Wawa Shrinks To Grow

Mid-Atlantic chain makes informed choices on SKU rationalization through business intelligence tools

What if you could predict how shoppers might react if you removed their favorite SKU from store shelves? Would they choose an alternative item, or would they take their purchases elsewhere? The answers to these questions can come in the form of business intelligence (BI), a retail technology tool increasing in popularity and use among the convenience store industry.

According to the 2010 Convenience Store News Technology Study, 74 percent of c-store chains use BI, up from 66 percent in 2009. The majority of chains use vendor-based BI products, and of all the possible uses of BI tools, market basket analysis holds the highest interest among the industry.

Market basket analysis can be used as a component of the decision-making process of a SKU rationalization program. Understanding the importance of an individual SKU on baskets and shopper loyalty was the topic of a recent Webinar hosted by CSNews and sister publication Progressive Grocer, during which Wawa detailed its successful SKU rationalization efforts in its fresh food case.

With 570 convenience stores in the Mid-Atlantic U.S., Wawa boasts a very strong and loyal customer base, and for this reason, the chain was hesitant to make drastic SKU reduction changes, as it feared those changes would impact or disrupt its current customer base, said Sarvath Amjed Jones, senior financial analyst, planning and analysis for Wawa. “We hesitated to do this [in the past] because we didn’t have the right analytical tools,” she said during the Webinar, which was sponsored by Applied Predictive Technologies (APT).

But since implementing APT’s Market Basket Analyzer and Test and Learn software packages in the fall of 2008, the convenience store chain has moved away from making decisions on its own perceptions and emotions, to making decisions based on data and executing tests. Using the software packages, Wawa has made several successful rollout decisions based on positive test results, or opted not to make the changes when tests were unfavorable. Areas covered in tests to date include labor, new product introductions, promotions, product rationalization, cannibalization, gas pricing and more.

For one of its tests, Wawa sought to find a way to reduce spoilage costs in stores, as well as decrease pressure on the production and distribution side of grab-and-go fresh food items in its Express Case, which include sandwiches, wraps, salads, fresh fruits and more.

“The challenge we faced with the Express Case was that we felt we needed to fill the cases to maintain a good representation, and more importantly, to make sure customers had a good variety,” she explained. “We thought we could simplify the core Express Case offering without losing purchases.”

To determine if this was possible, Wawa tested a SKU rationalization program in a set of stores representative of the chain’s markets. SKUs were reduced by half for each category in the Express Case, leaving only those most popular items in purchase transactions, according to Jones.

“We wanted to ensure the most popular and profitable products were retained, but that we would not lose any customers to the lost variety,” she said.

In the test stores, Wawa did see a net loss of roughly 10 percent of its margin on the Express Case items. But when looking at the performance of the retained items in the case, all SKUs realized a net increase in margin and sales, though it was not enough to offset the margin decline, Jones explained.

However, looking at the bigger picture, the rationalization resulted in a reduction in store spoilage costs that more than offset the decline in margin in the Express Case, according to Jones. It also caused builtto-order (BTO) product margins to increase, as salad and sandwich Express Case customers switched to BTO options. This transition of customers did improve overall profitability of stores, as margin per transaction for BTO customers are higher than the Express Case customers.

Wawa also gleaned several in-sights from the test, including that the reduction negatively impacted the performance of salads and sandwiches in the Express Case more than the wraps, because the chain offers BTO options for the first two product categories, whereas the Express Case is the only location customers can get wraps.

The test also showed that certain perceptions Wawa held of its Express Case customers were false. “We thought grab-and-go customers were different from the BTO customer, and that they wouldn’t trade off,” she said, noting the chain believed the Express Case customer prioritizes speed of the transaction over order customization.

“It was apparent that reducing SKUs in the Express Case was the right decision, and we rolled it out,” Jones concluded. “Despite losing margin in the case, the increase in BTO and decrease in spoilage did result in a positive impact to the stores.”

“We wanted to ensure the most popular and profitable products were retained, but that we would not lose any customers to the lost variety.” Sarvath Amjed Jones, Wawa

Mining the Crystal Ball of Market Baskets

Also speaking during the Webinar, titled “Thinking Inside the Basket: Making More Informed SKU Rationalization Decisions,” was event sponsor Applied Predictive Technologies’ (APT) president, Patrick O’Reilly, who provided insights into how retailers can create a successful SKU rationalization program.

“Our perspective is that SKU rationalization started from a grain of truth - that some categories were over assorted,” said O’Reilly. “But at this point, it’s something that has gone too far, too fast. The notion that SKU rationalization will cut costs and drive capital, while improving customer satisfaction seems overly optimistic. In reality, cutting a twentieth or a fifth of SKU breadth is fraught with risk and very likely to lose trips - and loss of trips is a loss of revenue.”

O’Reilly also noted there are two ways to avoid cutting the items that drive trips to stores. The first is to understand in advance which products drive trips, and the ones to which customers are loyal. This requires retailers to move beyond simple productivity measures of turns and gross margin return-on-investment, and instead, evaluate the value of each SKU by the importance of it to customers.

Another method is to cut SKUs in a limited risk environment, such as a small number of stores, and then evaluate the impact. “Test it first, understand what customers do, and make changes in the market to understand how customers respond in the real world,” he said.

O’Reilly concluded: “SKU rationalization is less about driving revenue and more about removing inventory holding costs and operating expense, with minimal impact on revenue.”

For comments, please contact Mehgan Belanger, Associate News Editor, at [email protected].