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WHAT IT MEANS AND WHY IT'S IMPORTANT New research released by Nielsen suggesting that retailers must be cautious when trimming SKUs as they risk losing customers if the wrong products are slashed clearly addresses an important issue and comes just on the heels of Drug Store News' June 7 report titled "7 Deadly Sins of SKU Rationalization."
(THE NEWS: Streamlining product selections could spell trouble for CPG retailers. For the full story, click here)
As the Nielsen data showed, 75% of retailers are downsizing their product assortment to improve merchandising opportunities, while 71% cited a desire for greater control over inventory. Sixty percent stated the moves are made to alleviate shopper confusion, while 52% are reducing selection to cut costs and improve profitability.
"Reduced assortments are definitely here to stay, and the message to retailers is to choose carefully when it comes to deciding which products to trim," stated Stuart Taylor, VP custom analytics for Nielsen. "In many cases, strategically reducing assortment can result in an improved customer experience and greater profitability. Cut the wrong product, however, and the potential customer backlash could be costly." This sentiment sounds quite similar to those opinions expressed in the "7 Deadly Sins of SKU Rationalization" special report.
Looking to trim costs and prescribing to the mentality that cash-strapped consumers no longer were buying products that they wanted but only the essentials that they needed, retailers began re-evaluating their business.
For many retailers in the mass market, this re-evaluation of the business involved deep discounts, a much stronger focus on private label and, of course, SKU rationalization. Oftentimes the first ones to the chopping block were niche brands, which, after all, seldom have the velocity or profitability that is comparable with a major commodity brand in any given category.
"The reason these little niche brands are so important isn't so much because of the amount of units they sell, and not even the amount of dollars that they bring in, and really not even their margins," David Biernbaum, president and senior consultant at David Biernbaum & Associates, told Drug Store News. "Their unit movement is still so much smaller compared with the big national commodity brands that no matter how high the margins are, it pales in comparison. The reason you carry these brands is because, unlike the major commodity brands that only drive destination by price, these small niche brands, which really are not available everywhere -- bring in your very best, highest-spending customers."
In fact, Biernbaum said his research has shown that while the average consumer will spend $71 at a store, the consumer that comes to a store to buy a niche or specialty brand will spend an average of $114. In other words, the niche brand generated $40 to $50 in additional dollars for that store simply because the niche product was available.
Mike Matulis, SVP of Pacific World -- a maker of artificial nails -- told Drug Store News, "You have to consider consumer loyalty when you are talking about niche brands. If you decide to take some of those brands out, you have to truly understand the loyalty factor of what you are going to be taking out of your equation. And not only the loyalty factor but also the market basket that goes along with that."
This recent Nielsen data clearly underscores the fact that many believe that retailers who cut too much likely are leaving dollars on the table.