Actionable Insights From APT's Retail Practice

So Many SKUs, So Little Space

April 14th, 2017 | Posted by APT in Manufacturing

The number of SKUs in stores has tripled since the 1980s – but sales have not grown at the same pace. Now, many retailers are reducing the vast number of products and pack sizes offered in-store in an effort to create a more streamlined shopping experience, simplify supply chain logistics, and reduce out-of-stocks. As a result, shelf space is increasingly constrained.

This shift creates greater pressure for consumer packaged goods organizations (CPGs) to optimize their in-store assortment. With fewer items on the shelf, CPGs must be as strategic as possible with the products they do offer. Quantifying the impact of each assortment change will help organizations make smarter decisions about which products to prioritize to fuel growth.

As CPGs work with their retail partners to evaluate the impact of assortment changes, it is critical that they think through how discontinuing some items will shift consumer spend. For example, how will a consumer react if his or her favorite product is no longer available? Will they turn instead to another product from the same brand, maintaining brand loyalty? A product from a different brand? Or is it possible that they may skip purchasing from that particular category altogether?

Further, CPGs and retailers have the opportunity to understand how discontinuing an item might impact consumers’ entire baskets. For instance, a CPG may decide to rationalize an item because it generated lower sales compared to similar products of the same brand. However, it is possible that a subset of consumers was very loyal to that item. These consumers may generally have larger than average baskets, and eliminating that particular item could risk losing the business of these profitable consumers in the long-term.

But optimizing assortment is not just about determining which products to cut; it is also important to consider how to effectively vary assortment by store. As shelf space shrinks, CPGs need to determine which product offerings will drive maximum sales, in which retail locations. Given that the right assortment will not be the same across the board, CPGs are trying to fine-tune their localization strategy by targeting assortment decisions by store type and local demographics.

The increased cost and complexity localized assortments introduce into a company’s supply chain require that companies understand the effect on revenue in advance of making such changes on a widespread basis. By testing different assortment iterations in different retail locations, organizations can measure the overall financial impact of each individual change. Taking a test vs. control approach enables CPGs to understand whether various changes in assortment are successful, in which locations they are most effective, and how they can be further refined.

For example, consider a CPG working to optimize its salty snack category assortment. By removing one snack, like a certain flavor of chips, from the assortment in a group of locations, they could measure their brand’s financial performance in those stores against that of other, similar stores that did not remove this item. The CPG could then precisely identify how discontinuing this product would impact overall brand sales, helping them to determine in which locations this flavor sells best, and where it may not sell as well. By testing different salty snack assortments in different types of stores, they could effectively target product assortment by location to provide the optimal mix of products for maximum value.

As CPGs work to determine the best possible assortment across different retail locations, it will be critical for them to test new assortment strategies in subsets of stores with different characteristics before implementing changes on a broader basis. Taking this Test & Learn approach will enable them to refine their assortment strategy to offer the right products in the right markets, ultimately boosting their bottom line.

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