Covid-19 has prompted manufacturers and their retail customers to step up reviews of product ranges and SKU counts. With the virus still in circulation and with an economic crisis potentially on the horizon, audits will continue to be necessary. Simon Creasey weighs up what questions executives should be asking as manufacturers try to tailor their product line-ups to the volatile trading environment.
In the early weeks of the Covid-19 pandemic, manufacturers and retailers were forced to make changes to their product sets.
Some grocery stores resorted to selling foodservice sized bags of staples like rice and cans of baked beans to satisfy the bulk purchasing needs of consumers. Others deliberately reduced the number of SKUs in product categories to simplify supply chains. In some instances, the reconfiguring of production lines in factories due to the need for social distancing also affected what products manufacturers could offer.
Companies from Canada’s Maple Leaf Foods, Ireland-based private-label supplier Greencore and French giant Danone all made changes – the latter said it late July it had moved to “prioritise high-velocity SKUs to maximise production capacity” and the company’s “ability to serve our customers the best way, taking into account the social distancing measures in our factories”.
Dirk Van de Put, the CEO of snacks group Mondelez International, has, in recent weeks, spoken of how Covid-19 has provided the company with “an opportunity to simplify our business”. He said the pursuit of growth can lead CPG companies to have too many products in their portfolios and too many innovation projects on the go. Covid-19 had, he said, presented Mondelez with a chance to “re-accelerate” its efforts to have a “cleaner portfolio”.
Mondelez, home to brands like Cadbury and Oreo, is cutting a “net” 25% of SKUs from its ranges. “The stars have lined up,” Van de Put said in July. “The clients want great customer service. They want a cleaner shelf. They want to make sure that they can serve their customers – and we have the same initiative.”
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But what’s the best way of choosing which SKUs to ditch and which to continue? Is it merely a case of looking at sales data and chopping back the long tail or does it require a more sophisticated approach?
Range rationalisation isn’t a new thing. It’s something all food groups constantly do, according to Mark Perry, head of category and in-store at Weetabix, the UK-based breakfast-cereal manufacturer owned by US group Post Holdings.
“We’ve not had to reduce what we make as a result of the pandemic and part of the reason for that is we’re constantly reviewing our portfolio,” says Perry. “So we’re constantly looking at how on-trend it is, how consumers are responding to it, whether it’s still relevant and just making sure that we’re being as efficient as possible with our operation.”
That said, in recent years, this review process is something major food groups have had to do on a more regular basis due to growing pressure from retailers.
“There’s been a push from retailers to consolidate the number of brands they have, let alone the number of SKUs, over the last few years,” explains Andy Searle, a managing director and partner at management consultants AlixPartners. “They’ll have a private label, a main brand, the challenger brands, and a few other brands, which has led to some particular challenges. So, overall, within an individual [food] business, it’s been very cyclical as to what happens with their complexity reduction or SKU rationalisation.”
However, Covid-19 has forced many food groups to take a closer look at the number of SKUs they produce. “I think Covid has really given quite a kick, or renewed energy, to that conversation,” says Searle. “During the early stages of Covid, where there was a question about ‘can we supply the supermarkets’, that led to a very rapid SKU rationalisation towards efficient production.
So [food manufacturers would say] ‘I’m not going to make half-kilogramme bags, I’m going to make 1kg bags because I can get more out doing it that way. Similarly, retailers just wanted stock so it didn’t matter what size bag of sugar or what size bottle of ketchup was supplied.”
Most of the large food groups reacted in the same way to the new pressures they found themselves facing as Covid-19 spread across the globe.
“Early in the pandemic, we chose to prioritise SKUs to simplify our supply chain, producing and maintaining inventory of our most popular flavours while withdrawing items that are important for variety, but would have added short term complexity,” explains a spokesperson for US giant General Mills. “For example, soup is one of our more challenged supply chain platforms to service amid significantly increased demand and limited available capacity. If you think about our Progresso soup portfolio, we have nearly 90 SKUs; to remove complexity we minimised the variety to about 50 SKUs.”
The spokesperson adds General Mills is now reintroducing many of these lines and intends for most of the products to return to the supermarket shelves.
Kraft Heinz reports a similar scenario. At the height of the pandemic, the company focused on production of its most popular soup varieties, such as cream of tomato, cream of chicken and minestrone, whereas other lower-selling varieties such as pea and ham and lentil and bacon were temporarily halted.
“Similarly for Heinz Beanz we prioritised our standard and no-added-sugar Beanz over BBQ, organic, curry and chilli varieties, which again were temporarily halted but only for a few weeks,” says a spokesperson for Kraft Heinz, who adds all of the lines that were halted are now back in full production.
