The following is a lightly edited transcription from the May 14, 2020 live interview with Flora Delaney and Third Haus founders, Chris Walton and Anne Mezzenga. The full video interview is available here.
Covid is forcing retailers to investigate SKU rationalization. It is a fundamental step in Assorting, but so many have accepted every new item that comes their way.
Retailers have assorted so many different forms, flavors and functions in every product line. For customers, there’s so many different choices. And what Covid shoppers have said is “I don’t care. I just want the thing.” Right? There’s only like 100 SKUs right now that are on everybody’s wish list: Clorox wipes, toilet paper, hand sanitizer, liquor. Those are the things that they really want.
But the other thing that’s really interesting is what that means for retailers is an incredible bubble right now in private label purchasing. So I don’t know if you saw the article “Kirkland is having a moment.” It was all about what is going on with Kirkland and 365 and the big private label brands. Private label before Covid was running right around 16% market share in grocery stores. and now it’s bumped up to 29%.
Customers are saying I don’t need whatever is normally my favorite. Just what is there will do. I want to limit the number of shopping trips I make. So whatever you got, I’m going to take. That means they are trying some things for the first time. Retailers wonder how many of those customers will they be able to retain? Once they try the Private Label SKUs- which are much more profitable to sell for the retailer –will they be able to retain that shopper and keep them in their private label brand?
Should they in fact be looking at their supply chain? Doing some serious SKU rationalization. Cut back some of the assortment and choices for customers. And instead decide to stand for a core set of items. Decide to go very deep with a supply chain. Have alternate vendors. Make sure that my customers can always walk in to my store and find these items. You know, it’s really going to be interesting to see what happens there.
Yeah and that’s like two things there. And with Private Label especially when there’s scarcity. Retailers don’t really need to order CPG like they did before. Because there is scarcity and they can push their customer into that Private Label. That higher margin product fairly easily. Same reason you’ve seen basically that decline in printed circular advertising on the weekend. They just simply don’t need to be advertising right now.
Lot of leverage there. That’s interesting.
The SKU rationalization is coming from two different points. The first one is “gosh, I have all these choices of jams and jellies for customers who only want grape and strawberry. So what am I doing with 10 different choices of orange marmalade?” That’s the first question retailers are starting to ask themselves.
But also the vendors themselves are having real issues with their supply chain. So they’re saying “So look, I I have core products and I have secondary and tertiary products. And for right now my production line is only going to be running out those core products so that I can make sure that I’m delivering those items. And all these other items that I normally would’ve been trying to push on you, Mr. and Mrs. Retailer, to carry? I’m not even going to fulfill orders for those items.”
So now even suppliers are doing some SKU rationalization. Retailers are starting to realize consumers are voting with their dollars. And they are saying” I’ll take what I can get.” But also the vendors are looking at their portfolio of brands and items and saying “maybe we’ve gone too far. We’d like to say that our innovation is building these new markets and things like that. But at the end of the day you know soda only needs so many colas and so many un-colas and then you’re done.”
Right. We heard a little bit about that on the ShopTalk virtual conference call today. They were talking about how some of the bigger CPG brands are even cutting the smaller size SKUs. Because people are feeling like 1) they’re willing to bulk up or buy the bigger size so that they don’t have to make repeat trips like they were before and 2) they’re just not going to the store with the frequency that they were before. So that impacts what CPG’s are providing and what retailers are going to be buying.
It’s a tough game too because the other part is who wins in that if you aren’t of that mindset, right? Like Amazon does. If you do have that proclivity to say I want something a little bit different, I want a bit of variety, spice up my life. Bezos would say it is a universal truth that you want selection. Covid probably changes that. But you know, that means you’re all going back to Amazon to find variety if and when some of these retailers start to cut back. Now if the CPG companies cut back that’s different. But for Amazon… Lord knows their stock is at an all time high, right? Or something like that. So they keep winning that game. Fascinating.