Rethinking SKU Rationalization

Aldata, Apollo Solutions Group

Nine steps to improve merchandising, reduce out-of-stocks and inventory, and boost the bottom line

In today’s challenging economic environment, retailers are exploring ways to cut costs and free up capital. In addition to reducing inventory and streamlining operations, more retailers are closely examining what products they sell. According to reports, industry executives and analysts have predicted a large number of retailers would reduce their product assortment by up to 15 percent. By reducing the number of stock keeping units (SKUs) they carry, retailers can improve merchandising, reduce out-of-stocks, cut excess inventory, reduce shopper confusion and improve their bottom line.

Decisions about what products and brands to carry are more pressing for convenience stores, which grapple with different challenges than other retailers. C-stores typically have limited shelf space, less room to stockpile inventory and face stiff competition from larger retailers and category-specific retailers. In this environment, choosing the right mix of merchandise and services is critical. C-stores can distinguish themselves from the competition and lure shoppers by offering an optimal mix of products and services.

When implementing a SKU strategy, here are some key considerations for convenience store operators:

Understand target shopper requirements. It is crucial retailers understand their target shoppers’ requirements in terms of variety and brand choice for each stocking category. By tapping into their data, including point-of-sale (POS) data, retailers can identify shopping patterns, quick turnover and stale items. Customer data can provide valuable insights, which is critical since some convenience stores only have room for a small number of SKUs per product segment.

Align SKU approach with retail strategy. A retailer’s assortment should be consistent with its store strategy. For example, a c-store that caters to mostly commuters may want to offer services such as on-the-go food and a wider variety of beverages. Customizing a store’s offerings to reflect an area’s unique shopping characteristics will enable retailers to better manage and select SKUs, and help them stand out among the competition.

SKU rationalization is part of an item lifecycle management process. Retailers should view SKU rationalization as an element of their overall product lifecycle management and as a way to effectively deliver positive financial results. This is particularly critical for convenience stores due to the limited amount of selling space in most locations and the highly impulse-driven nature of their customers.

Consider marketplace product availability. Retailers should understand product availability within their marketplace to make ideal decisions related to SKU assortment. This will ensure retailers offer a selection consistent and competitive with alternative shopping channels. For convenience store retailers, this requires careful examination of the store trading area, as well as transportation routes.

Leverage existing relationships to gain market insights. In contrast to other retail channels such as food or apparel, most convenience stores are owned by independent operators or franchisee owners. As a result, c-stores may not have access to the same data and resources as larger retail chains. However, c-stores should leverage relationships with distributors and industry associations to gain insights on trends and hot products, helping them make better-informed decisions about what products would succeed in their area.

Visibility into product carrying costs vs. incrementally. Retailers must find the optimal point on their cost/profit curve that drives the best financial results for the company. Consider that the law of diminishing return will create excessive costs or lost profit at all but one spot on the curve. For convenience store owners, this decision may lead to dramatic shifts in on-shelf inventory vs. foodservice offerings such as portable meals, expanded beverage service and co-branding.

Tailor decisions at a meaningful level. An increasing number of retailers are executing category tactics such as assortment on a store-by-store basis. While this level of planning proves highly accurate, it is not always necessary to achieve the desired financial impact. Instead, retailers should tailor SKU rationalization decisions at a level across their store network that is meaningful for their business. This may require segmenting stores not just by size and layout, but other factors such as shopper profile, climate, competition or proximity to points of interest.

Test before you execute. SKU rationalization can dramatically impact a business - both positively and negatively - based on the accuracy of planning and execution. Instead of rolling out SKU rationalization decisions across the entire store simultaneously, prudent convenience store retailers will implement planned decisions in a group of categories or test stores to measure the actual impact and validate their estimated impact.

Not a one-time adjustment, but a change in strategy. Convenience stores should approach SKU rationalization as a change in strategy vs. a one-time adjustment in their business. This will avoid the dangerous cycle of over-assorting and abrupt reductions in selection that can alienate shoppers. This is particularly important for convenience store retailers since many of their SKUs and categories have low turnover rates and limited reclamation points.

Most convenience stores have a limited amount of space in which they can merchandise a variety of categories and SKUs. Stocking more SKUs is not feasible or even key to increasing sales. Rather, it’s critical c-stores use their unique characteristics and embrace smart SKU rationalization. When done correctly, c-stores can make informed decisions about what SKUs they carry, reduce costs tied up with excess or stale inventory, while increasing consumer satisfaction and sales.

Shaun Bossons is senior vice president and responsible for the Apollo business unit with Aldata. He joined Aldata as part of the Apollo acquisition from Information Resources Inc. Prior to his role with Information Resources Inc., Bossons worked for Galleria Retail Technology Solutions, an assortment and space-planning solution vendor for more than nine years in various executive positions. To contact Aldata, e-mail [email protected].

Editor’s Note: The opinions expressed in this column are the author’s, and do not necessarily reflect the views of Convenience Store News.