February 18, 2009
Food Manufacturers Making Cuts to Product Lines
There are a couple of
stories that you typically hear from grocery buyers
when the subject of food manufacturers cutting back on their products comes
up.
The first goes that (fill
in the blank) company is great when it comes to delisting products – their
competitor’s, that is.
The second is that a
rep from (fill in the blank) company recently announced that, based on
scanning data, it had decided to cut four items from its lineup. And
now that this part of the business had been taken care of, the rep had seven
new items that were surefire bets to grow the category.
Jokes poked at food manufacturers
aside, The Associated Press (AP) reports that Kraft
Foods, Procter & Gamble, Heinz and Sara Lee are getting rid of slower
moving lines in favor of promoting top sellers in light of today’s economic
realities.
Kraft, for example, is
discontinuing its Handi-Snacks pudding line to focus on building its Jell-O
pudding brand. The company also cut
roughly a dozen South Beach Living frozen entrees last fall.
Procter & Gamble
has sold off lines including Crisco, Folgers and Jif.
Mark Gottfredson,
head of the global Performance Improvement practice at Bain & Company,
said that companies cutting SKUs has picked up in recent years.
Heinz is looking to
cut up to 20 percent of its SKUs over the next three years. The company
cut its SKUs in half between 2002 and 2006.
Scott
O’Hara, who oversees Heinz’s global supply chain, told the AP, "The
more we can simplify, while clearly meeting our customers’ needs, the better
off we are and the more cost we can drive out of business."
Mr. Gottfredson said, "You
have to be very thoughtful. You’ve got to be really good at the customer
research. If you do it well, it will drive your sales."
Discussion Questions:
Do you think branded food manufacturers are making
a wise decision in cutting product lines in the current economy? Is
less really more when it comes to SKUs produced and marketed at retail?
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I don’t think it’s a question of cutting in the current economy. I think it’s a good business decision if it doesn’t impact your sales at retail. For years, retailers and consumers have been telling manufacturers that there is too much choice and too little differentiation (FMI, 1994). It only took 15 years for manufacturers to listen.
I think the group has this right; as consumers are simplifying their lives and limiting their shopping choices it makes sense for the manufacturers to follow suit. In the current economic environment, everyone is cleaning house and re-entrenching and pruning back middling SKUs is one way to keep everyone focused on business basics and getting the most out of the winners.
Mark is spot on as well, though. For this to work it has to be joined with comprehensive shopper insight and marketing programs that help CPGs connect directly with their users. Otherwise, fewer SKUs makes it even easier for private label to encroach.
When a company vying for consumer support is in a competitive selection race, it shouldn’t carry extra weight on its shoulders. Brand emotion for “dead and dying ducks” is operational folly.
Toss what doesn’t fit the times and their traumas, and keep that which curries favor on the current marketplace.
Good decision in good times or bad times. For companies that are to continue to be successful, the need for focus is critical. Many of the brands selected for de-listing were suspect opportunistic launches emanating from paradox of growth. Said another way, “How do we maintain a company’s growth strategy?” resulted in products that were not the best match or use of organization resources.
Similarly, these new brands compete for scarce resources that need to be concentrated where they can be most effective and efficient. Especially at times like this, it requires firms to “shoot the losers.”
I think Ralph’s comments regarding Private Label are important here and should be expanded on. For instance, are the national brands slow moving because of competition from P/L? If so, retreating here may signal a long-term strategy of abdicating to P/L. Obviously, if the line isn’t performing like you want it to you need to ether cut it or find a way to increase performance. Competing with P/L might just force some decisions that are long overdue. On the other hand, if retailers leverage POS data for their P/L but share less information with the brands, it might be difficult to do the appropriate level of analysis necessary for good decision making. Are retailers playing that game? Will they? Better margin performance might encourage this.
I do agree we’ve got way too many SKUs, a result, perhaps, of a society focused on personal differentiation (I want it and I want it my way!). But we’ve seen the greater manifest of this in the economy the last year or so. Definitely in this economy, doing the right analysis and cutting poor performers should be considered. But unless you are claiming that the poor performers are helping build broader brand equity and are willing to “invest” here, then the same decisions should be made in good times, too.
