from SKU reduction, and 8-45 per cent of the products from each of the 10 categories were removed. Hayward writes, ‘The delisted products were carefully selected according to rules dunnhumby had developed to ensure no essential items were removed. Results spoke for themselves, sales increased in nine out of the 10 categories because shoppers were finding it easier to shop from the edited ranges.
AUTHOR: Natalie Berg & Bryan Roberts
PUBLISHER: Kogan Page
PRICE: Rs 595
Excerpted with permission from the publisher. Copyright Kogan Page India. All rights reserved.