How SKU Rationalization Impacts Your Brand

Foreign.

Welcome everybody to another episode of CPG Insiders. I'm your host Mark Young with my co host Justin Gerard. We're bringing back a dear friend and one of our regular guests here on CPG Insiders, David Berenbaum. He is from Beer and Bomb and Associates. I will tell you folks very quickly, David has forgotten more about the retail landscape than most people know about the retail.

Amen.

He's been in the retail business for, I don't know, probably as almost as long as Joe Biden's been in office.

I don't know if I like that analogy.

I can tell you that David is completely lucid and there won't be any issues. He won't be, he will not be talking about any gibberish or anything like that. But David, what you are going to be talking about with us today is SKU rationalization.

Right?

And let me set the table here very quickly folks. There is a, there's a practice amongst the retailers which is called SKU rationalization. And to put it in a nutshell, and correct me if I'm wrong, David, but really it's about how can a retailer get themselves down to the fewest number of offerings in a category while not reducing the gross yearly dollar sales in the category.

Yes, Mark, this occurs when the economy is, is weak. And my most deep experience with this was in 2008 right after the stock market crash. Lehman and all those events of that year occurred. That was really my first major experience in having to deal with it because it was so extreme.

And this allows the retailers to have less inventory and to have preventers.

Well, it, what it is is less brands, they almost have as much inventory. It's just that it's all invested in the top two or three brands in every category and much more so especially now in private label. So what happens is skew rationalization firms and consultants, and I've gotten to know them all rather personally and actually have a pretty good relationship with them now. And we actually work together now rather than work against each other like we did in 2008. But the firms go into retail and there's really three of them that get all the business and they come up with suggested schematics and planograms with the goal being to get rid of anything that's not a fast moving consumer product. And their shelves in effect become an extended warehouse. So a lot of the inventory that they have is actually on a shelf.

So reducing the amount of inventory in the back room or in the dc.

Yeah, it's, it's like the, a throwback to when Walmart started the just in time shipping and that's basically one of the functions is that everything from, you know, Procter and Gamble and the real big companies stays. In fact it's really a good thing for companies like that.

So David, is this the idea we go to, we go to Target and we see four facings of the exact same SKU of Windex on the shelf?

Yeah, exactly. And the idea is that those are fast moving products and they always have a really good supply of them so that they don't run out because there's so much of it on the shelf instead of being at the DCs or even in the back room. And in theory if I put on my most objective glasses and I've spent so much time trying to understand the philosophy of the firms that make the recommendations, in theory it's a good short term strategy for the retailers because it does in effect eliminate slow movers. It does keep them in stock on the top two or three items in every category and it simplifies their whole operation. The downside of it for retailers, which they don't in Mark and and Justin, it's like we're going through all this all over again like we did in 2008 because almost everybody making the decisions wasn't born yet in 2008 or they certainly did in the industry.

So keep in mind that we have temporary people making permanent decisions.

Yes.

And we have people that are not thinking past the next quarterly financial statement.

That's right. You know, most of these retailers are publicly held companies and they're really on a three month mentality. They have to be, it's just a fact of life. So they can't lose money or start losing profits only because there's a recession or somewhat of one. In 2008 there was a very, very big recession. It's not like that right now. It's not nearly as extreme. But retailers are thinking very much like they did in 2008. Maybe as I said, not to the same extreme but to a point where it's hurting. Small brands, niche brands, specialty brands, premium brands. I would say that they're going at it again like they did in 2008, probably at about 60 to 65% of the same vim and vigor. It's different now of course, because they all have online, you know, some of them better than others. But it's easy for all of them to say, well we'll just carry all the small brands on E commerce.

Problem with that question, David Let me ask when, if these retailers, if you know Walmart and Target and Meijer and all these stores start carrying all the big movers. One, aren't they cutting off innovation? Two, aren't they cutting off the brands that might be more profitable long term? And three, and here's where I think the long term problem is. I go to the store and I'm looking for, I'm going to call it an orphan brand, an odd brand that doesn't sell that much. But I want, but that's my brand. Now when I go to Walmart to get that, I'm probably not going there just to buy this one ten dollar.

Right, Right.

I'm probably going there to get a shopping cart full of stuff. But if they don't have it, are they not forcing me probably back to one of the regionals or one of the local players that might have it.

Or Amazon driving me to Amazon or Amazon? And that's, that's one of the inherent flaws. When Drugstore News and I did the article way back in 2008 about the seven sins of the deadly sins of ski rationalization, that was right on top. Because now, first of all, they're all listening to the same two or three firms and doing exactly the same thing. So guess what? Every retail store, whether it's a drugstore or a mass merchandiser or a supermarket in their HBC sections, they all look exactly alike. They all have only the exact same brands and the same SKU mix. The bigger stores have more of it. So now, and this was the conversation I had with everybody except for Walmart and that is you're going to get your butts kicked by Walmart because now you have nothing that Walmart doesn't have, right?

