So the consumer loves being spoilt for choice, right? Say she walks into a store to buy tea and is faced with 20 different flavour options. Does this array of choice really please her? Or simply muddles her to the point where she’d choose to just stick to one basic flavour rather than experiment with another, more exotic one? This delicate balance between offering too much and too little is a constant in every product’s life and also a starting point of stock keeping unit (SKU) and variant rationalisation.
To a certain extent though, SKU rationalisation cannot be done away with in India since a majority of the product categories are still in the growth stage and have single digit penetration rates in most cases. It is therefore driven more by the stage of evolution of a market. “India is a complex country. While modern trade (restricted mostly to larger metros currently) drives consumption and opportunities to upgrade (through larger pack sizes), rural markets need more penetration packs,” says Sameer Satpathy, EVP and head, marketing, consumer products business, Marico. To this end, different SKUs serve different needs. Like, say, a large bottle of shampoo at a modern trade outlet, a medium-sized one at a local chemist in a metro, a smaller one at a mom-and-pop store and sachets for rural markets.
This is quite at variance with the mature global markets, where pack sizes are fairly standardised now, says Harminder Sahni, MD, Wazir Advisors — a large pack at the bigger marts and a smaller one for the more local versions. However, as consumers and markets evolve, this will be a natural progression for the Indian market too.
Variants, however, are a different ball game. They may be launched to add excitement to a brand or a category and wrest shelf space from another player. But as Professor Swapna Pradhan, head, retail management at Welingkar Institute of Management Development & Research, says, “At some point, brands realise that not all products or variants launched by them are cash cows. From a profitability standpoint, some will naturally be more vital than others and must be focused on. This is where one needs to rationalise the offerings.” And a call must be taken on the laggards — whether they ought to be done away with or retained and, if so, at what cost. Simply put, it is the Pareto principle at play, where 80 per cent of your sales come from 20 per cent of your variants. The other 80 per cent variants is where harsh decisions must be taken. That said, doing away completely with these variants is not an option either, especially since these may be the ones that attract, say, a premium set of consumers or sustain consumer interest in the brand through the novelty factor.
Supply chain constraints
The pressure to rationalise SKUs and variants is driven as much by an internal requirement of streamlining processes and supply chain management for fast moving consumer goods (FMCG) and food and beverage (F&B) brands as it is from the retail end. “Shelf space, at the end of the day, is finite. A store that is 10,000 square feet in size and can house 8,000 SKUs cannot overnight house more than that. Rationalising the stock available is very relevant from the retail side,” says Devendra Chawla, president, food and FMCG category, Future Group, that runs supermarket chains like Big Bazaar and Food Bazaar. Interestingly, while shelf space is limited, the number of brands and their variants are growing. Retailers take stock of what’s selling and what’s not every four to six months with products churned accordingly. This is critical for FMCG categories that see more failures than launches. As Chawla indicates, almost 85-90 per cent FMCG product launches fail in India.
There is a constant pressure on retailers to control dead inventory for these categories — a challenge exacerbated by their perishable nature and expiry dates. So, though a company may want to stock all its 20-30 SKUs with the retailer, he may restrict the choice to the fast moving ones with some thrown in to shore up the variety.
It may be argued that in India most brands get just 5-10 per cent of their sales from organised retail; the rest come from general trade. But, where modern trade faces shelf space restriction, general trade also faces an additional monetary constraint. “The proprietor of your neighbourhood store has a budget allocated to each brand. His purse doesn’t expand in tandem with your portfolio breadth,” says a brand manager for a leading potato chips brand.
Brands — as well as the proprietor — will hence chart out the ‘priority packs’. Take the example of Lay’s potato chips manufactured by PepsiCo’s foods division Frito-Lay. Competitors say that the brand’s priority flavours are American Style Cream and Onion, Classic Salted, Magic Masala and Spanish Tomato Tango. These flavours will definitely be stocked with every outlet. The availability of the baked variants will, however, vary depending on the type of outlet. Other variants that are launched by the companies to coincide with an event and test marketed to check consumer acceptability, are pulled out of the market quickly if they don’t work. If they work, though, they’d be elevated to a priority pack status.
Test marketing comes handy here and the finance department in the companies cracks the whip on sticking to budgets. “If you have money, you can launch variants. But, when sales are slowing down, finance will hardly let you run amok. You need to show results with your test marketing to convince them to loosen the purse strings for a more big budget launch,” says the marketing head of an FMCG company.
Focus on season
Every brand’s variants can be categorised as core, seasonal and trial. The seasonal and trial variants are the ones that brands use to wrest away additional shelf space from the trader. Seasonal variants can also be used to avoid any kind of confusion in the consumer’s mind. Something that Parachute’s body lotions have been doing. The brand is available in variants such as summer fresh, deep nourish and soft touch. The variants are placed on shelves according to seasons to optimise stock availability and avoid confusing the consumer in any way. “The corollary to this is that when competition launches variants or new SKUs, the trader may take money out of the funds allocated to you, to test out the new offerings,” says the brand manager. The retailer knows very well what works with his customer and this is where stock management becomes critical.
At times, variants just don’t work and a different approach to grow may be warranted. Take Nestlé instant noodle brand Maggi. Over time, Maggi has launched variants such as masala, chicken, sweet and sour and capsicum. Of these, only two have survived — masala and chicken, and masala continues to be the flagship flavour, contributing 70-80 per cent of the brand’s sales, say analysts. The brand has experimented with more variants, such as the a garlic- and onion-free ones aimed at Gujarat, in particular. While some of these still exist, others have been discontinued. The brand has since experimented with several brand extensions in the form of ketchups, soups, soupy noodles, pickles etc, some successful, others not so much.
