Are Retailers Getting Over their SKU Management Hurdles?
By Denise Leathers
Determining which products deserve a spot on shelves — and which no longer do — used to be straight-forward. Retailers simply calculated units (in some cases, dollars) per SKU per store per week. Those landing above a certain number, also known as the hurdle rate, were in; those that fell below were out.
Today, hurdle rates aren’t the only determining factor.
“Hurdle rates alone are actually a really narrow constraint, though there are still plenty of retailers that just draw a line in the sand, and if you’re above that, you stay in distribution,” said Don Stuart, managing director, Cadent Consulting. “But more sophisticated, progressive retailers are moving beyond simply ranking items or utilizing the 80/20 rule and applying more advanced metrics. They’re factoring in whether an item is adding true variety, growth trends, gross margin return on investment, if it offers true incrementality, etc.”
Count Walmart among the latter group, says Greg Mertes, who spent 25 years at the chain before launching Five16 Marketing. “Walmart used to use pure sales-based hurdles,” he recalls. “But now they’re more willing to compromise if a current trend requires.
“In organic and gluten-free, for example, sales hurdle rates have been lowered and products are given more time to prove themselves in the interest of building consumer awareness.”
It that case, it’s all about attracting a certain type of consumer.
At the other end of the spectrum, Walmart has reduced hurdle rates on a group of smaller, less expensive products brought in primarily to help prevent customer migration to the dollar channel, says Mr. Mertes.
Lower hurdle rates may go to products that support a better-for-you brand message; private label because of margin benefits; and truly innovative items that help position the grocer as a leader.
Retailers are also relaxing hurdle rates in growth segments like, say, snack foods, dairy-free products and meat substitutes, notes Jim Hertel, SVP at Inmar Analytics. “They know these items are key to their own growth but that many come from smaller companies with fewer resources, so they may even forego slotting dollars as well.”
Is using sales-based hurdle rates still the best way to determine which items should get space on food, drug and mass merchant store shelves? Are there exceptions that should apply?
Comments from the RetailWire BrainTrust:
Hurdles are important but not the only criterion for making a stay or go decision. What purpose does the item serve for which group of consumers? Are those consumers important to you? Do you want to support the purpose that item serves for those consumers? The go/stay decision needs to consider a variety of factors, only one of which is a numeric hurdle.
Camille P. Schuster, PhD., President, Global Collaborations, Inc.
Hurdle rates alone are no longer anywhere close to good enough measurements for assortment planning. In my opinion, proper lineup development requires a sophisticated balance of sales, growth, competitive positioning, basket analysis and human instinct. In today’s fragmented and niche-driven economy, one size clearly does not fit all …
Dave Bruno, Marketing Director, Aptos
One key to proper product assortment is knowing who your customers are. Are more Hispanics shopping the store because more are living in the neighborhood? If so, the assortments need to change to cater to these new local customers. Shopper demographics always change, and grocers need to monitor these changes so they can give customers what they want to buy.
John Karolefski, Editor-in-Chief, CPGmatters
From the early days of the Category Management movement, when “rank-and-cut” assortment management became a thing, there was an awareness that those methods were too crude. It’s not just about what items sell most — it’s about what items are important to high-value shoppers? Fold in the trade marketing incentives (as others have mentioned here) and you have a multi-variate challenge.
The calculus has often been made harder by poor on-shelf availability, which can skew the metrics, and generally lax in-store implementation.
All three of the experts cited in this article are long-time, highly-astute observers of this phenomenon, and their suggestions should be heeded.
James Tenser, Principal, VSN Strategies
Hurdle rate is certainly still a consideration, but it is not the only consideration. Store assortment today must tell the story of the retailer, and that story must be specific to each and every store location. Which categories, brands, attributes, etc. best serve the customers of each location? Which drive traffic, engagement and conversion? Which support growth for the retailer and manufacturer alike? The lens must be broader than a simple dollars- or units-per-SKU calculation. Loyalty card program data will play an important role in answering these questions, so it must be part of the consideration set.
Susan Viamari, Vice President, Thought Leadership, IRI
Using sale-based hurdle rates won’t disappear anytime soon because it gives retailers an easy way to measure what products should and should not have a place based on results. However, it is good to have a blend of not just the lead selling items but what drives customers into a store and knowing what those items are is essential. Today with the technology available we can now see what other items may not be leading in sales but are resulting in helping to bring in the right customer. That is very beneficial. Smart retailers need to develop a balance of the “important” products to bring in the right customers along with the lead selling items to remain profitable. It’s doable, and those doing it already will no doubt see the benefits.
Art Suriano, Chief Executive Officer, The TSi Company
First of all, let’s be realistic. Many SKUs get to — and stay — on the shelves because of trade funds, not actual consumer demand. Secondly — outside of retailers such as Aldi, Trader Joe’s and a handful of others — most stores are still carrying way too much inventory because they either want those trade dollars or they really don’t know their customers well enough to know what to kill and what to keep. Velocity reports/hurdle analysis is one way to know what to keep stocking but it doesn’t help you figure out what you should be stocking that you currently aren’t. Sol Price, the founder of Price Club, used to talk about “the intelligent loss of business,” i.e., not stocking “dog” items and letting the customer cherry pick the competition. So hurdles are one tool — and a valuable one — but not the only tool retailers should rely on. Great retails like H-E-B, Wegmans and may luxury branders know two things some retailers don’t — who they are and how they want to differentiate themselves and, even more importantly, who their customers are and what they want. And that’s how they build their inventory models.
Ryan Mathews, Founder, CEO, Black Monk Consulting
This is a difficult issue for a supermarket. When you strip it down to the issue of what the supermarket business is, you get down to the fixed cost of operating the business, the limited real estate that can be utilized and the ROI on that limited real estate. That would suggest that the only measures are movement and margins.
But then you look in a typical shopper’s basket. How do you satisfy the shopper that has, say, 10 percent of their picks that might not meet those metrics? Eliminate those items and you may eliminate the shopper all together.
Gene Detroyer, Professor, International Business, Guizhou University of Finance & Economics; Executive Director, Global Commerce Education