Retailers Rationalize Products That Cannot "Earn Their Keep"

Retailers pruning their shelves likely will target duplicative line extensions, items that fall outside a store's brand image and products that sell poorly, a retail consultant warns.

Products that incrementally expand categories are among those likely to survive the rationalization process, says Dave Wendland, who helps retailers "optimize" products and space as VP of the Hamacher Resource Group.

Products that are in demand, inspire consumer loyalty and help fulfill retailers' commitment to wellness also should remain in stores, he said at the OTC National Conference in Philadelphia May 18.

But sales and profits may carry the most weight.

"A key factor driving optimization is retailer profitability," Wendland said. "Retailer space is at a premium. There is a finite amount of space and only so many products are going to fit," and stores want to ensure they stock the best-selling products, he explained.

Wendland noted cutting stock-keeping units to increase revenues may seem counterintuitive, but "it actually may help increase market basket size" by simplifying the shopping experience so consumers buy more.

"From a shopper's viewpoint, there is too much product to choose from ... and consumers are walking away dissatisfied" without the items they need because they could not find them on crowded shelves.

Cutting Through Clutter

Wendland noted that in 2007, the typical consumer purchased 340 unique items, which is "out of balance" with the "million or more" products most retailers offered.

In response, retailers are de-cluttering shelves to become more shopper-friendly, convenient and ultimately to "increase the productivity of every SKU on the shelf," he said.

For example, he noted one of his clients - a 14-store regional drug chain based in Wisconsin - recently condensed its typical 7,500 square-foot store into 4,200 square foot.

The chain also cut SKUs, reduced the size of shelves and improved signage. As a result, consumers thought the new locations were larger because they were not as cluttered as the old stores, Wendland said.

Walgreens also is part of the rationalization trend, cutting more than 30 percent of its health and beauty SKUs in its Consumer Centered Retailing program (¹ (Also see "Industry Must Adapt To Emerging Trends That Threaten Recent Economic Gain" - Pink Sheet, 3 May, 2010.)).

The national chain bases it cuts partly on whether products and categories are central to its "brand promise" to provide wellness and preventive care, Wendland said.

Costco's long-standing philosophy is more clear-cut: Remove products that do not sell, he said, noting that is becoming the norm across the industry.

Walgreens and Costco may be extreme examples, but Wendland said the average store could drop "more or less" 15 percent to 20 percent of SKUs in any given category.

Retailers will determine which SKUs to drop based on "a fundamental understanding of the shopper," Wendland said.

"Items that are not contributing to the customer value proposition really don't have a spot any longer on the shelf. They are not earning their keep."

First Cuts

Easily duplicated products available under a national brand and multiple private label brands likely will be the first on the chopping block.

Wendland said this includes superfluous "sizes, flavors, forms and other types of line extensions that do not create incremental sales."

"We don't need another flavor of something just to bring newness to the category," he said.

"If each iteration of a product doesn't bring something new to a category and it is only cannibalizing previous sales, it is not doing any good on the shelf ... and will be scrutinized pretty heavily."

Retailers also will scrutinize products in slow- or no-growth categories and products that are around only because of trade allowances, promotion dollars or because a dwindling number of consumers buy them, Wendland said.

Likely Survivors

On the flip side, products that "bring excitement to the category," and are "new and truly innovative" have an opportunity to survive the next round of rationalization, Wendland said.

For example, "a new delivery of a new flavor ... could be exciting to a retailer," he said.

Likewise, brands and products that add incremental sales to a category and do not cannibalize other sales are "golden" and will survive, he said.

However, he cautioned, to secure shelf space, marketers must communicate "loud and clear" to retail buyers how a product expands or enhances a category.

High-loyalty brands also likely are safe from cuts because retailers know that "consumers will flock to them and miss them if they go off the shelf."

One way to build loyalty is through "brand ambassadors," consumers who encourage others to buy the brand, Wendland said.

Procter & Gamble effectively created brand ambassadors for its OTC heartburn medication Prilosec OTC by launching its "Sponsor Everything You Do" campaign, which gave select users $1,000 sponsorships to fund their "individual passions" in exchange for spreading the word about the proton pump inhibitor (² (Also see "P&G Creates Prilosec OTC Social Network To "Sponsor Everything You Do"" - Pink Sheet, 18 Jan, 2010.)).

Social media campaigns like this are a good way to create product demand, which also helps safeguard products from rationalization, Wendland said.

Firms can use Facebook and Twitter to generate initial interest in a product through exclusive promotions and coupons, a strategy Schering-Plough used for Claritin Eye (³ (Also see "Zyrtec and Claritin Eye Drops Use Different Tactics In Head To Head Fight" - Pink Sheet, 11 Jan, 2010.)).

Likewise, online communities can generate brand loyalty, such as GlaxoSmithKline's support page for consumers who use the weight-loss drug alli .

Another way to create demand is with exciting packaging, Wendland said. "OTC medicines have largely become a little stale, a little bit too medicinal looking when you are competing with" revitalized store brands (⁴ (Also see "Private Label Shoppers Need Reasons To Spend More On National Brands" - Pink Sheet, 7 Jun, 2010.)).

Other ways to create demand include combining a product with a known entity, such as Mentholatum Co.'s October 2009 partnership with the Ironman strength-training and endurance race brand to launch pain relief products.

Wendland also recommends firms create demand to safeguard against rationalization by working with pharmacy benefit providers so consumers are eligible for insurance coverage for some OTCs, or getting involved in an in-store health kiosk system that help guide consumer decisions at point of purchase.

- Elizabeth Crawford ( ⁵ [email protected] )