Assortment Rationalization

Download PDF Version

BOOST THE BOTTOM LINE

The key to a wholesome, crunchy, cereal is proper separation of wheat and chaff. The key to proper separation of wheat and chaff, of course, is understanding which is which. Retailers’ strategies have varied, but, overall, actual assortments in major food categories have only shrunk by less than 1%, according to a recent Nielsen study.

Retailers have provided various reasons for maintaining high assortment levels: They want to provide better presentation, retain more control over inventory, alleviate shopper confusion, drive higher category profitability, accommodate private-label products, compress space within existing categories to add new lines of product, and/or try to keep up with other retailers using similar tactics.

Whichever your motivation, an Assortment Contribution approach can provide significant opportunity to improve margin, increase inventory productivity and grow top-line sales. We have seen as much as a 15-30% reduction in assortment breadth, a 7-15% reduction in inventory investment, a 1-2% increase in gross margin and a 2-5% increase in top-line sales.

A FOUR-PART STRATEGY

Successful retailers have taken a four-part approach:

• Identify departments and store clusters that have opportunity. Review performance by deciles, geography, store clusters, and other available attributes. Identify which items generate more than 80% of sales, what are the top 20 SKUs by contribution to the category, what is the gross margin contribution of top performing SKUs, and which SKUs are the lowest performers.
• Generate sales Pareto analysis. Focus on a product class within a department to identify those items that are contributing lowest sales and margin, at the end of the tail. For over-assorted categories, pareto curves will rise quickly and then flatten out with a long tail. Pareto curves that appear more diagonal typically indicate efficient categories with balanced assortments.
• Create scatter plots. View all SKUs on a two-by-two matrix (figure 1) to identify best in class (high sales/high margin), low volume (low sales/high margin), margin opportunity (high sales/low margin), and high concern (low sales/low margin). In an effective assortment, you would expect to see a balance across the quadrants. When a category is over-assorted, you would likely see a higher proportion of SKUs in the low volume and high concern categories.

• Manage the assortment decision process. Tools are only directional in the decision process. It is critical to consider the category strategy and role. Some items will need to stay in the assortment, and it might make sense to make decisions to limit the investment and only carry items in some stores. This would reduce presentation on the shelf to minimums (using inner-packs or case packs to aid in the decision process), enabling the reduction of total inventory dollars or the investment of those dollars into other categories. Successful retailers adhere to an ongoing Assortment Rationalization process and continually prune non-performers.

Making informed decisions to reduce unproductive portions of the assortment can reduce inventory, improve top-line sales, ensure that your stores stock items that are relevant to their local clientele and, most importantly, that maintain or increase your market share. With grocers under attack by the drug, convenience and mass channel competition, this has never been more important.