Cutting to the Core

Industry execs recommend a more focused approach to choosing SKUs, filling shelves.

By  Linda Abu-Shalback Zid, Senior Editor

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Four percent. That’s how many of your SKUs are driving 50% of your sales. That single digit, shared by Kit Dietz, illustrated a recurring theme at CSP’s 2011 Driving Impulse Sales meeting: Where new product innovation might have once reigned, core is now king.

Conversely, the bottom 50% of SKUs contributes only 5% of sales, and prompts this conclusion: “We need to rethink the store and the box based on how the consumer shops the store and perceives the store,” said Dietz, a longtime industry consultant and principal of Huron, Ohiobased Dietz Consulting LLC.

The reality, he said, is that the more space a product takes on the shelf, the less profitable it becomes—and 51% of activity-based costs are space-related. “So every square inch of your store space is vital to your profitability, and we can’t afford to get it wrong,” he said.

And while it is “not as simple as just slash and burn,” it’s particularly important to get the convenience channel’s limited assortment right. “Core SKUs drive a significant source of profitability and sales—and that’s underdeveloped in every category,” he said. “I’m not saying we shouldn’t have variety and variety’s not important, but it’s having the right variety.”

Candy Land

 From cores to categories, Dietz and other experts addressed challenging roadblocks and financial opportunities.

In candy, for example, more than 7,000 items congest the c-store distribution system. That “astounding number,” Dietz said, “speaks to the need to better rationalize assortments and better understand where the core is and how much variety you need outside the core.” 

The good news is that candy takes up less space than other categories; it has lower occupancy costs while still performing well. The category accounts for 26.3% of adjusted gross profit and 39.5% of true profit. And according to Dietz, part of that performance stems from retailers and distributors working together to set up category plans for candy, based on what the best items are for the category—a strategic alliance found less frequently in other categories.

“That is good category management; that practice has been very, very much instilled,” he said. “Everybody is understanding that if they can get better distribution on their core items, which is what consumers want, they’re going to drive profitability.”

This means that even the most prominent candy makers are scrutinizing their own portfolio to better match the need of the operator and consumer.

Pat Hesselmann, area sales director for Hershey, Pa.-based The Hershey Co., says his company has narrowed its focus on what Hershey calls a “big 33” of core items. Although the variety of more than noncore items is still important, the core drives true profit 4.5 times that of noncore products in candy, he said.

And, Hesselmann said, 75% of shoppers purchase candy at least once a week; 8% purchase it every day. “So take hold of candy’s profitability and impulse characteristics and focus on location, assortment, variety and effective promotions,” he said.

  • Location. More than half (53%) of candy purchases are made on impulse, he said. “So what does that tell you? It should be in several locations if possible.”

Hesselmann recommends placement at the busiest aisle that leads down to the cooler area, and an aisle endcap to drive people from the front counter down the aisle. “It’s also important to note that in a primary location or down the aisle is where 69% of the candy purchases are made from; 31% are made on secondary location,” he said.

  • Assortment and Variety. Hershey recommends a robust 12-foot set, with gum and mints across the top to lure shoppers down the aisle. King-sized, Hesselmann said, should occupy the eye-level position: “King-sized is a higher ring, and king-sized sales are skyrocketing.” Standard bars would go beneath.
  • Promotion. Hesselmann said candy purchasers spend at least 75 cents more per ring than the average c-store shopper. Cross-promotions (such as a recent tie-in with Coca-Cola) and bundling helps drive that basket size.

At La Palma, Calif.-based BP Products North America Inc., executives have noticed a “snack culture” trend that is helping to drive sales, including in the candy category. One component of that is having bite-sized, affordable tastes available, and the company keeps baskets of fun-sized candy at the front counter.

“It’s very important to the customer now, because they just don’t have the money to go out and be as indulgent and spend in the way they had in the past,” said Jim Hachtel, senior category manager, center of store. “The fun size is good; it gives the folks a chance to mix and match,” he continued. “They want to get a taste of a couple of different candies, and they’re able to do that—and we’ve seen some success with that.” He said the candy category overall is appealing to today’s cost-conscious consumer while delivering affordable indulgences: “Folks can still treat themselves a little bit, but it’s a small end ring, so those are the things the customer is looking for.”

Gum in the Works

BP is also making strides in the gum category, said Hachtel, using prepack shippers as a driver. “Customers get an opportunity to take advantage of some of the packages that are out there and opportunities that are out there,” he said. “And we get to continue to promote the gum category, not price-promote, but we just get the product in the right place for our customers to be able to buy.”

