ASSORTMENT PLANNING
SECTION ONE
SECTION TWO
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Putting the Shopper at the Center
Of Retail Assortment Decisions
Many retailers are rethinking the notion of carrying massive amounts of SKUs
on their shelves and are realizing that their stores have unique consumer
dynamics. They believe that SKU reduction programs need to maintain a focus
on the shopper. Retailers like Publix and other chains owe much of their success to such a shopper-centric approach.
Wal-Mart struggled to redefine the role of individual categories in their stores and the depth and breadth of product assortment choices. As a result, their (now-ended) SKU reduction initiative alienated many shoppers because Wal-Mart did not clearly understand the degree of loyalty for particular products. Just because a product is a slower-moving item does not mean that it does not have a loyal following. Take organic soup as an example. It does not have high velocities relative to the category, but if it is not available, the shopper will leave the store without making a soup purchase.
In some categories, national brands are not the drivers of the category. So retailers are looking to eliminate or significantly reduce the number of national brands on the shelf while expanding the presence of their more profitable store brands. We have seen this same phenomenon play out across many retailers as they appeal to value-conscious shoppers with formats ranging from Costco’s Kirkland brand at the high end to Wal-Mart’s Great Value in the mid-tier and Aldi’s store brands at the lower end of the value spectrum.
So what is the right approach to SKU, line (forms and sizes) and brand rationalization that reduces the risk of losing shoppers, reduces confusion at the shelf and maximizes returns?
The right approach starts with understanding how the shopper organizes the category into distinct segments based on their usage and purchase behaviors. When shoppers come to the shelf, it is essential to understand how they organize their needs and how they make purchase decisions. Understanding these behavioral dynamics will provide valuable insights in defining guiding principles for shelving and assortment. Henry Rak Consulting Partners (HRCP) uses our proprietary, attribute-driven MarketMap to understand switching behavior at a very granular level. It determines both usage and purchase behavior patterns which provide a holistic view of the consumer and the shopper.
In the case of adult analgesics, consumers may think about usage based on whether they have a headache or body muscle pain. From that starting point, how do shoppers make their purchase decisions? What is most important: brand, form (liquid or pills) or size? Are there other attributes that are important to consumers like convenience or flavors?
Once it has been defined how they use the product and make purchase decisions, organizing principles for SKU, line and/or brand rationalization can be established. For example, eliminating the bottom 20% of SKUs based on velocity may not necessarily reduce confusion at the shelf. It could potentially result in low velocity SKUs with high loyalty being discontinued, which could cause shoppers to choose another store.
The approach and tools chosen for SKU rationalization must be able to discern which products are truly incremental to the category and which are redundant based on actual shopper choices. This need in the market is what prompted HRCP to develop its MixMaster assortment planning tool. The goal was to precisely identify with those SKUs that are driving category growth versus those that sap category profitability.
The assortment planning tool defines the productivity of each consumer segment in the MarketMap, then determines which segments are candidates for growth vs. those that need to be rationalized. As retailers begin to make item add and delete decisions, the tool identifies where the product volume flows and how much volume leaves the category (walk rate). It also provides precision in understanding where new items will source their volume when added to the product mix. In some cases, the new product may be filling an unmet need and provide an incremental purchase to the category. Shopper switching behavior and the transferable volume flow from the MarketMap provides the critical inputs needed to create optimal assortments.
When it comes to brand rationalization, retailers must look at the number of brands that truly satisfy consumer needs. For a category like dry packaged desserts, which includes iconic brands with dominant market share like Jello, it is reasonable to hypothesize that no more than 2-3 brands satisfy consumer and shopper needs. In more complex categories like upper respiratory and allergy medication with many ailment symptoms like cough, cold and flu, there are most likely a distinct set of brands in each segment of the category that satisfy consumer needs. These needs dictate that a somewhat broader set of brands are required, but maybe not as many as are represented on the shelf today.
As these products are examined for deletion, it is important to understand shopper loyalty and which brands, forms, sizes and SKUs would cause shoppers to leave the store if they were not readily available. The range of assortment depth can vary by channel based on how shoppers value the depth of assortment. In the grocery channel, allergy products may be more of a convenience purchase and depth of assortment may not be critical. In the drug channel, allergy is a destination category where depth of assortment is valued and expected. Even when depth of assortment is valued, there is still considerable room for brand and SKU rationalization, but great care must be taken to understand SKU/brand incremental value and loyalty.
SKU, line and brand rationalization should not be a one-time event, but an ongoing process to capture the latest segment trends. The benefits, if done correctly, are improved retail shopability, increased distribution on core power SKUs, and greater category volumes with fewer SKUs which leads to improved gross margin return on inventory investment (GMROI) for retailers. This process needs to be collaborative between retailer and manufacturer to ensure that all SKUs are given similar scrutiny.
The end game is reducing confusion at the shelf, improving category metrics like revenue and GMROI, and satisfying shopper needs at the category segment level.
This essay was written by Paul Thompson, a Managing Director with Henry Rak Consulting Partners (HRCP). For more information, visit www.hrcpinsights.com.
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SECTION THREE
