SKU Rationalization Demands Market Basket Analysis

Wal-Mart Stores Inc., the world’s biggest retailer, is bringing back some products it had removed from shelves last year as shoppers turn to competitors for a wider selection of merchandise. A failed SKU rationalization effort?

The company met with suppliers about reinstating items to keep customers from going to other stores, said Leon Nicholas, a director at consulting firm Kantar Retail who has spoken with manufacturers about the move. Wal-Mart is telling suppliers it cut too much in some areas and wants to bring some items back, Smith said.

The retailer is noticing that consumers are visiting other stores and no longer going to Wal-Mart for everything they buy, he said. “I’m learning this from my suppliers who were down to one SKU in the store,” said Smith, who helps vendors hire account managers and other representatives to call on Wal-Mart merchants. “Now they’ve got a seat back at the table.”

Sales at Wal-Mart’s U.S. stores open at least a year declined 1.6 percent in the fourth quarter, more than its forecast of a sales decline of no more than 1 percent. Declining store traffic reflected disruptions caused by store remodeling, Wal-Mart Chief Financial Officer Tom Schoewe said last month.

Why did Walmart’s SKU rationalization effort fail? Because Walmart ignored the market basket effect.   It is not an issue of cutting too many SKUs; it is an issue of cutting the wrong SKUs because you do not know the product associations in buying patterns. A low frequency items can be profitable and may be often bought with other low frequency items.  If you cut one of these SKUs, you will lose the customer.   On the other hand, there are SKUs that are bought in low frequency in 1-item baskets. The loners!  These are typically low margin, high capital utilization SKUs.  These SKUs can be easily identified with Customer Buying Patterns Analytics.

What most retailers ignore in SKU rationalization is the market basket effect. Profitable customers may take their entire basket elsewhere, if they can't find certain items (even if those items are "slow-moving").  The market basket analysis across hundreds of thousands of SKUs requires advanced analytics. Based on testimonies from Wal-mart customers, people were in fact choosing to go elsewhere for many of their shopping trips. This is why Wal-Mart has changed their tune very quickly.

“They are calling me back and saying, ‘We need to hire somebody who has experience in this category and knows this buyer — it looks like we are back in business,’” said Smith, who is based in Rogers, Arkansas. I think Walmart does not get it.  They need help not just in categories; They need help across the categories. They need help on what items are typically in a basket – also called Customer Buying Patterns!