Successful retailers are rethinking the notion of carrying massive numbers of items on their shelves and realizing that their stores have unique consumer dynamics. Many owe much of their success to a shopper-centric approach that is easy to implement via assortment optimization technologies.
Walmart struggled to redefine the role of individual categories in its stores and the depth and breadth of product assortment choices. As a result, its (now-ended) item reduction initiative alienated many shoppers because Walmart did not clearly understand the degree of loyalty to particular products. Just because a product is a slower-moving item does not mean that it does not have a loyal following. Take organic soup, for example: It does not have high velocities relative to the category, but if it is not available, the shopper will leave the store without making a soup purchase.
In some categories, national brands are not the drivers of the category, so retailers are looking to eliminate or significantly reduce the number of national brands on the shelf while expanding the presence of their more profitable store brands. We have seen this phenomenon play out across many retailers as they appeal to value-conscious shoppers with formats ranging from Costco’s Kirkland brand at the high end to Walmart’s Great Value in the mid-tier and Aldi’s store brands at the lower end of the value spectrum.
So, what is the right approach to item, line (forms and sizes) and brand rationalization that reduces the risk of losing shoppers, minimizes confusion at the shelf and maximizes returns? The right approach starts with understanding how shoppers organize the category into distinct segments based on their usage and purchase behaviors. When shoppers come to the shelf, it is essential to understand how they sort out their needs and make purchase decisions. Using technology to understand consumer and shopper behavioral dynamics creates guiding principles for shelving and assortment.
In the case of adult analgesics, consumers may think about usage based on whether they have a headache or muscle pain. From that starting point, how do shoppers make their purchase decisions? What is most important: brand, form (liquid or pills) or size? Are there other attributes that are important to consumers like convenience or flavors?
Once the way they use the product and make purchase decisions is defined, organizing principles can be established. For example, eliminating the bottom 20 percent of items based on velocity may not necessarily reduce confusion at the shelf; it could potentially result in low-velocity items with high loyalty being discontinued, which could cause shoppers to choose another store.
The approach and tools chosen for item rationalization must be able to discern which products are truly incremental to the category and which are redundant based on actual shopper choices. Forward-thinking manufacturers are turning to assortment planning tools that can precisely identify items that are driving category growth versus those that sap category profitability.
Such tools can pinpoint the productivity of each consumer segment, and then determine which segments are candidates for growth versus those that need to be rationalized. As retailers begin to make item add and delete decisions, it can determine where the product volume flows and how much volume leaves the category, or “walk rate.” It also provides precision in understanding where new items will obtain their volume from when added to the product mix. In some cases, the new product may be filling an unmet need and provides an incremental purchase to the category. Shopper switching behavior and the transferable volume flow provide the critical inputs needed to create optimal assortments.
When it comes to brand rationalization, retailers must look at the number of brands that truly satisfy consumer needs. For a category like dry packaged desserts, which includes iconic brands with dominant market share like Jell-O, it is reasonable to hypothesize that no more than two or three brands satisfy consumer and shopper needs.
In more complex categories, like upper respiratory and allergy medication with many ailment symptoms, there is most likely a distinct set of brands in each segment of the category that satisfy consumer needs. These needs dictate that a somewhat broader set of brands is required, but maybe not as many as are represented on the shelf today.
As these products are examined for deletion, it is important to understand shopper loyalty and which brands, forms, sizes and items would cause shoppers to leave the store if they were not readily available. The assortment range often varies by channel based on how shoppers value the depth of assortment.
In the grocery channel, allergy products may be more of a convenience purchase and depth of assortment may not be critical. In the drug channel, allergy is a destination category where depth of assortment is valued and expected. Even when depth of assortment is valued, there is still considerable room for brand and item rationalization, but great care must be taken to understand item/brand incremental value and loyalty.
Item, line and brand rationalization should not be a one-time event, but an ongoing process to capture the latest segment trends. The benefits, if done correctly, are an improved shopping experience, increased distribution on core power items, and greater category volumes with fewer items, which leads to improved gross margin return on inventory investment for retailers. This process needs to be collaborative between retailer and manufacturer to ensure that all items are given similar scrutiny.
The trash-bag category, for example, is very brand-driven. The majority of volume is spread among two national brands and private label. While these brands dominate the category, a long tail of smaller brands contribute little incremental volume to the category and create clutter and confusion on the shelf.
The leading national brand in trash bags was looking to understand the low productivity and incremental contribution of this long list of smaller brands within the trash-bag category. To solve for this, they ran simulations that removed the smaller brands from the shelf set. Category impact was minimal because these brands have low loyalty and a low walk rate.
This simulation allowed the manufacturer to demonstrate to retailers that eliminating low-loyalty brands and streamlining the assortment will make the experience better for the shopper without materially impacting category revenue. In addition, eliminating these unproductive brands opens space on the shelf for innovation or expanded facings on top-selling items within the category.
It also demonstrated that the long tail of brands significantly interacted with private label. When these brands were removed, due to their low walk rate (loyalty), a large portion of their volume shifted to private-label items, benefitting the retailer’s brands as well as the entire category.
Meanwhile, an industry-leading healthcare company was interested in finding opportunities to increase production efficiencies and reduce costs by identifying and removing unproductive items from its large and fragmented catalog of suture products. An analysis of the wound closure market determined product segmentation and loyalty within the category. Once this behavior was understood, simulations were run to identify the most unproductive brands and segments within wound closure. After these products were identified, item reduction scenarios were run to understand the impact to the manufacturer as well as the entire category.
Because of the sheer volume of items offered in the category, the best solution was an item rationalization approach (as opposed to deleting entire brands or segments) that eliminated items with low loyalty levels. Eliminating approximately 25 percent of the items within the company’s portfolio had virtually no impact on either the company’s or the category’s revenue. This allowed the manufacturer to achieve significant operational cost savings with virtually no impact on revenue.
Leading-edge manufacturers have made significant investments in assortment planning capabilities within the US and other mature markets. However, the challenge of developing capabilities across emerging markets has largely been unmet. While the benefits are many, a “one size fits all” approach to assortment planning will not succeed if it does not adapt to the specific local consumer needs and data variability in each market.
So, what are the first steps to tackle assortment planning in emerging markets? Initiate a pilot with a mix of markets to generate success stories for a larger roll out. The markets should represent a cross section of sophistication. For example, include a high-complexity market that is accustomed to performing assortment analysis and has robust data, a medium-complexity market with limited assortment analysis experience and data, and a low-complexity market where little to no assortment analysis is performed and very limited data is available. Once the successful pilot is completed, an internal best-practices approach can be established and rolled out to the broader organization.
In any market, the results of assortment strategies driven by the latest optimization tools are greater revenue, more profitable sales and less shopper confusion at the shelf. 
