Brand loyalty has heavy hand in SKU rationalization game

WHAT IT MEANS AND WHY IT’S IMPORTANT The whole discussion around SKU rationalization -- or SKU optimization, depending upon your spin -- boils down to just one question: Just exactly how brand loyal is today’s shopper?

(THE NEWS: Report: Jewel-Osco SKU rationalization taken to new heights. For the full story, click here)

If you’re a proponent of SKU rationalization, or optimization as the case may be, your answer is “Not very.” And that could make sense. If mom’s buying a tube of toothpaste at her local grocer, her purchase hierarchy very well could place a greater value on benefit, price or value (family size) before she makes a selection based on brand. And, so long as some nationally recognized brands, such as Crest or Colgate, are price-competing on the shelf, so what if the brand she used to buy isn’t there? She’ll just reach for the Crest or Colgate.

And that’s all very easily justified by measurable savings to the bottom line. Cull a pre-existing SKU from an assortment, and not only can you tabulate exactly how much money will be saved in no longer buying that SKU, you also can conjecture just about how much will be saved in labor costs throughout the supply chain — from the warehouse all the way down to store level — because as many as 20% of a chain’s entire SKU assortment no longer has to be handled.

To be sure, it’s not just Supervalu that’s calculating this SKU arithmetic. Just about every publicly traded retailer is making SKU concessions, especially in this challenging economy. Shareholders are simply unforgiving — because smaller top lines can’t necessarily mean slimmer bottom lines, not if you can cut enough costs out of the equation.

The danger, though, is if mom is brand loyal. And the store where she used to get her Aquafresh no longer keeps that brand in stock. So she goes across the street to the competitor who does have it in stock. But then what if she makes that impulse Snickers purchase at the check stand? Then it becomes not only one lost sale, but two. What if she decides that the new retailer is price competitive across all the categories she shops? Then it becomes the loss of a complete customer, and that could mean the loss of between 10 and 12 opportunities to place one more item into her marketbasket.

But all of this conjecture is a lot harder to quantify. How exactly do you measure what might have been?

A recent Nielsen Co. survey may shed a little light on what might have been. According to the survey, more than half of U.S. consumers surveyed said they likely are to shop elsewhere if they notice a reduced product selection and can’t find the product they desire on shelf. More specifically, 7% of personal care product shoppers said they would leave the store without buying anything if they can’t find the product they want. While 7% may seem like a small number, consider that just a 0.5% decrease in shopper closure across the grocery channel could cost as much as $1.5 billion in sales, Nielsen stated.

While such a large figure as $1.5 billion represents a potential loss across an entire channel, if a specific grocer tabulates its share of that loss, well the justification for SKU rationalization, or optimization as the case may be, just got a whole lot harder to calculate.