But in truth, gum remains a sticky issue for many retailers.

In 2004, according to Crystal Pinkston, associate director of shopper research for Northfield, Ill.-based Kraft Foods Inc., gum’s growth rate soared an unprecedented 8.2%, nearly two-thirds of which was driven by c-stores. From 2009 to 2010, however, the convenience channel’s gum share declined 12.9%.

Pinkston blames gum’s fall on premium pricing during the recession, declining c-store trips and higher cigarette prices that compromised further discretionary spending. Also, other channels are winning shoppers with multipack offerings that cost less per unit. Pinkston was careful not to overstate the importance of gum. It is not, she acknowledges, a trip driver at c-stores. Still, there is ample opportunity to promote it “with some of the categories that are really a strength in convenience, as well as have a high affinity with gum, like coffee and beverage,” she said.

Kraft found that 43% of shoppers go to c-stores to buy a snack and 35% are seeking a cold drink. “Three-fourths of shoppers have told us that if they’re not visually reminded to purchase gum, they’ll forget,” Pinkston said. “So it’d be really important to make sure that gum is noticeable and that it’s in the right places so that shoppers are reminded to make that impulse purchase.”

Similar to what Hesselmann recommended for candy, Pinkston suggested gum be placed en route to key destinations and that there be secondary placements, with a focus on best-selling SKUs. The best primary location for gum, Pinkston said, is below the checkout, which can improve category sales by 6% vs. aisle placement due to improved visibility.

“It’s right there, people are waiting in line to check out, they see it, they’re triggered to say, ‘Hey, I need to buy this,’ ” she said.

Snack Attack

For snacks, Dietz said, vendor-managed categories can mean stores have no overarching plan. “Your DSD vendors come in, you negotiate the amount of space they’re going to get and put a plan and program together, but there is no overall thought generally for the mix,” he said.

“How do we segment the category to make sure we’re only offering duplications that matter, rather than duplications that are required?”

Meat snacks is one example that he’s seen “just hung anywhere” in the store, leading to item duplication without brand strength.

“It all starts [with]: How does the consumer shop the category, how do they make decisions about the category and how do we leverage that into highermargin opportunities?” Dietz said. He suggested thinking about the category holistically, as companies do with candy, rather than managing vendor by vendor.

 It’s that holistic approach that BP’s ampm stores are embracing, Hachtel said. “It helps us use the space a lot more efficiently in terms of the products that we put in,” he said. “It’s allowed us to really divide the various snack categories and subcategories up and get them positioned a little bit better within the store. It lets us make really good choices, in terms of the products that we want to keep in the assortment and the tail that we want to trim.”

At ampm stores, plan-o-grams include 80% core products and 20% flex space to allow retailers to customize to their local areas. “Nobody knows that store like that local operator,” he said in favor of limited flex space. “There’s certain SKUs within every category that should absolutely be there, no matter what.”

And in the company’s confectionary category, 80% of sales are represented by 24% of the SKUs. An additional 590 SKUs, many brought in by franchisees, add only 2% to total sales growth. “It’s not only product that’s unproductive in terms of the space it’s taking up, but it’s also product that’s tying up franchisee money in terms of holding costs and so forth on these various products they’re buying that aren’t selling,” he said.

“So this is an educational process that we try to go through with the franchisees to make sure that they understand implications.”

Where’s the Beef?

For meat snacks in particular, Dietz believes there’s a core to be had. “But because of the size, efficiency and turn, there is an opportunity to really look at different segmentations and different flavors and different points of difference in meat snacks,” he said. “That doesn’t mean you need to carry six companies, but it means that you should not overlook some of the new varieties that are coming along.”

Dana Rohde, marketing director for Oberto Brands, Kent, Wash., shared Nielsen numbers that showed total meatsnack sales for the latest 52 weeks were $882 million in the convenience channel. “For meat snacks, convenience is our biggest category, and it is absolutely the focus,” Rohde said.

To maximize planned purchases, “It’s about having the top brands, and delivering the right mix of products consumers are looking for,” she said. Top brands include Oberto, Jack Link’s and Slim Jim; top flavors are original, teriyaki, peppered, spicy and BBQ, she said.

Perhaps challenging to some retailers is that meat snacks are less of a planned purchase. Sixty percent of jerky transactions, said Rohde, are impulse. Getting the product in front of customers through endcaps, floor displays, countertop displays, clip strips and bundling opportunities with high-affinity items can help exploit that opportunity, she said.

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