August 13, 2013
FR Buyer: Is SKU Rationalization Impeding the ‘Buy Local’ Opportunity?
Through a special arrangement, presented here for discussion is a summary of a current article from Frozen & Refrigerated Buyer magazine.
"Foods with a local or natural connotation to them have much more potency with consumers than the average retailer thinks. If you are really good at serving that up, you attract a fast-growing and profitable segment of shoppers who are willing to pay more for what they want."
Bill Bishop, best known for his years running Willard Bishop Consulting and now chief architect at Brick Meets Click, was sharing his thoughts with me about Fred Meyer’s promotion of local products.
I’d told him how the chain’s fliers stress local produce and feature photos and stories of the farmers who grow it. Bill and I agreed that more of this can and should be done, across a wide range of products. Plain and simple, storytelling rings the register, especially when it comes to better-for-you products made not far from home. Shoppers really want to help out family farms and small, local businesses.
All this runs counter to a growing perception among some retailers that only two — or maybe three — SKUs are needed in each category. Economies of scale, slotting fees and funny money all drive the continued trend to SKU irrationalization that plays into the hands of big vendors. But I’m getting a sense that some of the best-practice (or better-practice) retailers are getting away from this and starting to pay more attention to the local vendors to whom consumers are attracted. There’s certainly differentiation and loyalty to be gained here, and it fits into the needs of what my old pal Bill calls "a fast-growing and profitable segment of shoppers."
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Discussion Questions
Do you agree or disagree with the view in this commentary that grocers are failing to fully address the buy local opportunity? Is SKU rationalization to blame?
Poll
Only people who are bad at SKU rationalization and are not smart enough to go beyond ranking reports would let this process get in the way of a good marketing idea. Buy Local and SKU Rat are not mutually exclusive.
I totally agree with Bill Bishop. Many Americans are craving more authentic, healthier choices, and are simultaneously suffering from brand fatigue and cynicism. In addition, when consumers “go organic,” about half start buying local produce, often at farmers’ markets (25% at farmers’ markets).
Recently, The National Restaurant Association (NRA) identified its top two trends as locally sourced meat and seafood as well as locally grown produce. If all retailing is “local” shouldn’t local products (fresh and otherwise) be a prominent part of a grocer’s point of differentiation. SKU rationalization is good if the focus is on the front door of the store (the customer) and not simply the back door (cost savings).
Bill certainly has a point about local products. They are important to customer satisfaction and too often they get lost in the hunt for volume.
The important point is that there is a major difference in approach between assortment optimization and SKU rationalization. Retailers often take the SKU rationalization approach which tends to just “shoot the short guy.”
Assortment optimization starts with a strategic understanding of the market or category structure based on data analysis and research to define the consumer decision tree. It then proceeds to select the optimal product assortment by segment or sub-segment based on substitutability. This can be adjusted to include local favorites.
Yes, this requires work and thinking instead of just using simple approaches like ranking reports. But in the end, it will pay off.
Local does sell. The challenge for larger retailers is getting those local growers/manufacturers into the system, or said another way, the supply chain.
When you run a few stores like, for example, Stew Leonard’s, it’s far easier to find local growers and secure a deal to carry their items. When you are running a chain of hundreds of stores, it gets much more difficult.
Opportunity: I propose a solution that allows local growers to post inventory and national chains to secure that inventory. For example, I live in Newtown, CT the home of “Gilbert’s Gourmet Goodies,” a really tasty gluten and nut-free cookie. Her challenge is finding a way to make it into the retail supply chain. Currently the only solution is using brokers that take a big bite out of profits. If Goodies could post her items for retailers to see, local Stop & Shops, Big Y’s and Stew Leonard’s could pick up her items. Same with local farmers. Delivery would need to get worked out, but that is the easy part compared to making the match between local items and local stores.
A solution like this has the opportunity to turn “local” upside down and make it easier for everyone in the supply chain to benefit including the most important person, the “CONSUMER.”
I see another angle to this phenomena—the “storytelling” side of it. Local works in part BECAUSE there is the photo, there is the human touch (I see/know/experience the farmer) that is not as easily communicated through national brands.