This is really stating the obvious: Eliminate SKUs that aren’t producing required results, and expand those that are. The challenge is to have complementary metrics for both the Retailer and Manufacturer. If there are defined velocity rates at the store level, such as cases/month/store, then there are mutual goals for all the stakeholders.
Typically, more than 75% of SKUs move LESS than a case/week/store, so why do we have so many deliveries per week, and why do we still have 8-15%+ out-of-stocks? If the assortment was truly optimized we would have better shelf capacity of the fast-movers, and sustain fewer OOS between trucks. However our emotions get involved and we tell our selves to respond to consumers’ desires for more variety. The consumers say they want it, but they don’t purchase variety. They stay very much within a small group of SKUs, typically.
Another aspect to look at to build growth is the current upward trend of private label. This is where national brands can take share by offering contracts to more retailers. The P/L world is still very fragmented, as evidenced by the annual PLMA event.
Since our presentation at the GMA MSM conference, Fall 2007, we have been consistent in our view that the US CPG industry is over-SKUd and over stored. A couple of additional points:
While the right place to start is with a one-off analysis of SKU profitability, manufacturers need to think through how they will make SKU profitability analysis a business capability. In my experience, few companies have a robust process to assess their portfolio on a periodic (quarterly/semi-annual) basis. This process must be cross functional, understand SKU economics and the role that SKU plays in the shopper, consumer and retail experience.
Manufacturers need to adjust cost accounting processes to capture the true costs attached to a specific SKU…how many change-overs occurred? How many days of safety stock are held due to uncertain demand? What are expediting costs associated with the item to meet lumpy demand? What is the spoilage rate? What is the stockout rate at retail?
Today, having a robust understanding of SKU roles and profitability will become even more important as retailers continue to expand their portfolio of formats–city stores, fresh stores, convenience concepts–where the store footprint shrinks to accommodate the few, important items consumers demand. But which items, in which stores, for which consumers, fulfilling what occasions?
Most manufacturers manage at the mean. It’s time they manage at the meaningful…by store/day/SKU.
This is a very good move for these companies as it will streamline their production and inventory and therefore, reduce overhead. The tightrope they walk though is that they don’t want to give up shelf space in the process and that can be hard to do. Why should a retailer automatically let them fill the vacated spaces with new, unproven products? Maybe a strong promotional allowance will grease the way? Or slotting fees? The retailer will argue that it costs money to make all these changes in its system and must be compensated.
I think the manufacturers are doing the right thing but it will be interesting to observe how well they can protect their space and at what cost.
CPG companies have been slow to discontinue product for a number of reasons. Even when products are at the end of their life cycle, they don’t want to give up the brand. They created them and they were successful at one time, so why not again?
I remember when I worked at a CPG company and we sold off brands and discounted others because we were not really making money. Brands sold off became very profitable for the buyer that did not have our overhead allocations.
A slow-selling item for a retailer is also a slow-selling item for the manufacturer. When you apply all the true cost using ABC, it is not surprising how little if any profit they make. With all the manufacturer consolidation, without high volume they really don’t make money. Brands are kept on the shelf with promotional money to save the shelf space for the company. After years of this and no real replacement, it is time to move on.
Food manufacturers are taking a logical step in light of what’s going on in the marketplace and the economy. Automakers are making the same decisions (goodbye PT Cruiser and Saturn). But consumers are going to continue buying pudding, cookies, and cheese long after the manufacturers consolidate brands.
The more strategic question is whether these CPG companies have effective category management strategies in place to stem any losses to competitors and build additional loyalty FOR the brands they’re keeping. The companies mentioned in the article obviously aren’t cutting the more successful labels, so streamlining in this case makes sense in the short term.
But to protect and strengthen their positions and maintain profitable price points, manufacturers will have to use all available sources of shopper information–POS, loyalty, and transactional store-level data–to develop deep consumer insights. To date, few CPG companies have been able to successfully connect shoppers to store dynamics using in-store activities like promotions, features and displays, and category locations.
Brand marketers become emotional about their brands, and that is the worst thing that they can do. Marketers want to keep brands in place due to heritage, history, identity, etc. But the fact is, if a product line does not contribute to the bottom line, you have to place it on the firing line. And this is true whether it is a good economy or a bad economy.