So now it's all about price, right?

It's all price. And you will not win that contest. Walmart's gonna win.

Is this why, Is this why an HEB or a Meijer or a Publix will bring in some more obscure newer brands or local brands where the big guys don't? So they can, I'd say they can separate themselves from this.

Well, you know, Meijer is really almost an enigma because they have always march to the beat of their own drum and Meijer has always been fantastic and being open to bringing in small brands, new brands, innovative brands, and they really don't change their behavior at all. Even in an economy like this. They pretty much know how to keep bringing in customers and business and they do a really good job of it. But they really are the exception. Most of the retailers in all the channels of trade in the beginning will go by this formula in skew rationalization. And in the short term, and I'm being very direct and you know, very candid in the short term it work, it works for them for the first probably three to nine months, really closer to nine, they will make profit. They will, this does help them survive the economy and it works for them because they're just really banking on the volume of lower margin products, but they're banking on the volume and having the inventory and not having any slow moving products in the whole store. And it's really slow moving products that really hurt the profitability. The problem is, and you know, you, you guys and me, we're all in the business mostly of working with smaller companies, smaller brands, premium, you know, niche brands. The problem you have, if you're anybody other than Walmart and you don't have any niche brands or specialties or small brands, you've lost all of your destination customers who come to your store for those specific brands. And they tend to be the most profitable brands for you that you carry. Those are usually 42% to 50% margin brands, whereas what all you have now on your shelves are the 16 and 18% margin.

Isn't PNG like an average of 17?

Yes, it is. And really Mark, you know, I do some work with them and I can tell you that it's, it's even less in most cases.

Right.

So.

So Walmart has a $10 bottle of Tide.

Yeah.

And make a buck 70. If they've got a dollar bottle of Bob's new detergent, they can make $4 on that bottle.

Right?

They can. And another flaw in the whole process is that there, there is a consumer pretty large market of consumers that really isn't that much affected by the economy as much as you know, conventional wisdom would, would think. And there's a large market that, where brand loyalty, even to small brands in niche brands are very important. You, you know, you and I have both worked like let's say with a mouthwash, you know, that really does work better than everything else and it really does almost cure bad breath. We've worked with arthritis products like that, we've worked with itch products like that. And there's a whole market of consumers that they count on. They count on those type of formulations. Those companies will never do the volume that, you know, a Chatham product does or a PNG or a Colgate product. But the consumer isn't going to settle for a commodity or something that isn't as niche or isn't as special or you know, doesn't have some kind of unique formulation or something that works. So in 2008, like you said earlier, they would probably just go to a regional and see if they can find it there. Although the regionals tend to be copycats too. Now in, you know, 2024, you know, you can buy everything on Amazon. Yeah. So now they just go to Amazon and the brick and mortar loses all the business. And their e commerce sites are so bad. Yeah. You know, except for Walmart which has now a, a, a pretty good one. It's getting better and it still doesn't even remove no Amazon volume targets. Is, you know.

Yeah, C. Yeah, they don't come close. Well, that was what I was wondering Dave, when you start bringing this up, my mind immediately went to Amazon.

Right.

Like this, this way of thinking for the retailers, even short term. And you talked about this three to nine months. But, but the amount of business that they're driving towards Amazon with making these decisions and the, the, the, the way that Amazon is continuing to eat into their market share because they continue to have new offerings and making it easier for consumers to get every type of product and they're multiplying the, the touch points in which they're engaging in consumers pharmacy for example.

Right.

So there, Amazon continues to find ways to, to change the way consumers shop. So taking this type of approach to me feels like you're opening that door even more for Amazon when you're already at risk.

Well, you know Justin, to show you how right you are, I read, you know, a lot of different data reports and now there's, there's more than ever, especially because of AI being available. But Amazon's business and health and beauty care is actually up 14% this year already in health and beauty care. So, so they don't care about the economy at all. They're doing just fine and it's not hurting them at all and it's not really hurting small companies that do business with Amazon for their Amazon business. This certainly is hurting small companies and small brands in brick and mortar, which is still, even today, even today is still about, you know, 76% of all commodities volume. So you still need it. It's not like you can get by without it in most cases.

So David, let me ask you another question. We're seeing a trend at retail and what I want you, after I ask you this one, I'd like you to talk about how can our listeners, who are these challenger brands, how they work with their Retailers get their retailers to not do this or to realize it. But here's my other question. We're seeing some of the big drug chains who are increasing their retail pricing in an attempt to make up for the loss of volume that is going to Amazon, which in turn is driving more people to Amazon because of the lower price.

