Retail brands or sectors strive to extract greater profits from fewer products and inventory.
It has been 15 years since the author and cultural provocateur Malcolm Gladwell’s now-famous Ted Talk enlightened us on how supermarkets came to stock dozens of brands and tastes of a simple product like tomato sauce. Up until the 1980s, the two most popular brands (Prego and Rag) each sold a single, straightforward formulation and recipe. Gladwell claimed that by 2007, he had identified 36 distinct varieties of Rag spaghetti sauce, including cheese, garlic, mild, Robusto, extra chunky, and so forth.
As businesses place a greater emphasis on SKU (pronounced “skew”) reduction, brands’ strategy of securing the most shelf space through such proliferation is currently in full retreat. SKUs (stock-keeping units) are bar-coded identifiers that are distinctive to each product’s color, style, and characteristics. SKUs offer real-time information on sales and inventories when scanned. Consumer-facing businesses have been forced to reconsider the purchase and stocking of products that are sluggish sellers, less profitable, and occupy valuable warehouse and shelf space as a result of the pandemic and supply chain problems. Rationalizing SKUs is nothing new. According to a study by two supply chain specialists published in the Harvard Business Review in 2006, increasing product diversity tends to lower profit margins. According to the researchers, in the one company they looked into, the bottom 40% of the products earned less than 3% of sales, and the bottom 25% were extremely unprofitable. At another company, Clorox, 30% of the stock-keeping divisions weren’t meeting the company’s profit and sales goals. Retail sales per SKU increased by more than 25% when the company implemented a procedure to identify trailing goods. SKU rationalization is becoming a popular practice in the retail sector, and many companies financial reports frequently include it. HanesBrands, which started reducing its product range in 2000, has been a leading adopter. CEO Steve Bratspies stated that Hanes had decreased the number of its SKUs by more than 30% during a conversation with analysts in February of last year. It’s unclear how the initiative has affected sales and profitability, but for three of the previous four quarters, the business has posted results that were higher than experts had predicted. Hershey is a more recent adopter, reporting in April that pandemic-related difficulties had prompted it to begin an SKU simplification initiative that, according to the business, had “added shelf space while freeing up capacity and decreasing complexity.” Steve Voskuil, CFO of Hershey, said at the time to analysts, “We’ve been able to obtain more (shelf) facings and sell more core goods.” SKU proliferation can be difficult for customers as well as a problem with inventory management and financial success.
The retail sector was already overstocked before the springtime oversupply brought on by late-arriving cargoes from abroad. There are countless variations and types of power cords available at Lowe’s and Home Depot. SKU proliferation in eCommerce is still a problem, despite big box stores like Walmart and Target actively competing with Amazon by allowing third-party merchants on their platforms. Nowadays, you can buy many of the same goods on their websites for approximately the same price and far better than what you can get on Amazon. It’s unclear if the abundance of products will ultimately help or hurt retailers’ ability to turn shoppers into paying customers. Investments in inventory are riskier than ever and come with a significant amount of unknowable risk. Doing an SKU rationalization and choosing more winners is one important tactic. Finding out which one is the right choice is difficult, especially in today’s dynamic, consumer-driven economy. Customers can offer some perspective on these choices.
The bottom line of a retail sector is influenced by a variety of factors, including properly priced products that maximize unit sales without compromising profit per unit. Achieving your profit objectives requires understanding your company’s cost structure and selecting the appropriate pricing approach. There are numerous pricing techniques, so it could be a good idea to try a few different ones until you find the one that works best for your particular firm.
