The importance of Strategic Thinking when Building Optimal Ranges.
I love to play Devils Advocate. It’s one of the joys of doing what I do, and one of my favourite examples of this is when we start talking to clients about Choice versus Duplication in the context of Range Management.
This is so important in a world where space is being put under more and more pressure, but very few suppliers, and sometimes retailers think about range strategically.
It goes like this…
I will show two 500ml bottles, one of Red Coke and one of Diet Coke and I then ask delegates does this represent Choice or Duplication? Normally we get quite clear answer; It’s definitely choice they say. Why is that, I ask? We have a little discussion about sugar levels and have a fun discussion. I then replace the Red Coke with Coke Zero and ask the same question; Choice or Duplication. I’m sure people who work for Coca-Cola will definitely tell you it’s a different flavour profile, with a different target consumer and probably a whole many more reasons.
This is where I start to have fun. I will say “Surely both of them are just brown fizzy cola that happen to be Low or No sugar, so Coke Zero and Diet Coke are Duplicates”. We will again have a good debate around this.
Now we replace the 500ml Coke Zero with a 330ml can of Diet Coke and we repeat the same question; Choice or Duplication?
What do you think?
We could repeat this exercise many times adding in different pack sizes or different flavours of Coke such as Cherry Coke, different bottle sizes like a 2 litre Coke before we even get to adding in Pepsi!
Understanding Shopper Needs
At its heart, what we’re trying to do with this exercise is to push our clients to understand the reasons why it’s important to distinguish between products that offer choice or just duplication. What attributes does each SKU have that are important to the shopper?
As stated earlier, the reason it’s so important is because space on fixture is at a premium and increasingly under more and more pressure in most categories. Space is being squeezed not expanded so having a real understanding of what each SKU is adding to the customers offer is critical. At the root of this is a deep understanding of how Shoppers shop the category, or in technical terms, the Purchase Decision Hierarchy (PDH). If we have understood this well then it becomes easy to represent our Shoppers Needs through the range that we carry.
Fundamentally building an optimal range is about satisfying as many shopping needs with as few SKU’s as our space allows.
The discounters are masters at this. I remember meeting a buying director at one of the discounters who very proudly asked me “why do I need 14 Chicken Tikka Masala sauces? I just need one but the one I have will be the best in the marketplace”. In recent times we’ve seen the big box retailers stripping back range as well.
At the other end of the spectrum, online retailers often have targets around growing range. They want more and more to maximise the choice and cover as many of the shoppers needs as they can. Is this great for shoppers ? Not necessarily, as a shopper I still want to get to my preferred choices as efficiently as possible. So understanding an online shoppers path to purchase is just as important, and becoming increasingly important as more shopping moves on-line.
TPG have extensive experience of working with both Retailers and Manufacturers to develop omni-channel and e-commerce strategies, based on developing a deep understanding of the path to loyalty across digital touch-points.
Treating Range Strategically
At TPG when we when we talk about range optimisation we encourage our clients to treat range strategically. If we’re clear about our category strategy, about our shoppers and their needs and understand how they shop, then when we start to work of analysing sub-categories segments and SKU’s, we can be much more confident in our decision making.
The first job is to be clear our strategy. What is our Category Strategy trying to achieve and how might this impact our decisions regarding range? Are we clear on the definition of a category, the structure of our category and its segments? Do we have a robust purchase decision hierarchy (PDH) which understands the role of brand, the role of different pack sizes, the role of flavour? Are we clear on the role the category plays in-store and what this might mean for our range and merchandising? And do we have a clear set of objectives for the work we are about to do?
Once we have established these things we can then look at the performance of each sub-category or segment. We can look at which sub-categories or segments are more or less productive. We can analyse how fragmented each sub-category or segment is. We can compare how broad or narrow the range is in my store versus the competition, and how well my range currently performs compared to my competition.
Once we have understood this and we have determined how broad or narrow each segments range should be we can then establish where we should cut the tail. Then we assess the performance of each SKU around our cut-off point to think about the performance of the SKU. The data agencies have developed some sophisticated tools and software to help with this process, and we are now seeing how these tools can complement TPG’s approach to take much of the hard slog out of the process, and enable more robust decision making.
If we make Range decisions based on performance alone, we run the risk of missing a significant number of shopper needs, and excluding SKU’s from our range. Or equally wasteful is giving space to SKU’s that duplicate a need already being met by another product. Choice versus Duplication is about looking at our PDH, reflecting each SKU’s role in meeting the needs of the shopper based on our understanding of the way they shop for a segment of the category such as Colas. Does each variant of Cola add choice for our shoppers, or is duplicative and doesn’t actually satisfy a new or unique need? Get this right and you can deliver a range that meets the maximum number of needs with the minimum number of SKU’s.
Impact Beyond the Metrics
Devils Advocate put to one side, one of the additional benefits of this work is just how much expertise and understanding of a retailers range and individual product SKUs a category manager would build. In all of the projects I’ve delivered it never fails to astound me just how much knowledge of the category and it’s range is built through this process. I could ask any category manager the rationale for retaining or deleting any given product SKU, and they would be able to tell me in detail why that particular product was being recommended for addition or deletion based on up to eight different criteria. It is truly astonishing to see.
Do your Category Managers have that depth of knowledge on their customers ranges?
TPG also spend a lot of time ensuring we get our client to think and prepare for engaging the retailer. Doing this collaboratively, with this level of understanding and knowledge about their customers range it is truly powerful.
Aside from the capability build for the client’s team, the impact of these projects can be very impressive, in terms of the impact on category sales. We see typically uplifts of between four to eight percent with a reduction in the product SKU count of around 15-20%. In addition, there is also a beneficial impact on supply chain costs of stripping out some of the complexity.
So it all comes down to a CHOICE. Carry on as you are, or, if you’d like to learn more about Choice versus Duplication and taking a strategic approach to Range Optimisation, please contact me.