Right.

What's the thinking there? I mean, how did they hope to win that, that race to the bottom?

Yeah, well, it's a very short term thinking because of what you had said earlier about the three month mentality. So it's short term, you know, and the other way that they try to make up the difference, of course, is in charging more fees to suppliers for everything. The, the problem they run into there is, yeah, P and G and companies like that certainly have the funds in the deep pockets to pay all the fees, but sometimes they just don't feel like it and sometimes they give retailers a hard time and say, no, you know, we're not, we're not going to pay that kind of fee, you know, put up our display. You did it last year, the year before that, put it up again. And now there's no leverage because they have to pretty much do like they did in the 1960s and 1970s. They pretty much have to do whatever PNG wants them to do.

Yeah.

So they lose control on the grocery.

Store and not sell Tide.

Right, exactly. Or Crest toothpaste or, you know, whatever the case is. Whatever the case is, yeah. The laundry aisle is, you know, what about 75 or 77% PNG brands and most of the rest of it's private label cereal aisle.

I mean, imagine a cereal retailer that decides we just won't carry Kellogg.

Exactly.

Not carry Post.

Yeah, they can't do that unless they're Aldi.

Right.

Or unless they're Trader Joe's.

So how can, how can our listeners persuade, okay, a Walmart to not rationalize them?

So every, you have to know going in that every retailer has already been subjected to the firms that told them absolutely 100% this is what you've got to do. And most retailers believe it. Although I will tell you at the buyer level and category manager level, they don't like this at all. In fact, that level has encouraged me and my team to more than ever. In fact, they help us get the appointments at any CBS annual with their, you know, with the higher up people. They don't set the appointments for us, but they tell us how to get to those people to set them up because they know this isn't the Right thing to do, but it comes from top down. And the higher up you go, the, the less they really understand the flaws of this because it makes so much sense to them financially. But a small supplier, our type of clients, you need to step up the sophistication of how you present your program and your brand just for an example, instead of just going in and selling the features and benefits and why your brand is better or unique because that doesn't matter as much as it did two years ago. You need to understand who buys that product, how much do they spend on a shopping trip inside that store, what other items do they choose and how profitable are those items, and what is the power of the destination element of your brand or what will it be? And you have to approach it because you need to come up with compelling reasons that the retailer needs to carry your brand, even if it's not one of the top two or three, because there are in many cases some very important reasons. I just got back from, let's just say, one retailer over one particular line that I represent. And I got the help, you know, of, of actually a tab group. I don't use them for everything, but I use them for this. And I came up with a really good argument for why my particular specialty brand that I'm representing brings in a consumer who spends an average of $114 on all profitable items for the retailer versus any one of the two or three national commodity brands where that consumer spends an average of $71 and buys half of that are loss leaders in discounts and promos. Well, now the retailer starts to open their eyes. The challenge there is, you're talking to a buyer or a category manager and they already understand that. So now you need to supply to the category manager a deck, if you will, that they can take and present upward inside their own building so that they could persuade upper management or educate them to understand the same thing. So you need to provide them with those weapons. Now you always will offer to make that presentation with them. And you know, candidly, I mean, somebody like me, I can, I can get the senior people to present to, but frankly, most people cannot. So I'm going to assume that, you know, you don't, you know, they don't have me, they don't have you. So they have to prepare the category manager to sell upward. So you have to do that. Now, the situation is not as extreme as it was in 2008. There are small brands getting distribution, but it's much harder. It's like half as likely Right now, as it was. And I'll just say it. In the Trump years, those years, let's say roughly 2017 up and, you know, right up until the pandemic. I've been in the business since 1977, and I've never experiencing anything like that. That was a thrill ride. Every retailer was. Was making a lot of money, at least the ones that stuck around, and they were just wide open to new items, to innovation. In fact, they were begging for innovation. Those were fun times. And I can tell you personally, I mean, I made a lot of money in those years because of that, because those are my clients. It's not like that anymore. And now it's back to, you know, they're not making a lot of money anymore. They are dealing with high interest rates. Credit cards aren't being as user friendly, you know, to consumers as they were because of the interest rates. Everything's more expensive. Everything from gas to energy bills.

Yeah.

And certainly the merchandise. You know, one of my pet peeves on social media right now are all these idiots that are blaming retailers for the high prices.

Ah, yes, the green.

Oh, yeah.

Patience.

Like, how stupid can you be?

Because we don't live in a world where there's several people doing the same thing who can go and compete with us on a lower price.

