Yesterday’s (17 August) news that Wal-Mart plans to begin reintroducing a number of delisted products will give reason for many suppliers to breathe a sigh of relief.
Range rationalisation has been a spectre hanging over the manufacturing industry since many retailers began cutting the number of SKUs at the height of the recession last year in order to reduce operating costs.
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SKU reductions have the potential to drive up operating income for retailers, while sales remain relatively static. This happened in Wal-Mart’s US operations in the third quarter of last year, where it saw a 6.9% operating profit increase on a 1.2% sales growth.
However, limiting offerings may not be the magic pill that they have been hyped to be, as in the longer term, retailers may drive customers away entirely if shoppers feel they can’t get the products they want or need.
According to Planet Retail data, Wal-Mart cut the number of SKUs it offered in its US outlets by approximately 15% last year. Alongside another quarter of falling comparable sales, Wal-Mart announced that it would be bringing back a number of the products it delisted as part of its ‘Project Impact’.
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“In the coming weeks and months, our assortment will be more relevant to our customers, with the right mix of new and innovative products,”said Wal-Mart US president Bill Simon. “We are restoring thousands of products to our assortment and adding new items. We plan to win in every category and let customers decide through their purchase decisions what to include in our assortment.”
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By GlobalDataWal-Mart is not the first retailer to relist products lost as part of range rationalisation. In May, Canadian grocer Loblaw announced that it planned to restock about half the products it delisted. According to the local press, the company’s executive chairman, Galen Weston, said the company’s IT system was not sophisticated enough to identify unpopular products and it was putting those items back on shelves.
“We knew we’d get probably about half of it wrong, not necessarily across the country, but on an individual store [basis],” said Weston. “Then we’d have to go through the process based on the customer calling us or letting you know what they want and we’d bring back those 5% of [products] that really matter to that store.”
These are just two retailers that have completed the more brutal aspects of their range trimming programmes and are now seeking a happy medium. But there are still many other retailers like Supervalu Inc, Safeway Inc and the world’s second-largest retailer, Carrefour, in the earlier stages of rationalisation schemes.
Through Supervalu’s ‘Project SHE’, which stands for Simplify Her Experience, the US grocery retailer embarked on its own rationalisation programme at the beginning of this year. On its earnings call for the first quarter of its 2010/11 fiscal year, Supervalu said that it was working to maintain variety in each category, while looking to avoid product redundancies and find space for locally relevant products and own-label items. However, where CEO Craig Herkert got most excited was around the enhanced labour productivity and the reduction in excess inventory it was seeing.
He said that the company found that in some categories it was offering some 90 SKUs, where it could not fit a full case on the shelf at a time. “When that happens across the 1,200 stores, that means that you’re putting massive labour out there each time you have to top that shelf,” said Herkert.
Supervalu seems to have learned its lessons from Wal-Mart and Loblaw’s mistakes. “To be successful, we have to be flexible. Running an algorithm or a spreadsheet will not tell you how each customer is affected by these changes,” he said.
“We expect that new sets will need tweaking. It’s a normal part of process and a healthy way to better understand and meet the unique needs of each community in which we operate. Where we’ve made decisions that are unpopular with a number of shoppers, we go back and fix our assortment. Ultimately, we are confident that our methodical approach will result in efficiently run stores that carry a product assortment customised for the communities they serve,” Herkert added.
Rationalised ranges have many benefits for retailers, including improved supplier terms due to larger purchases, reduced labour costs, less complex supply chain and inventory management, as well as increased customer basket size in some cases, as the reduced range simplifies the decision making process.
Until retailers see a turnaround in consumer confidence on the horizon, these rationalisation schemes will continue to take place.
However, as we are seeing with Wal-Mart and Loblaw, delisting is by no means a life-sentence for a product or brand. When consumer confidence eventually returns, customer focus will slowly, but surely shift away from value towards novelty and retailers will have to look at new products to fulfil their needs.
In the meantime, manufacturers can be buoyed by these developments, as where Wal-Mart goes, most of the others tend to follow.
