April, 1998

From the Editor

It's All About Assortment, Not SKUs

“Take dry-grocery specialty items that move one retail pack every two days. Now, the statisticians would say, ‘Get it out of here.’ But when we look at the baskets some of those items are in, we find they are three times the order size of our average customer.”

Glen Habern
Chief Information Officer
H.E. Butt Grocery Co.

Quick, read the quote in the center of this page. It is an early sighting. A tentative sign the supermarket industry is finally awakening from its trance-like infatuation with driving costs from the system and starting to look at the real goal: enhancing profitability. It’s a change in focus that will benefit both the supermarket industry and the specialty food trade.

Glen Habern’s comments were given in a remarkable presentation at this year’s Food Marketing Institute’s MarkeTechnics conference in Los Angeles, CA. The presentation was unusual in that it not only challenged so many shibboleths of contemporary retailing, but also pointed the way to answers.

Of great significance to the specialty foods industry was Habern’s insight that the big market baskets of specialty food consumers indicates something specific. “What that tells us is that our customers are coming to us for assortment.” In other words, all products are not created equal.

The staple items carried by all markets cannot, almost by definition, create a compelling reason for a consumer to select one store over another. Specialty items, however, have that power, because the items are…well…special. The items are not available everywhere.

As a result, stocking a specialty item can make a particular store a destination spot for consumers who crave that item. Add to this the fact that the specialty foods consumer is far less price-sensitive than the general consumer and one realizes that stocking specialty foods is an excellent strategy for attracting more customers who will purchase larger quantities of the highest margin items. In other words, all customers are not created equal.

The customer who purchases few items and the customer who purchases mostly low-margin items are simply not as valuable as the specialty food customer, who has a big market basket ring at high margins.

It is hard to overstate the importance of Habern’s observation, especially when it comes from the chief information officer of a major chain that has studied the matter. The big push in retailing has been to “rationalize” SKUs. This started when warehouse clubs took off and became more pronounced as Wal-Mart, widely feared for its low costs and advanced technology; began building supercenters at a rapid rate.

But following another operator’s game plan is almost always a recipe for disaster in business. Each business must play to its strength. Since supermarkets are attracting their most valuable customers by offering a broad assortment of foods, Habern went on to explain, H.E.B. thinks “…rationalizing space is more important than rationalizing SKUs.”

What this means is that, instead of trying to reduce the number of SKUs and thus reduce the assortment a store offers its customers, a store would look to insure that space is properly allocated so that assortment can be maximized. In other words, don’t take up space with product that isn’t necessary.

To do this, H.E.B. studied daily movement information. It applied that information to its salad-dressing section: “We looked at our salad-dressing Plano gram, which was 16 feet and said, ‘Let’s Plano gram it the way customers are buying,’” said Habern. “We took average daily sales and added two standards of deviation – about 100 percent safety stock – just to be safe and said, ‘Let’s see how it Plano grams.’ Those 16 feet became 12 feet.”

How did H.E.B. execute this daring plan? “We put it in a fairly high-volume store. We didn’t change any of our processes. We ordered it the same way, and we stocked it the same way,” explained Habern. “The only change we made was to take the vendor pack out of the equation. If the Plano gram called for eight, and the vendor pack had 12, we put eight on the shelf.”

What were the results? Well, after four months, sales were unaffected by the change as were in-stock positions. “Stocks are the same place they were four months ago, but we got 4 feet,” detailed Habern. “We got 25 percent of our space back. We took specialty items from one of our DSD suppliers and put them in that space, and our gross in that category went up 200 basis points.

“We haven’t looked in detail at what our sales are in that 4 feet,” said Habern. “But even if it’s a dollar, it’s a dollar we weren’t getting before.

Indeed. Imagine the implications for specialty food and DSD distributors. If the chain can continue the experiment with other categories and take back 25 percent of the space in every category, the assortment that could be offered to consumers could boom. What an extraordinary opportunity for specialty foods.

Of course, specialty foods won’t be exempt from the drive to rationalize space. Habern also explained that H.E.B. is looking at some new self-fronting shelves. The reason for the interest? Supermarkets are loath to put a single facing of anything on the shelf. After all, one sloppy consumer who places another item in front of a product obliterates the product if it is only displayed in a single facing. A self-fronting display case should help keep the products properly fronted.

The problem, of course, is that the volume per item on all these specialty foods in a single-facing display is not likely to be great. This poses some problems, and not just for specialty foods.

“Vendor packs are just too big,” Habern continued. “Half the items in the store don’t sell a pack a week. Working with the suppliers is a big opportunity for us to reduce the packs where we can and get the right number of products on the shelves.”

The sizes of vendor packs are often determined without any consultation with retailers. They are selected for shipping and packing efficiency and, of course, in the thought that the retailer will buy one box, whatever that box size may be.

H.E.B. is on a road that would truly benefit the specialty food industry. It is looking to increase assortment by using existing space more efficiently. Since this is much more likely to happen than to see stores increasing assortment by adding space, the specialty food industry would be wise to push this trend.

But a key to effective implementation may be reducing vendor-pack size. Putting out partial cases is both a pain and a logistical nightmare. It means keeping track of partial cases and often encourages backroom thievery. The obvious answer is for vendors to work with their distributors and retail clients to determine optimum pack sizes.

Doubtless it is a blow to the ego to learn how little of one’s product an individual store might sell in a day. Still, whatever encourages the efficient use of valuable retail space is likely to open the door for more specialty food products in supermarkets. And, in an industry always exploding with new products, that is a consummation devoutly to be wished.     FDM