We want to affiliate and associate with PEOPLE and the self-serve environment can be very soul-less. The local angle has plenty going for it outside of the “story” angle. However, it should not be minimized.
And, I also think this is NOT in conflict with SKU rationalization in some (many?) categories. Only, perhaps it will be fewer national brands next to a local provider and a store brand (or brands if “tiered”). Perhaps 3 is too few in most categories, but 5 vs. current 8-9 can happen.
SKU rationalization is not the culprit here. I can think of at least one very successful grocer that has very few SKUs in their stores, and caters extremely well to local markets. I believe these are two distinct issues.
1) Local focus: National chains do have challenges with executing a local focus. However, there are sufficient supply chain partners available in most every region to successfully implement a strong local program.
2) SKU rationalization is a whole other topic completely. This has been talked about for literally decades, however, successful execution is rare. This has been driven by gut feel more than true fact. It is true that consumer purchase a small percentage of the items in a typical store at a rate of more than one case per week. However, our planogramming doesn’t accurately reflect this. Lots more to discuss here, but I wouldn’t blame poor localization on SKU rationalization.
I suspect (not having seen the data) that “buy local” may be a significant opportunity for some brands, and perhaps even for some sub-segment of stores within some brands. The most compelling observation here for me, though, was the “storytelling rings the register.” This is true—for some consumer segments in some product categories. The key is understanding the consumers you serve and their behavior/profile within each distinct product category. There is no panacea…there are only tactics and strategies which work for given brands and aligned consumer segments, mitigated by competitive opportunities and pressures.
Is SKU rationalization to blame? Let’s not blame a tool for being used incorrectly or sub-optimally. SKU rationalization is only the assortment tactic of analyzing the net contribution each SKU provides within the context of the costs associated with maintaining that SKU. This is not a bad approach. Mandating a SKU count may or may not result in lost opportunity. Only the data shows, SKU rationalization is a proven technique for managing net profit contribution at the SKU level. Like it or not, there are many elements to the calculation of that contribution…some of them are “funny money.” But money isn’t funny. It’s money.
And SKU rationalization, comprehensively applied, takes into consideration not only the individual product, but also market basket and related product benefits. In the end, if the consumer is served by a product, it will remain in the mix, and no amount of “funny money” can alter that reality.
From my many travels and store visits, few retailers are playing the local opportunity well. Some of the causes include lack of merchants making the decisions, lack of buyer incentive programs, and weak execution at retail.
Stew Leonard’s has always played the direct from farm card very successfully. With the many years of consolidation, few chains have effectively implemented local store assortments. All the while the larger suppliers still drive towards 100% distribution. With the growth in Private Label the shelf is getting crowded. Retailers cannot be all things to all customers. It’s back to what we have been saying for years—what does your target consumer want?
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Only people who are bad at SKU rationalization and are not smart enough to go beyond ranking reports would let this process get in the way of a good marketing idea. Buy Local and SKU Rat are not mutually exclusive.
I totally agree with Bill Bishop. Many Americans are craving more authentic, healthier choices, and are simultaneously suffering from brand fatigue and cynicism. In addition, when consumers “go organic,” about half start buying local produce, often at farmers’ markets (25% at farmers’ markets).
Recently, The National Restaurant Association (NRA) identified its top two trends as locally sourced meat and seafood as well as locally grown produce. If all retailing is “local” shouldn’t local products (fresh and otherwise) be a prominent part of a grocer’s point of differentiation. SKU rationalization is good if the focus is on the front door of the store (the customer) and not simply the back door (cost savings).
Bill certainly has a point about local products. They are important to customer satisfaction and too often they get lost in the hunt for volume.
The important point is that there is a major difference in approach between assortment optimization and SKU rationalization. Retailers often take the SKU rationalization approach which tends to just “shoot the short guy.”
Assortment optimization starts with a strategic understanding of the market or category structure based on data analysis and research to define the consumer decision tree. It then proceeds to select the optimal product assortment by segment or sub-segment based on substitutability. This can be adjusted to include local favorites.
