BARRINGTON, ILL. — Less assortment and reduced inventories as food retailers seek to cut costs should be expected by consumer packaged goods companies over the next several years, according to analysis by Paul Weitzel, vice-president, Willard Bishop, a consulting group based in Barrington.
Mr. Weitzel projected a significant focus on stock-keeping unit (s.k.u.) rationalization in the years ahead in "SKU Rat is coming, do you know where you stand?" The article was published in the group’s newsletter, Competitive Edge.
While s.k.u. rationalization has been addressed to varying degrees for several years, Mr. Weitzel said the magnitude of what will transpire in the years ahead is very different.
"We’re not talking about a few s.k.u.s," he said. "C.P.G. companies are facing the possibility that they may lose an entire line, and this isn’t happening only at Wal-Mart."
Prompting the more aggressive approach toward rationalization is what Mr. Weitzel described as an urgent need to contain operating expenses. He said retailers have only a handful of major tools at their disposal to cut costs and that s.k.u. rationalization is the most likely approach to be taken.
Wal-Mart executives have discussed the company’s strategy on a number of occasions over the past year. Dubbed the win/play/show category strategy, the company is looking to better match the potential of various categories with shelf space and selection.
In a presentation earlier this year, Bill Simon, executive vice-president of Wal-Mart Stores, Inc., and chief operating officer of Wal-Mart US, detailed the company’s objectives.
"A ‘show’ category is likely to have fewer s.k.u.s than we’ve had in the past while in win categories, price leadership is absolutely critical along with an exaggerated and more pronounced position and feature position and displays in the store," he said.
The prospective changes have attracted the interest of Wall Street analysts.
"Wal-Mart is narrowing altogether the square footage dedicated to certain categories, including most likely spices and seasonings," one analyst said. "There are some categories that Wal-Mart has decided are not a category that draw people into stores. They will take space from those categories and put it elsewhere."
The analyst said retailers have determined the shopping experience for the consumer "has become overwhelming with too many choices and not enough differences."
He said food companies are best off when they proactively decide to reduce s.k.u.s, leaving the strongest units on the shelves, perhaps taking two size choices down to one.
"Often, the net effect is zero for the food company, when the faster selling item is left on the shelf," he said.
Mr. Weitzel cited Kroger Co. as a chain looking to make shelf space utilization more efficient.
"Kroger is moving from 1.2 cases on the shelf back up to a 1.5 case pack rule," he said. "In addition, they are in discussions with suppliers to reduce case pack sizes so they can meet the 1.5 case pack rule with fewer shelf facings. The goal is to improve in-stock positions of power s.k.u.s and lower store labor costs."
More than 25% of categories and more than half of s.k.u.s in the center of the store lose money for retailers, Mr. Weitzel said. Still, even well-managed retailers struggle because of the "insatiable appetite suppliers have for space," he said. He decried too many examples of "line extensions and non-value-adding s.k.u.s" gaining shelf space.
Whether an s.k.u. survives depends on a variety of factors identified by Mr. Weitzel, including whether the product offers variety for consumers, profitability and productivity for retailers, whether inventory costs are high and the category is growing.
Like the analyst, Mr. Weitzel urged food companies to address the issue proactively.
"Put yourself in a position to not only know where you stand, but more importantly, develop a strategy to help retailers make space more productive," he said. "Those companies that do are finding they can win fair share of shelf space and actually improve their overall financial position. They are also in a stronger position to navigate through these turbulent times."
This article can also be found in the digital edition of Food Business News, October 13, 2009, starting on Page 24. Click