How to win the retailer SKU rationalisation

As the pandemic causes retailers to reduce their product range, how can suppliers find opportunities for growth?
16 February 2021
retailer SKU optimisation
Tim Winfield

Sales Director, Analytics, Consulting Division, UK

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COVID-19 has accelerated many aspects of shopper behaviour. As a result, retailers have looked for opportunities to simplify retail operations as well as shopper purchase decisions.

One notable theme emerging from 2020 and continuing through 2021 is range simplification and SKU reduction. Once COVID-19 becomes stable, most economies will be in recession conditions, meaning the themes of simplification and promotion reduction will persist.

This is not a negative situation for suppliers. With the right insights, a reset can provide an opportunity for portfolio optimisation, a consolidation on core lines and new product introduction.

Range reductions in UK grocers

The UK grocery market is leading European rationalisation evolution right now. According to research firm Assosia (w/c 15 June 2020 vs w/c 2 March 2020), 13,794 grocery products were delisted from the UK’s top six supermarkets, representing a 9% decline. Asda’s range alone has been cut by 3,847 lines (15.7%). And Morrisons has cut 2,906 products (about one in seven SKUs).

Morrisons will review over 170 product categories from spring this year, The Grocer (Jan 2021) reported. During a recent online conference, commercial director Andy Atkinson told suppliers the aim was to simplify the shopping experience and enhance its value credentials. Quoted by the trade journal, Atkinson said Morrisons wants all products to be “easy to open, replenish, recycle, shop and identify.” He added that the rationalisation did not mean the retailer would not be launching new products, as new opportunities may emerge from the review.

Shoppers are purchasing fewer SKUs too, according to research from our Worldpanel division. Since 2018, the number of distinct SKUs purchased at Tesco has declined by 5,000 products, for example. This only further supports retail reduction strategies across Europe.

Suppliers respond

Many suppliers have put their own plans in motion. Mondelez reported in its 28 July 2020 earnings call that it was aiming for a 25% net reduction in its SKU count, representing less than 2% of global sales. This measure will simplify its supply chain, reduce cost, reduce inventory and improve customer service. Sales should also improve through increasing space available for the highest-volume items. But this approach should not be just for the likes of Mondelez; all CPG manufactures can use this opportunity to assess their own portfolio health.

How you can rationalise your range

At Kantar, we have conducted rationalisation projects in multiple markets and categories using multiple data sources, shopper insights and advanced algorithms, together with human expertise, and have found these factors to be critical in successful optimisations:

  1. Making decisions based on shopper behaviour
  2. Understanding the incremental value of each SKU to your portfolio and to the category
  3. Assessing the impact of Private Label in your assortment mix
  4. Understanding brand loyalty and switching behaviour
  5. Introducing new products

All category experts involved in making these decisions know there is no simple criteria; rather, there is an optimal mix that needs to be achieved from blending robust data analytics and category expertise.

Making decisions based on shopper behaviour

Shopper decision making has evolved during COVID-19 and the purchase decision hierarchy has changed dramatically in many categories, as we consider health & safety, speed, missions and occasions. Robust portfolio and assortment rationalisation should map each SKU to a current shopper decision hierarchy in order to correctly segment and identify the uniqueness of a SKU.

Understanding the incremental value of each SKU to your portfolio and to the category

One key weapon in a supplier’s rationalisation review with a retailer is understanding the incremental value of a SKU (this is the Kantar approach). Sometimes lower sales values have significantly higher incremental impact when we consider purchase switching. This is why assortment decision making should go beyond just sales value or margin. Combining SKU incrementality with shelf space efficiency, also makes it possible to identify the optimum facings needed. While major grocery retailers are rationalising, some discounters are looking to expand their range – and the same approach will be just as applicable.

Assessing the impact of private label in your assortment mix

Trying to convince a retailer to remove or reduce a private label SKU can be very difficult, if even possible. In response, you can develop an assortment optimisation that protects key private label SKUs and identifies opportunities in other areas. Combined with an understanding of the retailer’s KPIs, like GMROI, suppliers can make more compelling recommendations. While retailers are typically reluctant to share profitability data, modelling retailer profitability on your portfolio can help open up the conversation.

Understanding brand loyalty and switching behaviour

Having a lighthouse brand in a category is a goal for all suppliers. Those with lighthouse brands often come under pressure from new and emerging brands that retailers are willing to list and test. Securing or winning this position can be simplified by using panel data sources and combining these with the incremental value data and shopper decision hierarchy. This combination blends multiple data sources with shopper behaviour to measure real-world switching behaviours.

Introducing new products

With fewer promotions and SKU reductions, manufacturers will have to look harder at innovation and not simple line extensions. Building an optimal portfolio or retailer assortment should consider different parameters that would appeal to both retailer and shopper. The UK will see huge changes in 2022 with the proposed Government guidelines on promoting and selling HFSS (high fat, sugar & salt) products. Retailers will continue to consider assortments that are optimised to nutritional as well supply chain efficiency. Nutritional and supply chain factors are parameters that can be modelled in robust analytics and algorithms to help identify the sales impact and ideal space allocation for new products.

How to plan, adapt to the constant demands from the retailers to reduce space, rationalise SKU and facings, guarantee supply and still grow is a challenge almost all FMCG companies are experiencing. We advocate a combination of an analytics modelling tools, with shopper insights and category expertise to get the right offer and be flexible to rapidly adjust to where the market is going. Kantar’s Perfect Category team can help. Contact us for more information.

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