Yes, this requires work and thinking instead of just using simple approaches like ranking reports. But in the end, it will pay off.
Local does sell. The challenge for larger retailers is getting those local growers/manufacturers into the system, or said another way, the supply chain.
When you run a few stores like, for example, Stew Leonard’s, it’s far easier to find local growers and secure a deal to carry their items. When you are running a chain of hundreds of stores, it gets much more difficult.
Opportunity: I propose a solution that allows local growers to post inventory and national chains to secure that inventory. For example, I live in Newtown, CT the home of “Gilbert’s Gourmet Goodies,” a really tasty gluten and nut-free cookie. Her challenge is finding a way to make it into the retail supply chain. Currently the only solution is using brokers that take a big bite out of profits. If Goodies could post her items for retailers to see, local Stop & Shops, Big Y’s and Stew Leonard’s could pick up her items. Same with local farmers. Delivery would need to get worked out, but that is the easy part compared to making the match between local items and local stores.
A solution like this has the opportunity to turn “local” upside down and make it easier for everyone in the supply chain to benefit including the most important person, the “CONSUMER.”
I see another angle to this phenomena—the “storytelling” side of it. Local works in part BECAUSE there is the photo, there is the human touch (I see/know/experience the farmer) that is not as easily communicated through national brands.
We want to affiliate and associate with PEOPLE and the self-serve environment can be very soul-less. The local angle has plenty going for it outside of the “story” angle. However, it should not be minimized.
And, I also think this is NOT in conflict with SKU rationalization in some (many?) categories. Only, perhaps it will be fewer national brands next to a local provider and a store brand (or brands if “tiered”). Perhaps 3 is too few in most categories, but 5 vs. current 8-9 can happen.
SKU rationalization is not the culprit here. I can think of at least one very successful grocer that has very few SKUs in their stores, and caters extremely well to local markets. I believe these are two distinct issues.
1) Local focus: National chains do have challenges with executing a local focus. However, there are sufficient supply chain partners available in most every region to successfully implement a strong local program.
2) SKU rationalization is a whole other topic completely. This has been talked about for literally decades, however, successful execution is rare. This has been driven by gut feel more than true fact. It is true that consumer purchase a small percentage of the items in a typical store at a rate of more than one case per week. However, our planogramming doesn’t accurately reflect this. Lots more to discuss here, but I wouldn’t blame poor localization on SKU rationalization.
I suspect (not having seen the data) that “buy local” may be a significant opportunity for some brands, and perhaps even for some sub-segment of stores within some brands. The most compelling observation here for me, though, was the “storytelling rings the register.” This is true—for some consumer segments in some product categories. The key is understanding the consumers you serve and their behavior/profile within each distinct product category. There is no panacea…there are only tactics and strategies which work for given brands and aligned consumer segments, mitigated by competitive opportunities and pressures.
Is SKU rationalization to blame? Let’s not blame a tool for being used incorrectly or sub-optimally. SKU rationalization is only the assortment tactic of analyzing the net contribution each SKU provides within the context of the costs associated with maintaining that SKU. This is not a bad approach. Mandating a SKU count may or may not result in lost opportunity. Only the data shows, SKU rationalization is a proven technique for managing net profit contribution at the SKU level. Like it or not, there are many elements to the calculation of that contribution…some of them are “funny money.” But money isn’t funny. It’s money.
And SKU rationalization, comprehensively applied, takes into consideration not only the individual product, but also market basket and related product benefits. In the end, if the consumer is served by a product, it will remain in the mix, and no amount of “funny money” can alter that reality.
From my many travels and store visits, few retailers are playing the local opportunity well. Some of the causes include lack of merchants making the decisions, lack of buyer incentive programs, and weak execution at retail.
Stew Leonard’s has always played the direct from farm card very successfully. With the many years of consolidation, few chains have effectively implemented local store assortments. All the while the larger suppliers still drive towards 100% distribution. With the growth in Private Label the shelf is getting crowded. Retailers cannot be all things to all customers. It’s back to what we have been saying for years—what does your target consumer want?