Walmart’s most recent attempt to reduce shelf stock has its vendors concerned, but the greater consideration should be applied to its shoppers. Walmart may be doing so, as it appears to be relying more heavily on greater amounts of reliable data. Here, a closer look at how data can help.
At Walmart, a craving for a peanut butter and jelly sandwich can transform a shopping trip into an odyssey.
The chain offers more than 500 kinds of jellies, jams and related fruit spreads. As for peanut butter, there’s chunky, creamy, natural, organic, twin packs, no-stir, reduced fat, whips, chocolate flavor (white or dark) – the list goes on.
It is well documented that choice does not make us happier but instead accomplishes the opposite, because it diminishes our sense of certainty. This applies to store shelves perhaps more regularly than anywhere. So, after previous failed attempts to do something about it, Walmart is once again taking a run at inventory rationalization, having removed about 15 percent of its store displays and about 2,500 items from the shelves in the past year.
The inventory trim is not an overt attempt at consumer happiness; rather, it has been characterized as an effort to make Walmart’s stores easier to navigate and appeal to higher-income shoppers. Put another way, Walmart is aiming to increase profits by cutting stock-keeping units (SKUs).
It’s been tried before, with less-than-moneymaking results. What would make the difference this time? First and foremost: Stop thinking like a profit-generator and start thinking like its customers. And Walmart may be doing so, as it appears to be relying more heavily on greater amounts of reliable data.
Customers, of course, are not the only parties affected by SKU rationalization. The changes also are, not surprisingly, raising concerns among vendors worried about losing sales.
Yet to me the bigger issue, for all parties, is whether Walmart is approaching this task with its best customers in mind. It made the mistake of not doing so back in 2009, when it cut 15 percent of its inventory to make its stores less crowded and easier to shop. The plan backfired and sales declined for seven consecutive quarters as shoppers took their entire shopping lists elsewhere. By April 2011, Walmart added 8,500 SKUs back to its mix, an average of 11 percent of its products. The mistake: It stopped thinking like its customers.
This time around, Walmart appears to have its shopper goggles on, widening aisles up to 10 feet (so shopping carts can pass each other) and shifting restock times so popular products are less likely to run out. It also is culling items that aren’t big sellers and adding to categories that are growing, like fresh produce.
“This time you are going to see a lot more nuance on these decisions,” Robin Sherk, a retail analyst at research firm Kantar Retail, told the Wall Street Journal. Walmart also is using more and better data to decide which products should stay and which should go, she said.
Calculate What Customers Love
This data could not come at a better time, for any retailer. When the supermarket shelf is so convoluted that even the peanut butter-and-jelly aisle can cause a panic attack, it is time to reconsider the shopper’s experience.
One method for optimizing the shelf selection is actually calculating the products a retailer’s regular customers love and the unique roles these products play in purchase decisions. Data derived from deep-dive customer insights can help to minimize the sales risk when delisting items, while freeing up space from underperforming items. Methods to doing this include:
The Transferability Of Demand: A retailer should ensure its customers would have viable alternatives before delisting an item. A key component of this approach is to understand how a consumer would shift her purchasing if an item were removed; in technical parlance this is called transferability of demand.
For example, our customer analytics service has found that in the bottled water category there is a high likelihood that shoppers will happily switch between the mainstream bottled water brands and a retailer’s store brand. Additionally, if the retailer removes the 24-packs of one of these bottled water brands, shoppers will switch to the 12-pack or to one of the other 24-packs, retaining the majority of the sales from the delisted item.
However, shoppers are very brand loyal to some of the added-benefit waters or the premium waters. Removing one of these from the assortment would result in most of those sales walking out the door to a competitor that carries the brand.
Loyal Customer Analyses: It is essential to understand the importance of individual items to valuable, loyal customers. Retailers will sometimes rank all items in a category by sales and then remove the items at the bottom. Yet we frequently find that some loyal customers buy items that are near the bottom of the list because they are important to them. By removing these items, retailers run the risk of sending those shoppers to competitors, which in turn could lead to the loss of the entire lifetime purchases of that customer.
What-If And Cross-Shopping Analyses: While some products have natural and obvious affinities (beer and pretzels, milk and cereal) others are less obvious but just as effective for cross-merchandising. By examining purchase baskets, retailers can gain a better sense of the items that lead to the purchases of other products, and how often each appears in the same basket.
We once found, for instance, that shoppers who buy coconuts also are more likely to buy calling cards. Upon further analysis, we learned that shoppers who tend to purchase coconuts are migrants from warm climates.
Work With Vendors: Retailers such as Walmart also would benefit from working directly with their vendors on specifying clearly the requirements for remaining on its shelves. This would better enable its suppliers to develop strategies to optimize their products before distribution.
Clorox, for example, manages its SKU proliferation by segmenting all of its products into four categories ranging from always-available “base” products to “value-add” products that might be short-term but with heavy promotional budgets. In doing so, it is basically creating four supply chains, each of which is evaluated annually so Clorox can design long-term strategies.
Smart Allocation: Once a retailer has removed low-risk items, it can determine what to do with the available shelf space. It could expand the space allocated to the remaining items in the assortment, but would have to be careful not to lower productivity (generating the same sales but across greater shelf space). It could expand the distribution of items sold only in a limited number of stores, but should ensure these items are viable beyond certain markets. Or it could introduce new products into the assortment.
With such processes in place, a retailer can monitor its remaining shelf items to see which ones consistently sell – or sell better – and reduce the risk of SKU proliferation proliferating again. Product adjacencies factor in, as does the lack of competition. Fewer varieties of peanut butter may actually result in higher overall peanut butter sales, or lead to increased sales of other adjacent products, such as Go-Gurt and cheese sticks (all of which can be found in a child’s lunch box).
Most important, the shopper’s craving for a better shopping trip would be sated.
This guest post came courtesy of Bryan Pearson. Bryan is the author of The Loyalty Leap For B2B and is president and CEO of the LoyaltyOne consultancy firm.
This article originally appeared on Forbes.com, where Bryan serves as a retail contributor. You can view the original story here.