Procter & Gamble has been executing this way for a number of years, and doing it extremely well. Kraft and others are making a great decision in discontinuing product lines that don’t contribute, or are too expensive to continue to maintain. All companies should take a look at their brands, and their underperforming SKUs, and make the same decision.
It does make sense to cut lines/products that are underperforming. Manufacturers are concentrating their resources on brands that have the best sales and sales potential. My hope is that this does not lead to another round of line extensions for existing brands. Manufacturers need to realize that in many categories there are too many products and variations on the shelf already.
Less is more.
There’s a big difference between selling a brand (Jif), eliminating a product, and eliminating a size. When you sell a product, you get paid. Eliminate a product and you have to replace the volume. Eliminate a size, you might not hurt the volume significantly. Grocery suffers from me-too brands, and size proliferation makes it worse. Minor product extensions (more flavors of the same product) make the overassortments double worse.
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I don’t think it’s a question of cutting in the current economy. I think it’s a good business decision if it doesn’t impact your sales at retail. For years, retailers and consumers have been telling manufacturers that there is too much choice and too little differentiation (FMI, 1994). It only took 15 years for manufacturers to listen.
I think the group has this right; as consumers are simplifying their lives and limiting their shopping choices it makes sense for the manufacturers to follow suit. In the current economic environment, everyone is cleaning house and re-entrenching and pruning back middling SKUs is one way to keep everyone focused on business basics and getting the most out of the winners.
Mark is spot on as well, though. For this to work it has to be joined with comprehensive shopper insight and marketing programs that help CPGs connect directly with their users. Otherwise, fewer SKUs makes it even easier for private label to encroach.
When a company vying for consumer support is in a competitive selection race, it shouldn’t carry extra weight on its shoulders. Brand emotion for “dead and dying ducks” is operational folly.
Toss what doesn’t fit the times and their traumas, and keep that which curries favor on the current marketplace.
Good decision in good times or bad times. For companies that are to continue to be successful, the need for focus is critical. Many of the brands selected for de-listing were suspect opportunistic launches emanating from paradox of growth. Said another way, “How do we maintain a company’s growth strategy?” resulted in products that were not the best match or use of organization resources.
Similarly, these new brands compete for scarce resources that need to be concentrated where they can be most effective and efficient. Especially at times like this, it requires firms to “shoot the losers.”
I think Ralph’s comments regarding Private Label are important here and should be expanded on. For instance, are the national brands slow moving because of competition from P/L? If so, retreating here may signal a long-term strategy of abdicating to P/L. Obviously, if the line isn’t performing like you want it to you need to ether cut it or find a way to increase performance. Competing with P/L might just force some decisions that are long overdue. On the other hand, if retailers leverage POS data for their P/L but share less information with the brands, it might be difficult to do the appropriate level of analysis necessary for good decision making. Are retailers playing that game? Will they? Better margin performance might encourage this.
I do agree we’ve got way too many SKUs, a result, perhaps, of a society focused on personal differentiation (I want it and I want it my way!). But we’ve seen the greater manifest of this in the economy the last year or so. Definitely in this economy, doing the right analysis and cutting poor performers should be considered. But unless you are claiming that the poor performers are helping build broader brand equity and are willing to “invest” here, then the same decisions should be made in good times, too.
This is really stating the obvious: Eliminate SKUs that aren’t producing required results, and expand those that are. The challenge is to have complementary metrics for both the Retailer and Manufacturer. If there are defined velocity rates at the store level, such as cases/month/store, then there are mutual goals for all the stakeholders.
Typically, more than 75% of SKUs move LESS than a case/week/store, so why do we have so many deliveries per week, and why do we still have 8-15%+ out-of-stocks? If the assortment was truly optimized we would have better shelf capacity of the fast-movers, and sustain fewer OOS between trucks. However our emotions get involved and we tell our selves to respond to consumers’ desires for more variety. The consumers say they want it, but they don’t purchase variety. They stay very much within a small group of SKUs, typically.
Another aspect to look at to build growth is the current upward trend of private label. This is where national brands can take share by offering contracts to more retailers. The P/L world is still very fragmented, as evidenced by the annual PLMA event.
