SKU rationalization is a hot topic, especially in the recent economic downturn. And retailers are insisting on it, with increasingly smaller formats, making more space for private label, and the constant pressure of new SKUs being introduced. When done correctly, SKU rationalization can lower production costs for manufacturers and ideally make the shopping experience more pleasant for shoppers by not overburdening them with too many choices. Reducing the number of SKUs can even grow the category.

SKU rationalization needs to be a joint manufacturer/retailer decision. In some cases, retailers are doing it themselves because manufacturers haven’t taken the lead since it can be difficult for a manufacturer to recommend de-listing their own SKUs. Walmart recently announced that it had to reverse some of their SKU reduction decisions, returning as many as 300 SKUs back to the store.

A case in point: Walmart had de-listed the number two brand in a category. The manufacturer wanted to demonstrate that carrying the brand would grow the category and strengthen shoppers’ perceptions of Walmart. A SimuShop® virtual shopping study was conducted where half the respondents shopped the current aisle and half shopped the aisle with the number two brand added back in. The learning provided the information needed for the manufacturer to convince Walmart to reauthorize the brand. Adding the brand grows the category The brand’s lead SKU becomes the #1 SKU in the category On a per facing basis, the brand becomes the top seller With the brand back in the aisle, shoppers are more likely to say Walmart has a good selection of category brands and carries the ones they want

There are right and wrong ways to identify SKUs to discontinue. The worst way is to look at historical sales data and truncate the lowest performing SKUs. This doesn’t take into account substitutability, basket analysis and shopper perceptions of the category and the retailer. Even when TURF or Shapley Value is used to create a potential reduced set, it needs to be tested with the consumer before implementation.

Another case in point: A fast-food company was trying to optimize their salad offerings. TURF analysis suggested three salads would satisfy most consumers. But when only three salads were on the menu they were less noticeable and the patron felt they lacked choice, resulting in low satisfaction with the menu and low perceptions of healthfulness. It was recommended to offer six salads that could be prepared using the same ingredients, so there was no additional cost. With six salads, consumers felt they had a choice, healthfulness perceptions improved and overall satisfaction was stronger. So, stopping after the TURF analysis by offering only three items would have been a mistake.

The key is determining shoppers’ behavior at the point of purchase, at the shelf (or menu board), using virtual shopping or in-market tests. The perceptions of the products, category and store are impacted by SKU rationalization. Just because a consumer will accept and buy from a limited selection forcing them to choose between one or two national brands and private label in the short run, it can have a disastrous effect longer term resulting in reduced category purchases and potentially leading to fewer trips for the retailer. Consumers demand a choice – but it has to be the right choice.

As a manufacturer, what should you be doing? If you are number one or two in the category, you should provide retailers planograms (based on consumer testing) that reduce the competitive set. Key targets include lagging national brands and regional brands that don’t offer anything unique to the retailer. Some of the SKUs reduced may be your own but it’s better to create your own destiny than be at the mercy of the retailer’s decisions. If done correctly, your recommendation should be able to grow the category, strengthen your position and possibly lower your production costs. If you are a small player, you need to focus on justifying why you should remain on the shelf. You need to demonstrate to the retailer that you bring unique benefits to the category, lead to larger basket sizes, or provide a higher margin. Regardless of your category position, you need to proactively work with the retailer to do what’s best for him, you, and most importantly, the shopper.