Yeah. And it doesn't help when the President of the United States is telling him it's the retailer's fault and that it's all corporate greed. Like, no, it has nothing to do with that. What it has to do with is CVS has to pay 26% more for the average product in their store than they did three years ago. And they have to keep their margins pretty close to what they've always been. And they have to make as much penny profit as they always have before because they're a publicly held company. And so the only way they can accomplish that is to raise their shelf prices by the same 20 or 26 or 18%. And that's what they do. It has nothing to do with. There's no corporate greed anywhere in this whole environment. I mean, the manufacturers aren't. They're not making more money on it, they're making less. The suppliers to the manufacturers are trying to hang on, but, oh, man, when people blame the retailers and say it's greed, and then when, you know, forgive me for being too political, but it's obvious how I feel about this. But when Biden then tells them shrinkflation, you know, is the problem, I mean. No, it's not.

Yes. They Put. They put fewer chips in the bag.

Yeah. And it's like, you know, what's the old expression to every complex, every complicated issue or problem, there's a simple answer that's wrong and stupid. Well, that fits right in.

Well, another thing I'll share with people really quick, we've seen, since we're kind of down a political road, we've seen the President talking about how he got drugs and specifically insulin cut to $35. Oh, that he took on Big Pharma.

Yeah.

Here's the reality, folks. Actually, he did nothing with Big Pharma. He took the money out of the pharmacy. And this is why you're seeing companies like Walgreens closing down a couple of thousand stores.

Yes.

Because they didn't go after Big Pharma. They took it out of the retailer. And now the retailers, those locations that are dependent on pharmaceutical income are no longer profitable.

100%. Right, right. It would really help if politicians, and this is one thing that I have to say I really like about Trump is that he understands business, obviously. And for any business he's never been in, it doesn't take him long to understand it. You know, for an example, like retail. And most politicians have never ever been in business, and so they don't understand it.

This goes right back to Ayn Rand in Atlas shrugged in 1957 when she pointed out that eventually the non producers will be telling the producers how to do everything.

Yes.

And when the non producers tell the producers how to do everything, the economy collapses.

It really does. And now I will say, because, you know, nobody likes to talk politics, and I get that this is a retail discussion, except that everything we're talking about today is directly related to politics because every problem we're having right now in the retail economy has a relationship to politics. Now also, what happens in November really can change it all.

You may not be paying attention to politics, but politicians paying attention to you.

That's right. So, David. Yeah.

How can people learn more about you and more about your company?

Well, I have a lot of information on my own site, which is consult davidb.com c o n S U L T D A V I d be like baker berenbaum.com we also have a really large group on LinkedIn that's very informative because I've got a hundred thousand other people besides me who are putting up news and information every day.

And everybody that's listening here should be a member of that.

Really. And I will tell you, you know, you don't see retail executives posting A lot on there, but they are definitely following it. I know that firsthand because of all the feedback I get, both pro and con. But they're watching it and they're reading it. And, you know, some of the retail executives do participate. For an example, Doug McMillan of Walmart participates on it. He posts on it, he comments on it. And there's others, you know as well. So that's another way. And then I'm also on a blog. It's really the leading retail blog in the industry. It's called Retail Wire, you know, retail wire w I r e.com and there's a brain trust on there. So there's about 50 people other than me. And this is really a tremendous group of knowledge. All of us have been in the industry for years and years and years. And I mean, it's one of the only places where I can learn things that I didn't know before I read. So that's retailwire.com it's really a great blog. We comment on two topics every single day. They're always two. And it's not just, you know, it's not just the usual thing, you know, about Walmart or CVS or something like that. I mean, we get involved with fast food restaurants and all different kinds of retail. It's very, very interesting. So I recommend that as well, there's no fee or anything.

Go to the Show Notes and Matt will have links to all of these things in the Show Notes. So if you're driving, you don't need to pull over and write all this stuff down. That's it for this episode. David, I hope you'll come back with us and in, in soon and we'll talk about some other topics for sure.

And if you have any, you know, questions about, oh, about SKU rationalization, you know, if you're a supplier, a brand, I mean, feel you could, you can drop me an email and if it's a good question, I'll take the time to answer it or give you a call at no charge because it's really something that is very important to me and all of my clients and all the clients I don't have. Because we need to change the way that we approach the business for a while. And you know, I'm someone that can help you do that.

Absolutely.

Thank you for the opportunity to be on today and good topic and any questions you guys have, feel free to shoot me an email or give me a call.

Thank you, David. Thanks for with us. That's it for this week on CPG Insiders. If you're looking to greatly increase sales on your CPG product, don't hesitate to contact us at Jekyll and Hyde Advertising and Marketing, by the way, the only advertising agency with a guaranteed result. Just go to jekyllheidagency.com or feel free to give us a call at 800542.