Sometimes, F&B brands can also end up being victims of their own brand building, becoming synonymous with their core flavours so that new ones simply don’t go down well with consumers. Consider Parle Agro’s mango drink Frooti. The brand experimented with variants, introducing flavours such as orange and pineapple. It even went on to launch a sweet-sour variant, Frooti Green Mango. But the consumer found it difficult to identify the “mango Frooti” with any other flavour and the variants had to be scrapped. The company has done well with the SKUs of Frooti though, introducing pet bottles for home consumption and slim paper cans with a pull tab, targeting teenagers who felt the unit that came in Tetra Pak packaging and had a straw attached was “kiddy”.
Since F&B products are taste driven, consumers may not substitute one brand/variant with another as easily, says Pradhan of Welingkar. So, one who likes orange juice, for instance, may not pick up a guava variant if the orange one isn’t available. This also applies to an intensely personal category like cosmetics. If a particular make up brand that suits one’s skin type is not available, the consumer may not pick another in a jiffy. For some categories though, like shampoos or body washes, consumers may not be that specific in their choice and could switch between brands and variants of the same brand. This can, however, pose a completely different challenge, with variants eating into each other’s market shares, with specific data, then, not being available on consumer usage patterns.
Data is critical
Unavailability of data is a major concern for FMCG players as they must rely on the retailers to rationalise their stocks. “In the absence of real time data, retailers can end up taking arbitrary decisions on discontinuing the variants. There can be multiple reasons for a variant not selling — lack of proper display, pricing or promotions by competitors,” says a former key accounts manager, modern trade, for an FMCG brand. At times, he adds, the retailer may even try to put variants down, in a bid to put players against each other, browbeating them into paying up higher margins. Sometimes, retailers may purposely try to push out a variant if the margins aren’t good enough. Sometimes, this can also be done to give mileage to private labels.
Private labels though aren’t an immediate threat as per Pinaki Ranjan Mishra, Ernst & Young partner and national leader, retail and consumer products practice. “The market leader brands do not really have to worry about private labels as they are the footfall drivers. It’s those lower in the pecking order who need to be concerned as they can be at conflict with the private labels,” says Mishra.
Whatever the compulsion, dealing with proliferating SKUs is not as simple as just dropping some units. The answer is to narrow component selection and finished goods offerings to a few units because excessive item counts can bring supply chain improvement effort to its knees.
| Dos and don’ts for brands looking to rationalise portfolio Keep it shallow but go wider: In the quest to rationalise SKUs, companies tend to cut on the options available to consumers. The approach should be to offer more real options than SKUs. The basic premise is that SKUs exist to service particular needs of consumers. So, as long as the need is there, the brand services that need, the SKU can exist. In the case of a beverage brand, for instance, the need may be to have distinct flavours, not different pack sizes, which may be 50ml more or less than other SKUs. Different strokes for various markets: Some SKUs work somewhere and others work elsewhere. A company can have a portfolio comprising of several SKUs and offer them for different markets as per their distinct needs. Hence, any particular market or a consumer segment may be exposed to roughly 12 SKUs out of 20 while in other markets only 10 out of total SKUs may be offered. There is no reason to push all of them in all markets. Though brands start with this intention, lack of control and eagerness to maximise returns creates problems. Keep consumer at the centre of SKU strategy: Brands exist to serve consumers and good ones end up belonging to customers as much as to the brands’ managers. So, SKU rationalisation has to have consumer and her needs right at the centre to ensure that she is never alienated in the fervour of rationalisation. Many times, simple ABC analysis leads to elimination of an SKU that may add little to revenue but is fairly critical from the point of view of the consumer. Run the ‘commercial benefit test’: All efforts to rationalise SKUs should lead to measurable cost savings or margin benefits to justify the effort and the risk of losing some consumers and shelf space at the retail end. Every single decision should be evaluated on the commercial benefit test to ensure a reasonable cost benefit equation. Let the numbers do their share of talking too. Don’t ignore the retailer: The most affected party in case of surge of SKUs by various brands and categories is the retailer — be it traditional kirana or a modern retailer. All retailers have limited — and expensive — shelf space, so companies should not ignore the retailer when conducting SKU rationalisation exercises. In the era of too many options (new categories, more brands and variants) vying for the same shelf space, it is vital that companies and brands tread carefully to ensure that the full range and variants of products are on display. Don’t vacate space for competition: In the urge to fine tune their own supply chain and garner some cost savings at the back end, companies should not end up rationalising to the extent of vacating shelf space for the competition. This could lead to unintended outcome of losing sales and market share, which in turn can be detrimental for the brand. Don’t confuse the consumer: Several times, brands, in their enthusiasm to service every single micro consumer segment and their all possible needs — stated or unstated — tend to add too many SKUs to the portfolio. This ends up not only complicating life for all stakeholders in the value chain but also ends up confusing the consumers. Sometimes, less is more. Giving clearer choices to consumers is a far better way to handhold them in selecting the right one for them versus bombarding them with so much that they leave without picking any. Don’t be led by competition: This is the worst thing that a brand manager can do to a brand but it is ironical that it happens every day around us across several segments and various categories. Never ever let the competition drive you into deciding whether you should add — or eliminate — SKUs. The competing brands may have their own reasons to launch or remove a variant and it may be justified. However, the addition or removal of an offer is only one part of the story that is generally visible to competition, which could be misleading. Instead, it makes sense to follow the consumers. |