Since our presentation at the GMA MSM conference, Fall 2007, we have been consistent in our view that the US CPG industry is over-SKUd and over stored. A couple of additional points:
While the right place to start is with a one-off analysis of SKU profitability, manufacturers need to think through how they will make SKU profitability analysis a business capability. In my experience, few companies have a robust process to assess their portfolio on a periodic (quarterly/semi-annual) basis. This process must be cross functional, understand SKU economics and the role that SKU plays in the shopper, consumer and retail experience.
Manufacturers need to adjust cost accounting processes to capture the true costs attached to a specific SKU…how many change-overs occurred? How many days of safety stock are held due to uncertain demand? What are expediting costs associated with the item to meet lumpy demand? What is the spoilage rate? What is the stockout rate at retail?
Today, having a robust understanding of SKU roles and profitability will become even more important as retailers continue to expand their portfolio of formats–city stores, fresh stores, convenience concepts–where the store footprint shrinks to accommodate the few, important items consumers demand. But which items, in which stores, for which consumers, fulfilling what occasions?
Most manufacturers manage at the mean. It’s time they manage at the meaningful…by store/day/SKU.
This is a very good move for these companies as it will streamline their production and inventory and therefore, reduce overhead. The tightrope they walk though is that they don’t want to give up shelf space in the process and that can be hard to do. Why should a retailer automatically let them fill the vacated spaces with new, unproven products? Maybe a strong promotional allowance will grease the way? Or slotting fees? The retailer will argue that it costs money to make all these changes in its system and must be compensated.
I think the manufacturers are doing the right thing but it will be interesting to observe how well they can protect their space and at what cost.
CPG companies have been slow to discontinue product for a number of reasons. Even when products are at the end of their life cycle, they don’t want to give up the brand. They created them and they were successful at one time, so why not again?
I remember when I worked at a CPG company and we sold off brands and discounted others because we were not really making money. Brands sold off became very profitable for the buyer that did not have our overhead allocations.
A slow-selling item for a retailer is also a slow-selling item for the manufacturer. When you apply all the true cost using ABC, it is not surprising how little if any profit they make. With all the manufacturer consolidation, without high volume they really don’t make money. Brands are kept on the shelf with promotional money to save the shelf space for the company. After years of this and no real replacement, it is time to move on.
Food manufacturers are taking a logical step in light of what’s going on in the marketplace and the economy. Automakers are making the same decisions (goodbye PT Cruiser and Saturn). But consumers are going to continue buying pudding, cookies, and cheese long after the manufacturers consolidate brands.
The more strategic question is whether these CPG companies have effective category management strategies in place to stem any losses to competitors and build additional loyalty FOR the brands they’re keeping. The companies mentioned in the article obviously aren’t cutting the more successful labels, so streamlining in this case makes sense in the short term.
But to protect and strengthen their positions and maintain profitable price points, manufacturers will have to use all available sources of shopper information–POS, loyalty, and transactional store-level data–to develop deep consumer insights. To date, few CPG companies have been able to successfully connect shoppers to store dynamics using in-store activities like promotions, features and displays, and category locations.
Brand marketers become emotional about their brands, and that is the worst thing that they can do. Marketers want to keep brands in place due to heritage, history, identity, etc. But the fact is, if a product line does not contribute to the bottom line, you have to place it on the firing line. And this is true whether it is a good economy or a bad economy.
Procter & Gamble has been executing this way for a number of years, and doing it extremely well. Kraft and others are making a great decision in discontinuing product lines that don’t contribute, or are too expensive to continue to maintain. All companies should take a look at their brands, and their underperforming SKUs, and make the same decision.
It does make sense to cut lines/products that are underperforming. Manufacturers are concentrating their resources on brands that have the best sales and sales potential. My hope is that this does not lead to another round of line extensions for existing brands. Manufacturers need to realize that in many categories there are too many products and variations on the shelf already.
Less is more.
There’s a big difference between selling a brand (Jif), eliminating a product, and eliminating a size. When you sell a product, you get paid. Eliminate a product and you have to replace the volume. Eliminate a size, you might not hurt the volume significantly. Grocery suffers from me-too brands, and size proliferation makes it worse. Minor product extensions (more flavors of the same product) make the overassortments double worse.