FRBuyer: Should Retailers Save, Not Bury ‘Dead’ SKUs?
Through a special arrangement, presented here for discussion is a summary of a current article from Frozen & Refrigerated Buyer magazine. A long-time Harris Teeter executive, Mr. Harris is a former chairman of the National Frozen & Refrigerated Foods Association and a member of the Refrigerated Foods Hall of Fame.
A lot of retailers look at detailed profitability reports prior to category reviews or management meetings and look for items that are not generating the "appropriate" amount of profit. Without fail, they'll zero in on some items to chop.
Is it always wise to get rid of those items? Heck, no. Despite what the reports may tell you, you still need a lot of them to satisfy your customers' needs and to compete effectively. Some of these may just need more space, promotion or nurturing to put them on a profitable path.
Say you have an item with two facings and low profitability. You may be considering cutting it to one facing or delisting it entirely. But have you really looked at why the item isn't doing so well?
What's your competition doing on pricing? On number of facings? On promotion? Does everyone else in your market still carry the item? If so, why?
Maybe you need to advertise the item more and it may well be worth your time to discuss promotion levels with the vendor. If overly high, you may have priced the item out of the market. Is your profitability report taking into consideration off-invoices, reclaim, scandowns and other factors that may not be a part of the formula?
Sometimes when retailers look at the profitability report, they get their panties in a wad and don't think straight. Sometimes they'll look at an entire line, but mainly they just look for the low-hanging fruit they can chop off the vine. Fundamentally it's about the right product, at the right price, in the right stores at the right time.
Of course it's not easy. Box stores keep the price pressure on supermarkets, and there's no let-up. Often the best thing to do with low-profit, high-velocity items that your shoppers demand is to have strong private label items going up against them. Then the manufacturer will come back with more promotion money for you.
Above all, work with your vendors, especially if you are considering delisting items. And don't be a slave to those profitability reports. Your customers, and your company, will thank you.
Discussion Questions
How would you improve on the design and use of profitability reports? Under what circumstances should they be ignored or taken with a grain of salt? Do grocers need to rethink how they manage low-profit, high-velocity items?
They should be a starting point, not an ending point, and as such, should always be taken with a grain of salt. That’s why vendors have category management resources—to answer questions like this. Let the vendors give you the rationale for keeping/de-listing an item.
Velocity, velocity, velocity. Whether you are selling food, apparel, hardware, or cars! I can make a ton of profit if the velocity is high enough. This is a relatively simple process to master, especially with the technologies available today.
You need to have definitive velocity clip levels in every store. You may need clusters of stores with the same velocity clip levels, and other clusters with differing ones. For instance, in a supermarket, if I don’t move a case of a product per month per store, then it may be time to consider delisting it… UNLESS the item is unique in its function (an apple cider vinegar, or something of which we would only carry one brand, etc.).
Facings should also be adjusted accordingly. We should not have the same facings of a canned vegetable that moves a case per week per store as an item that moves only a case per quarter per store. You’d be surprised at how many items violate this rule. Check it out.
SKU-level profitability reports are a critical part of managing a profitable retail business if used properly. A couple of thoughts: 1) demand data integrity to avoid “garbage in, garbage out” decisions, 2) do not make quick decisions, give every SKU a fair amount a time, 3) look at the whole picture, every category needs the right balance of products.
Low-profit, high-velocity SKUs can be a healthy part of any category. Again, look at the total picture and potential impact of changes when adjusting a high-velocity SKU.
Before delisting any item, a retailer will want to understand shopper data. Do they have key customers (weekly shoppers with large baskets) that have that item regularly in their basket? If so, a delist could cause that shopper to go elsewhere. These items may never be your top sellers, but they could be worth stocking.
As far as high volume, low profit items go, their are a few things to consider. I like the suggestion of building out a strong Private Label line to compete. You could also use these items as a lost leader and promote other more profitable items with them. Buy A Get B or meal solutions including that item.
Several years ago Walmart tried to delist several items so they only carried the top two national brands and one private label brand. It didn’t work. Consumers like and need variety.
Use them as a starting point, not the end point. As has been suggested, look at the reasons why the items are not generating the profit you want.
Also look at the market baskets that they appear in. This may show that the items are important to some of your best customers.
You should pay attention to profitability reports. I understand you shouldn’t be a “slave” to them as Johnny Harris suggests, but when you’re beholden to shareholders that want profitability, you have to perform reality checks.
Recent buying habits are showing that since the recession, shoppers aren’t too keen on overpaying for products. There are low-performing SKUs that sometimes just need to be rationalized, there’s no way around it. If continuing the SKU can’t be justified, sometimes it’s not the marketing, it’s just a pig you’re trying to put lipstick on.
Johnny makes strong points here for steps to take prior to delisting. Each are valid.
However, grocery executives should also keep in Peter Drucker’s principles of “Start,” “Sustain,” and “Stop.” If it is determined that a product has reached and surpassed its life cycle, the courage/wisdom of calling a halt to it, or “Stop” strategy has to kick in. These less profitable, in-demand products have to go so they do not prevent others from entering the “Start” or “Sustain” phase.
Retailers cannot continue to carry items that have been decimated by the discount stores. Several categories in my store are long gone, as it is useless to try and compete on many household, and HBA items, with the dollar stores, and big-box stores selling them below what I can buy it for.
This is not a level playing field, and hasn’t been for over 20 years, and it will continue to get worse, as online becomes more competitive.
Perishables still have value and great opportunity to go against the giants with success, and it will remain so, as the labor costs to produce high quality meat cuts, and scratch deli items are not something the big boys want to mess with. Pop wholesale prices for independents are insane, and a no-win for us, so we need to rethink how we present to our customers some great values in other areas to stay profitable.
I have said many times for those who read this, that changing how we view our stores is critical for future success, and unless we realize what is going on, than failure is an option.
Lot’s of great observations here, so I would only add one (as usual) “quip.”
Until you can turn them into INCREMENTAL profitability reports, they can’t ever tell the whole story.
The problem starts at the beginning with the description of detailed profit analysis. Decoding this means item gross margin percent and dollars. In the ’80s we learned through the Direct Product Profit work that gross margin was not even a predictor of profit.
What retailers need is a delisting process. Start with fill accounting for the item. Then determine how many of your A, B and C customers buy the item. Next step is to research competition as to price, facings and promotions for the item. Next ask what can be done to improve this item’s sell-through. It can be as simple as the customer not being able to find the item on the shelf as it only has two facings. Next step is to review why the item was listed in the beginning and what the expectations were. Last step is, if the item were delisted, identify the item that would replace its sales. With this information a rational decision can be made.
The article brings up good points about what to consider before eliminating a product. The comments bring up equally good points on the costs of continuing to carry slow movers or dead SKUs. A key takeaway would be that getting rid of SKUs should not be all black and white. Instead, leave some room for the gray.
One case I have heard over and over again from retailers is that even though a specific product is a slow mover, it may also be the main reason a customer continues to shop at your store instead of at a competitor’s. With so much marketing money going into creating conversions, carrying a product that makes minimal money (but also drives additional product sales) is a small price to pay. That is not to say that every product a customer requests should be carried. It needs to be a conversation of value. Is the shrink created from offering slow movers a higher or lower cost than the profit generated from converting or maintaining a customer?
Previous comments mention a standard, or cut-off point on dead SKUs. I would argue that the same needs to be determined for planned shrink items like these. An example would be, “we won’t offer a product unless 50% or more of the case sells before expiring.”