RECIPE TO RETAIL: Part 18…
I listen to clients eagerly talk about all the new items in their product development pipeline. Launching products is exciting and gives brands something to crow about, but over time, the product assortment can swell to the point of being bloated. An overweight portfolio with too many SKUs can drain finances, time and resources. The negative impact affects multiple areas of a business.
When More is Not Better
From a sourcing and procurement standpoint, managing a large listing base is more complicated. As the number of ingredients increases, inventory turns and replenishment must be carefully managed to prevent losses and out of stocks. Expanding packaging inventory ties up money and can lead to write-offs when packaging becomes obsolete. And as storage space fills to capacity, outside warehousing may be needed, increasing expenses.
Production planning becomes more complex and operational efficiency is tested. More SKUs means shorter production runs which results in more down time.
R&D and new product launches are an essential part of growing a sustainable brand. However, the money, resources and time invested in product development do not guarantee sales. There is no ROI (return on investment) if the products don’t generate enough profit to cover the cost of the project.
Retailers list the products that will sell best, not your entire range. Having too many flavours or sizes can cannibalize sales of other SKUs. Because stores have very limited shelf space, they use a “one in, one out” approach to make room for new items.
As your portfolio grows, marketing and sales activities can become less focused. More money and resources are needed to raise awareness and drive trial of new products. This comes at the expense of older products that are the backbone of the portfolio.
Consider the 80/20 principle which is widely used in business. It refers to the relationship between effort and outcome. When applied to marketing, the idea is that 80% of sales come from 20% of the products (percentages are approximate). In other words, a handful of SKUs generate the bulk of the revenue. So what does that mean in terms of the remaining products?
Trimming the Fat
Let’s look at the practice of SKU rationalization (reduction), an important component of portfolio management. The process identifies products that contribute the most to business growth and hence are worth keeping, over those that put a strain on the business, making them candidates for discontinuation.
Conduct a review of annual sales, ranking products by dollars and volume. Analyze every SKU: selling price; cost to produce a unit; GM$ (gross margin dollars); and GM% (gross margin percent). Compare all the SKUs and zoom in on the lowest ranking ones. Do they reduce operational efficiency? Is there a compelling reason to keep them?
Beyond financial data, other factors to examine include:
- What objections would your largest customers have if the SKU was discontinued?
- Can it be replaced with a better selling SKU?
- Is it a star in waiting or on the cusp of an emerging trend?
- Does it satisfy an unmet consumer need?
- How likely is it that consumers would switch to a competitive brand?
In conclusion, when planning new product development also consider SKU rationalization. A well-managed portfolio will improve business efficiency, save money and contribute to a healthier bottom line.
As a packaged foods consultant, Birgit Blain helps food brands prepare their products for market – from strategy to finished packaging. Her experience includes 17 years with Loblaw Brands managing a President’s Choice® portfolio. Contact her at Birgit@BBandAssoc.com or learn more at www.BBandAssoc.com
© Birgit Blain
This article appeared in Food in Canada magazine.