Tuesday, February 16, 2010

Retailers Get Tough on Brands

CNN Money's website has a good article documenting how large retailers are streamlining the number of branded products on their shelves. As you might expect, Wal-Mart features prominently in this development. The article describes how retailers are reducing their product assortments, i.e. Do we really need 50 different types of toothpaste on the shelf?

Why might retailers streamline brand and product assortment?

1. Private label offers an attractive, value-oriented option for consumers, and it provides attractive margins for the retailers.

2. Reducing assortment offers an opportunity to drive higher volumes on a smaller set of SKUS, thereby increasing inventory turnover (thus driving return on assets higher).

3. Fewer SKUs means less confusing displays for the consumer, and more opportunities to showcase particular products in a more prominent way.

4. A reduction in SKU count and brand assortment may reduce logistics costs and administrative expenses, particularly if the retailer now has to deal with fewer suppliers and supplier locations.

5. Pitting brands against one another in a battle for shelf space enables retailers to extract concessions from key suppliers, thereby reducing costs of goods sold and increasing margins.

6. Retailers may have an opportunity to reduce the square footage of their store footprint, particularly as they experiment with urban and "neighborhood" store types.

Of course, large retailers are not necessarily breaking new ground here. Smaller retailers have been very successful with this limited SKU strategy for some time. Consider, for instance, the small but highly successful New England grocer, Stew Leonard's, as well as the popular national chain, Trader Joe's.

5 comments:

PIA said...
This comment has been removed by the author.
PIA said...

Good Article. I also recently read an article about how Walmart was attempting to make their stores more 'shop-able' and customer interactive...Seems like the 2 go hand-in-hand.

Luke Bornheimer said...

Also to note, Target has recently begun to move in this direction as well.

Specifically, the company hopes to streamline its food aisles, broadening their reach in terms of products.

This can be done, for example, by eliminating 3 of the current 5 types of peanut butter they sell and open space for a type of product they couldn't offer before.

Though I agree that the strategy will make the shopping process easier for customers and enhance the company's model, I wrestle with what this means for local brands.

With the narrowing of SKUs throughout these stores, perhaps stores like Stop & Shop and Shaw's will be open to offering more local foods; One could only hope...

PIA said...

Local foods = fresher and healthier foods = always a great thing! Well said Luke!
Overall, I guess there's always that fine line of too many options vs. not enough options. For me, many times things come full circle to 'keep it simple stupid' : )

PIA said...

Don't you love when your talking about something and start to see it all over the place? : ) Looks like those products may be eliminating themselves ...

http://blogs.hbr.org/leadinggreen/2009/07/walmarts-transparency-exposes.html