Putting the Consumer into
Retail Assortment Decisions
By Paul Thompson
Many retailers like Wal-Mart, CVS, and Walgreen’s are rethinking the notion of carrying massive amounts of SKUs on their retail shelves. They are redefining the roles of individual categories in their stores and what that means relative to how they think about depth and breadth of assortment choices.
For example, if the retailer does not consider the category a significant profit builder
and it is somewhat ancillary to the needs of their customer base, that category becomes
a prime candidate for reduced shelf space and significant SKU reductions along with
brand rationalization.
In some categories, retailers are figuring out that national brands are not always the drivers of the category. They are looking to eliminate or significantly reduce the number of national brands on the shelf while expanding their more profitable store brand presence. In April, it was reported that Wal-Mart was reducing the amount of space it provided branded manufacturers like Coke and Pepsi for their Dasani and Aqua Fina bottled water brands. Margins in the bottled water category are very low, and leveraging Wal-Mart’s private label brand would enhance category margins. We have seen this same phenomena play out across other categories within Wal-Mart. The major drug chains that historically have carried a vast array of OTC products now recognize that this has created a sea of consumer confusion at the shelf.
The premise of reducing consumer confusion at the shelf and reducing non-productive SKUs makes an incredible amount of sense, but carries considerable risk if not managed correctly. We know from previous assortment studies that there are certain categories where consumers will travel greater distances for better selection, while convenience may be more critical in
other categories.*
If the SKU and/or brand rationalization process is not managed appropriately, retailers could lose shoppers and significantly reduce category volume. Conversely, retailers could grow category volume and lose shoppers loyal to specific brands. For manufactures, the risk is that every retailer picks a different approach to manage their retail portfolio. As a result, they lose control of their internal portfolio rationalization process which causes their supply chains and manufacturing efficiencies to spiral out of control.
What is the right approach to SKU, line (forms and sizes) and brand rationalization that reduces the risk of lost shoppers, reduces consumer confusion at the shelf and maximizes returns?
The right approach starts with understanding how the consumer organizes the category into distinct segments based on usage and purchase behaviors. In the case of adult analgesics,
for example, consumers may think about usage based on whether they have a headache or body muscle pain. From that starting point, how do consumers make their purchase decisions? What are more important: brands, forms (liquid or pills) or sizes? Are there any other organizing benefits to the category that are important to consumers like convenience
or flavors?
Once it has been defined how the consumer uses the product and how they make purchase decisions, the process can then begin setting the organizing principles for SKU, line and/or brand rationalization. It must be determined which approach has the optimal impact to the category and the consumer. Eliminating the bottom 20% of SKUs may not necessarily reduce consumer confusion and potentially could result in low velocity SKUs with high consumer loyalty being discontinued. That would cause those shoppers to choose an alternate store to fulfill their needs.
Organic products are a good example of products that tend to have lower retail movement, but high loyalty among its shopper base. Eliminating the bottom 20% of SKUs does not always reduce shelf confusion because all the sizes, forms, flavors that may be redundant tend to be retained and continue to create consumer confusion. However, eliminating the bottom 20% may identify the brands that are least incremental to the category and provide a good start to brand rationalization.
The approach and tools chosen for SKU reduction must be able to discern which products are truly incremental to the category and which are redundant based on actual consumer choices. Those SKUs that are redundant will reallocate their volume to similar SKUs when deleted and will not hurt the category volume. It is also important to understand the overall productivity of each of the consumer segments by comparing the dollar sales to unit volume, and then you see which segments are candidates for growth and which may need SKU rationalization.
As retailers begin to rationalize SKUs and make “add and delete” decisions, it is critically important to understand where the product volume flows when items are added or deleted. Clearly, not all volume falls away when an item is deleted and not all volume is incremental to the category when new items are added.
Given that it is important to understand how the consumer makes choices when the item they had previously purchased is no longer available, it is equally important to understand 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. Understanding consumer switching behavior and the transferable volume flow is done through usage and purchase-based market structures along with tools that provide detailed switching behaviors based on alternative SKU choices.
When it comes to brand rationalization, retailers must look at the number of brands that truly satisfy consumer needs. For example, when looking at a category like dry packaged desserts, which includes iconic brands with dominant market share like Jello, you have to believe that most likely there are no more than two or three brands that satisfy the consumer needs for
that category.
