The SKU rat trap

NEW YORK —When it comes to the front-end offerings at drug and mass-market retailers, there is perhaps no topic currently being talked about more than SKU rationalization—and there’s a good reason why.

In light of the volatile economy and fragile retail environment, many retailers raced back to the drawing board to re-evaluate their businesses—moves that often resulted in deep discounts, a much stronger focus on private label and, of course, SKU rationalization.

Enter, for example, Walgreens’ massive Customer Centric Retailing initiative, dubbed the CCR project. The project is aimed at jazzing up the front end by rationalizing and rejuvenating the merchandise mix, section by section, to weed out slow-moving and redundant product. The initiative called for the delisting of some 4,000 SKUs.

Meanwhile, Walmart reduced up to 30% of its assortment last year, stated Euromonitor International in a June 30 webinar on the home and personal care industries.

While the newly reshaped, money-conscious consumer had long expressed a desire for cleaner, less-cluttered stores, the aggressive slashing of SKUs at retail would, in some cases, prove too aggressive. It seems as though several retailers have found themselves caught in the SKU rat trap.

To underscore this point, recent research by The Nielsen Co., indicated that more than half of U.S. consumers surveyed said they are likely to shop elsewhere if they notice a reduced product selection and can’t find the product they desire on shelf. More specifically, 7% of personal care product shoppers said they would leave the store without buying anything if they can’t find the product they want. While 7% may seem like a small number, consider that just a 0.5% decrease in shopper closure across the grocery channel could cost as much as $1.5 billion in sales, Nielsen stated.

The online surveys were conducted in March and April 2010. Nielsen surveyed consumers in more than 21,000 U.S. households conducting nearly 55,000 shopping trips, as well as nearly 50 retailers across U.S. consumer packaged goods channels.

While SKU reduction likely is here to stay for the time being—as 42% of retailers indicated they’ll continue to downsize, with stated targets to cut up to 10% of SKUs, according to Nielsen—there is no doubt that some retailers are scaling back the efforts amid consumer backlash.

“We added back several hundred products, primarily to complement product class in categories such as automotive and hardware, and we initiated the introduction of new SKUs in existing categories, such as new branded electronic sets,” Greg Wasson, president and CEO of Walgreens, told analysts during the company’s third-quarter conference call on June 22.

Wasson added that, “Although results are preliminary, our second wave of CCR store conversions is trending well against the rest of the chain, and in Dallas, we’re encouraged by the improvement in sales variance versus the rest of the chain as well. If you recall, Houston had a larger percentage of stores impacted by the reduction of SKUs in the complement product class that led to more pronounced sales impact in those select stores, which are now showing improvement with the re-introduction of key SKUs.”

As indicated by Nielsen, as well as other industry sources previously interviewed by Drug Store News, the message to retailers is this: Choose very carefully when it comes to deciding which products will hit the chopping block.

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