However, manufacturers are going to have to adapt to retailer requirements as Searle thinks the recessionary environment created by Covid-19 will see the renewed focus on SKUs continue and potentially accelerate.
“We are in a recession and all of the retailers are going to move to position themselves for more promotions and better value for their customers,” he explains. “They’re going to want to be as efficient as possible which means minimum amounts of SKUs through their distribution and [held in] stock and they’re going to push that price pressure down on to manufacturers. The manufacturers in turn are going to want to be as efficient as possible and all of that points towards SKU rationalisation.”
So what’s the best way of approaching SKU rationalisation? For Weetabix, its product review process focuses around the needs of consumers.
“Whenever we start looking at our range, and certainly when we’re looking at innovation as well, we always start with the consumer need,” says Perry. “Over time, tastes change and needs change – and things like the health agenda changes – so that’s always where we would start. If you come up with something that the consumer wants to eat, then as a shopper, they will want to buy it.”
Perry adds sales data does come into the equation, but focusing on sales alone may not lead you to the right decision. It’s a view shared by Hamish Renton, managing director at UK food and drink consultancy HRA Global.
“The sort of superficially obvious way of doing this is you cull the things that are selling the least, but very often there’s a sort of weird Sod’s law of economics that kicks in and you find the thing that would be a no-brainer to get rid of [in terms of sales data] your customer is strangely attached to,” says Renton.”It’s what one politely calls a ‘service line’, which is something you’re going to take a bit of a bath on because you going to make it back elsewhere, or it’s a product that you’re required to sell because it makes some other products viable.”
Searle concurs. He says although cutting the long tail seems like the obvious way of approaching SKU rationalisation often those products are the ones that in the consumer’s mind are not substitutable.
“It may be that there is a price pack or a particular type of taste or profile that attracts a unique customer to buy my product or attend my store [if you’re a retailer],” adds Searle.
He says to effectively undertake a SKU rationalisation process food manufacturers need to think in terms of complexity management.
“You need to weigh up the value of that complexity to the customer and you need to weigh up the cost of delivering that complexity from the customer end and that’s either the person who eats it or the retailer,” says Searle.
“What’s the value that they attribute to that SKU? If I’ve got 20 SKUs, it may actually be that a number of them are exchangeable in the customer’s mind. It’s kinda nice to have a 450g ketchup bottle and a 600g ketchup bottle because they’re at different price points but, fundamentally, there’s no real value for the customer between those two different packs.”
The other factor all food groups looking at SKU rationalisation need to consider at the moment is coordination. Essentially, much of the supply chain is going through the same process at the same time, so the big challenge for packaged-food manufacturers is to drive the process and end up with a solution that works for them.
“If the retailers all end up with a lower SKU count, but actually they all take different SKUs, then my complexity doesn’t change,” says Searle. “Manufacturers need to drive this and they need to drive it by giving retailers clarity about what the value of each of these SKUs is to the customer. They need to provide perspective on things like distribution, rate of sale – all of the things that retailers are interested in. Internally, they’ll also need to be really clear about their own operation and cost structure.”
In recent months, tremendous sales volumes have gone through grocery retail channels and there has been changes to consumption patterns and attitudes, which causes challenges but, in the round, may make now as good a time as ever for food manufacturers to take stock and consider the relevance of their ranges – especially with economic storm-clouds starting to gather.
“I think it may be fine for you as a manufacturer to think ‘I will stick to my guns’, but actually all of the retailers are positioning for a value war and a price war, so they’re gonna come to you for lower costs, etc,” says Searle. “You probably want to start thinking about this soon to ensure you’re well positioned when those conversations [with retailers] come up in the next five to six months.”
Speaking to analysts in late July, Greencore CEO Patrick Coveney, which had overseen the private-label manufacturer focus on fewer products in the early weeks of the pandemic, suggested that concentration could persist.
“I think, particularly in the larger store formats, both us and our customers have learned that probably a lot of these categories were over-ranged,” he said. “While we are undoubtedly seeing ranges come back from the incredibly-concentrated ranges that we would have had in April and May, I think they’re not likely to come back to the whole way to pre-Covid levels.
“That I think will create a necessary opportunity for both us and our customers to be able to be structurally more productive and find some ways of offsetting what will be some incremental cost right the way through the supply chain associated with Covid-19 in particular, in relation to some of the extra cost to keep people – be it our work colleagues or shoppers or other supply chain participants – safe. I think one of the factors that will be necessarily here for us all is to have structurally core productive ranges going forward and I think you will see that.”
Greencore is unlikely to be the only manufacturer to be viewing its product portfolios in that light.