In more complex categories like upper respiratory and allergy medication with many ailment symptoms, 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 products are examined for deletion, it is important to understand consumer loyalty and which brands, forms, sizes and SKUs would cause consumers 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, however, 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. Great care must be taken to understand SKU/brand incremental value and loyalty.
The act of SKU, line and brand rationalization should not be a onetime event, but an ongoing process to capture the latest segment trends. The benefits, if done correctly, are improved retail shopability, improved distribution on core power SKUs, improved 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 low performing SKUs are viewed equally, including private label. This collaboration also works best when real margin and profit data for that category are incorporated as part of the output results.
The end game is reducing consumer confusion at the shelf, improving category metrics like revenue and GMROI, and satisfying consumer choices at the category-segment level. This is not a onetime event. It is an ongoing, evolutionary process that requires a consumer lens on the category and the appropriate tools to discern item effectiveness and incrementality.
Paul Thompson is Managing Director of Henry Rak Consulting Partners, a Chicago-based consultancy. To learn more about HRCP and its services, visit www.hrcpinsights.com, or call Paul at 817-416-1759
*Source: How Does Assortment Affect Grocery Store Choice? January 2008 Richard Briesch SMU, Pradeep Chintagunta University of Chicago, Edward Fox SMU
JANUARY 2010
Kellogg’s Leverages Virtual Shopping
To Plan Reset of Cereal Category
By John Karolefski
The Kellogg Company will be working closely with key retail partners in 2010 to implement new planograms for the ready-to-eat cereal category. The shelf sets will be based on research using a virtual shopping platform.
Kellogg’s has developed seven planograms based on a multi-stage research project that involved shopping trips and purchase decisions made in a virtual cereal aisle of a supermarket. The Consumer Decision Tree part of the online research focused on category structure, product perceptions, and decision influences – that is, what product attributes are most important to shoppers. Kellogg’s was especially interested to learn shopper perceptions of the category and how to leverage strategic brands.
“We have spent the last two years learning how shopper and consumer dynamics could be leveraged to optimize the shelf set in the cereal category,” said Katie Paul, Senior Manager of Shopper Insights, Morning Foods for the giant cereal maker based in Battle Creek, Mich.
Paul acknowledged that testing multiple planograms in stores is time consuming. Online research can yield a national sample, she explained, and the results can be available in as little six weeks vs. several months for in-store. For its online research, the cereal maker relied on Decision Insight based in Kansas City, Mo.
Plans call for implementing the planograms with key retail customers in early 2010 as they reset their shelves. That will be Phase One.
“We want to measure the results from the planograms we are launching in early 2010,” said Paul. “We will work with our retail and research partners to understand what works best for them going forward. This is an evolutionary situation for us. We’ve opted to walk before we run.
“The one thing that we found and felt very confident about both from the research we did {with Decision Insight} as well as with some of the in-market testing we did we some retail partners was to go ahead and simply launch a ‘pillar’ strategy, staying within the manufacturer block and using those pillars that seem to draw sales,” she said, speaking at the LEAD Marketing Conference recently in Chicago.
Kellogg’s is aiming to having final recommendations for Phase Two in late 2010.
The simulated shopping environment provided by Decision Insight gives output measures based on actual consumer behavior just like using in-store tests. The platform is designed to enable marketers to test many more ideas in less time and lower cost than in-store test, as well as providing diagnostics not available with an in-store test.
Decision Insight promotes virtual shopping not as a research tool, but as a platform for conducting a wide array of research initiatives such as category management, new product introductions, pricing, packaging, promotions, merchandising, etc. It measures actual behavior by testing tactical approaches in the context of an actual shopping experience (including a full competitive set).
Online research aims to answer these key questions:
- What merchandising strategy/layout benefits the manufacturer as well as the retailer?
- What is the effect of different category displays on consumer purchase?
- Can you expand overall category sales?
“Whether its presentation of the total category in a large retail environment, altering displays to maximize brand performance, or maximizing use of shelf space, our process can produce results with extremely high correlation to market sales,” said company executives.
They point out that traditional research techniques focus on stated attitudes and opinions. The problem is that these stated measures do not translate into actual sales.
“Instead, we need a tool that measures behavior,” they said. “For companies with a portfolio
of brands and products, it is critical to understand the impact of a strategy not only on an individual SKU, but also on the full brand, the full corporate portfolio, and even the entire product category. The only way to do that is to include those components in the research,
and the best way to do that is to create the full shopping environment.”
