Unintentional Effects of SKU Rationalization

SKU reduction has become one of the most transformational forces to hit retailers in the last decade. Undoubtedly influenced by studies in decision-making and shopping anxiety, some retailers have begun trimming down their shelf sets to a mostly two-tier system composed of the best selling national brand and private label. But have they gone too far?

Benefits of SKU rationalization include: inventory reductions, improved margins, and better shopper experiences – but recent news of Walmart’s Q4’09 sales decline has caused some analysts to question its validity, or at least its execution.

Has SKU rationalization unintentionally sparked a price war? In a recent comparative price examination, a basket of 40 products came out cheaper at Target than at Walmart – a fact that has not gone unnoticed by shoppers, many of whom report crossing over to other retailers such as grocers and club stores in search of better prices in certain categories.

Interestingly, in the latest edition of The Checkout, shoppers reported walking away from the shelf empty-handed due to price and limited product selection. The issue may be related to some retailers utilizing SKU rationalization methodologies that do not account for low-velocity items having “shopping basket gravity” – the pull some products have on other complementary products. Without a clear understanding of retailer-specific shopping patterns and basket drivers the wrong SKUs may be cut, leading shoppers to take their business for that entire category elsewhere.

How do you think SKU rationalization will play out in 2010?

Read more about this and other topics in the upcoming release of The Checkout next week!