Time to rationalize

Over the years, there has been a proliferation of brands, products and SKUs in the marketplace as retailers with private-label brands and manufacturers compete to satisfy the consumer appetite for innovative products and experiences. But for retailers, more is not more; when this process is not managed properly, it increases the likelihood of out of stocks resulting in lost sales and negative customer experiences. Now is the time for retailers and manufacturers in Canada to reassess and rationalize their assortment to better meet the changing needs of consumers and maximize sales and profitability.

Globally, there are structural challenges with assortment across many CPG categories. In Canada, 85% of SKUs in the household care category contribute to less than 2% of overall category sales—pointing to the excess in non-performing products and variations that exist within just this one category alone. The same can be seen across other key categories such as pet care (83%) and baby care (77%), illustrating that this is not an isolated incident, but rather one that needs to be addressed by the industry.

CHANGES IN CONSUMER BEHAVIOUR HAVE IMPLICATIONS FOR ASSORTMENT

Changes in consumer behaviour brought about by the pandemic require retailers to reassess their assortment within their private-label brands and national brand offerings. Some things to consider:

• Newly constrained, existing constrained and cautiously insulated consumers are streamlining their budgets and have become more discerning about what, where, when and how they purchase products.
• With the rise in e-commerce and the increased trust in online shopping platforms, shoppers are visiting physical stores less often, and when they do visit, they come prepared with lists and they spend less time browsing the shelves than they did before the pandemic.
• Financially impacted consumers have less money to spend and will, therefore, be more focused on essentials. That doesn’t mean they will not have the desire to indulge once in a while.

The challenge for manufacturers and retailers is to ensure the products and brands in their portfolio cater to consumers at all ends of the economic spectrum, while also remaining cost-efficient and being selective in non-essential assortment.

ASSORTMENT RATIONALIZATION PROVIDES A TRIPLE WIN

The case for assortment rationalization is extremely strong. A recent NielsenIQ BASES study highlighted that approximately 30% of promising innovations do not get enough support to realize their full potential. Complementary studies by Bain & Company show that a SKU reduction can result in savings across supply chain and inventory management. Achieving the right mix of assortment will also reduce labour expenditures. When retailers are able to manage assortment, a number of additional positive benefits are also recognized including the back room running more effectively, improvement in shrink management and overall store efficiency.

The savings derived from assortment optimization aren’t just theoretical either. For example, a client in North America was recently able to optimize the category assortment of SKUs using the same space to identify a growth opportunity in the confectionery category of 9.5%. This example is a true indicator of having the right SKUs on-shelf for consumers when they want them. It’s worth noting that rationalizing assortment is not just about eliminating SKUs with low sales. It requires a more sophisticated and data-driven approach that is focused on the idea of incrementality, which means building an assortment that can drive profitable growth while drawing the interest of more shopper segments (through niche products, for example).

By correctly identifying which SKUs to retire and which to keep, not only can the industry focus production and supply chain efforts on incremental brands and SKUs, but they can also eliminate waste, increase profitability and reinvest profits into new product and category innovation, which will ultimately capture new shoppers. This is a win for the shopper, a win for the manufacturer and a win for the retailers.