Friday, August 31, 2012

SKU Rationalization - Reassessing Retail Assortments

Copyright (c) 2012 Ted Hurlbut

When sales decline, assortments have to be adjusted.

Think back, for a moment, to the late Nineties, when the economy was booming and cash was plentiful. If you went into a typical mall in mid-October, most likely you'd find a temporary Christmas specialty store opening up. These stores would carry a full range of seasonal merchandise, from outdoor decorations to artificial trees to every hanging ornament imaginable. These stores might be 2,500 square feet, sometimes more, and they'd be loaded with merchandise. Do you recall seeing any store in the mall like this past Christmas? I know I saw one, and it didn't look like it had even enough inventory to pay the rent. The mall Christmas specialty business has retrenched to a few, very tightly merchandised kiosk's.

I use this example to illustrate an important point about merchandising and assortments in these challenging times. When there's a lot of cash in customer's pockets, there are categories and items that are suddenly viable and in demand that might never have been significant before. Conversely, when there's not as much cash around, those categories and items are no longer sustainable on the same scale, if at all.

This might seem obvious, but it can be a painful realization when it happens within your own store. Independent retailers understand that when sales are declining they have to tighten up inventories. The difficult truth, however, is that most strongly resist reducing their inventory levels by the same percentage as their sales are declining. They don't want to get caught short when things turn around. And they are loathe to tighten their assortments. They are concerned, not without reason, that they'll alienate potential customers if they can't find what they're looking for. As a result, inventories remain too high, turnover slows, and precious cash is left tied up in stagnant merchandise. But, in times like these, the risk associated with not having everything a customer might want is far less significant than the risk of coming up short on cash.

This is called SKU rationalization. As you review your inventory levels, and reassess your retail assortments, here are several thoughts to keep in mind about SKU rationalization.

* Break your retail assortments down into core/destination, complementary/accessory, secondary and impulse items, categories and programs. Each of these groupings needs to be considered separately, in their own way. The most challenging part of the analysis, in fact, may be in determining which grouping each, item, category and program actually belongs in.

* Core/destination items, categories and programs are those things that drive your traffic, and your business. They are at the heart of the understanding you have with your customers. They contribute the largest percentage to your sales, and they turn over the fastest. You carry them in breadth and depth. All of which isn't to say there aren't individual items within these categories and programs that aren't carrying their weight. These assortments need to be reviewed for anything that's not doing its job, and either have the depth of stock reduced, or be cut from the assortment completely.

* Complementary/accessory items are those things that complement or accessorize core or destination items, categories or programs. These are logical add-on items to any sale of core or destination items, but they are not essential to the purchase. One example in a women's designer boutique might be a basic pant program in several colors. In a store like this, the core/destination categories are likely to be fashion tops and bottoms. (It's worth noting that an item like a basic pant might be a core wardrobe builder in your customer's closet, but that does not necessarily make it a core/destination item in your store.) A basic pant program will tend to turn over more slowly, and need to be reviewed carefully. It could be that three styles need to be culled to two, or four colors pared to three.

* Secondary items, categories or programs are those things that are not core, but have developed over time into a nice piece of business. These may have grown out of a carefully constructed test, or expanded from a hot item. Consider an activewear program added to our women's designer boutique. Usually, these things take root when business is good and customers are willing to expand their basket. Conversely, when business is not good the customer's basket contracts, and these items, categories and programs suffer the most. This is the merchandise you must review soberly. The turn on this merchandise can collapse quickly when business turns sour. Inventory can quickly back up, and suddenly feel like a black hole for cash. When this happens, these items, categories and programs need to be suspended and liquidated and suspended immediately.

* Maintaining irresistible assortments of impulse items is essential to maintaining your dollars-per-transaction during difficult times. These assortments still need to be reviewed, however. Frequently, a customer's attention will be drawn less by those items that are more frivolous and unrelated to their purchase, and shift to items that have a more related, utilitarian appeal. Price points likely need to be sharper and more attractive. Impulse appeal is still the driver, but the nature of the items shifts.

When sales decline, assortments have to be adjusted to bring inventories back into line. If inventories remain higher than sales can support, precious cash becomes tied up in inventory that turns very slowly, if at all. And in this economic environment, nobody can afford to have cash tied up in excess inventory.

Ted Hurlbut is a retail consultant, coach and speaker who helps independent retailers increase sales, profitability and cash flow by leveraging his deep expertise and proven retail know-how, Get his FREE report "The 16 Essential Elements of a WINNING Independent Retail Strategy" Visit:

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