New Economic Realities   //   March 18, 2024

Retailers are cutting SKUs to improve margins

In an attempt to increase profitability, more retailers and brands are taking a less-is-more approach to their product assortments.

Earlier this year, Oatly opted to cut down over 70% of its SKUs in Asia to improve its profit margin. Toy maker Hasbro said in an earnings call in February that it plans to cut back half of its SKUs after sales dropped 23% in the fourth quarter. Meanwhile, Dollar General said it is also slashing a “meaningful number of SKUs” to alleviate ongoing supply chain issues and boost margins. 

During boom times, the philosophy of many brands has been to offer people the luxury of choice. But as inflation has driven up the cost of manufacturing, having a broad assortment can be a bad thing. Especially if brands don’t have the demand to back it up, having too many products can hurt brands’ profitability and complicate their supply chain operations. Now, brands are opting to reduce a significant number of unprofitable SKUs to reduce costs and simplify their operations. 

“It’s really about balancing and prioritizing what’s going to kind of get to that fewer, bigger, better [strategy],” said Rachel Dalton, head of retail insights at Kantar. “There’s a lot of strategic work that goes behind the analysis, but the idea of it is the simpler that you approach your brand and your business while still meeting your consumers’ needs, the better off you are.”

Retail sales were up 0.6% last month after falling 1.1% in January, according to the U.S. Commerce Department. Still, sales remain low for some brands as shoppers continue to feel the pressure of inflation. The fourth quarter is typically a strong sales season for the toy category due to the gifting season, but Hasbro’s revenue in the period declined by 23%

However, Hasbro is kicking off the year with plans to develop a healthier balance sheet and a leaner cost structure. As part of the company’s effort, Hasbro eliminated half of its SKUs, which it said were duplicative and unprofitable. The company said these SKUs only generated 2% of its revenue. 

Hasbro’s strategy is to “refocus on play behind a philosophy of fewer, bigger, better,” Hasbro’s CEO Chris Cocks said in an earnings call. The company is focusing on “fewer SKUs that drive higher impact [and] bigger investment behind winning brands in more focused categories.”

For Oatly, scaling down its SKUs is already reaping rewards. Oatly began its plans to slash its SKUs in Asia halfway through last year after sales for its Asia region fell 15% in the second quarter. Its gross margin for the fourth quarter has improved to 23.4% from 19.2% in the second quarter.  

RJ Romano, supply chain advisory leader at BDO, said that reducing SKUs can reduce operational costs. A broader range of SKUs causes higher storage and production costs. Shrink costs also tend to be higher for businesses with higher SKU counts due to products being outdated or damaged. 

Dollar General said during a call with investors last month that it aims to rebuild its margins. The discount retailer’s operating profits for the quarter slid 41.1%. The bulk of the SKU cuts will be on the “non-consumable piece.” 

“We have identified several opportunities to eliminate certain SKUs that have become less productive, first, by moving them out of our DCs and then ultimately to our stores to sell through,” Dollar General CEO Todd Vasos said in the earnings call. “As our store teams have fewer SKUs to manage, we can lower our cost to serve, while driving higher inventory turns and higher sales of products that are most important to our customers.”  

Additionally, a leaner SKU count could help brands react more quickly to supply chain disruptions. Romano said it is easier to monitor and forecast demand when brands have fewer products.

“You’re shortening or limiting the amount of touch points that you need to manage your supply chain,” he said. “Things like supplier lead times, for example, get changed all the time based on disruptions: the Red Sea and the Panama Canal.”

Limiting SKUs could also help brands free up more cash to invest back into their business, said Kassi Socha, director analyst at research firm Gartner. From a marketing standpoint, she said, having fewer SKUs can help brands build a brand story with a core set of products. 

But eliminating certain products can be risky, Socha said. Retailers could lose potentially hit products — and, in turn, customers in the process. In 2019, fans thought Stanley’s Quencher tumbler, more commonly known as “the Stanley cup,” was going to be discontinued when it became harder to find in stock. Stanley said it had no plans to discontinue the product. But after seeing the passion for the product online, started re-investing in it more by launching more colors and exclusive releases. Now, the Quencher tumbler has grown to be a best seller with its recent Valentine’s Day line selling out just minutes after it went on sale at Target.

“SKU rationalization is a rhythm that retailers and brands have been going through over the course of retail history,” Socha said. “This is not a new process that retailers and brands are going through. It’s just a moment in time where it’s more critical for retailers and brands to do it.”