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Our Thought Provoking Insights

Growing through range optimisation – SKU expansion versus editing

Years ago, before the birth of online, the physical store was the key constraint on how many items SKUs (or items) you carried. Obviously, store estates vary greatly but most retailers managed the offer to fit the bulk of their stores, not just a few giant flagships and they aimed to trade as many “full range” stores as possible.

Online has removed this constraint and there has been a material expansion in many retailers’ SKU counts as a result. Some of the underlying thinking says that more product is more attractive and will therefore expand sales. More often than not this is simply wrong, and product expansion has helped to dilute trading economics.

Retailers are relying on outdated tools and processes

In this era of tech sophistication, inventory management in retail is relatively primitive. Markdowns, promotions, returns and even the most fundamental element – pricing – are very often managed using old-fashioned analogue methodologies. While the market and shape of demand has become far more dynamic, these analogue methods are slow, complicated and cannot model at the level now needed to deal with market change.

Higher SKU count does not always equal greater profitability

The biggest cost in any retail business is inventory. Stock turn (how fast you turn your stock into cash by selling it) remains one of the most critical metrics in a retail business, but is often sacrificed in the pursuit of SKU expansion. More SKUs will very often lead to slower stock turn, putting pressure on availability and cash flow.

This should not be confused with platforms, where a host will be selling third parties’ products. Amazon sells many millions of items although clearly, it does not actually “own” all of that inventory. Nevertheless, a platform may well be warehousing and delivering on behalf of third parties and the general principles of stock turn will still apply, albeit in a diluted way.

Cutting-edge technology is transformative to retail

Much of this is circular, and the beginning and end of the circle is demand forecasting, a fundamental retail discipline that tech is readily available to transform. As we enter what the Bank of England is calling the worst recession for 100 years, predicting accurately, using multiple models to optimise inventory management will be less a nice to have and more a prerequisite of survival.

Determining the right quantities, channel and store allocations, replenishment, mark downs, promotions and returns management will all be key to better trading economics.

Maybe it is right to add SKUs, but doing so without a detailed understanding of the economic consequences is an unnecessary risk and potentially life-threatening. However, in our experience, less is very often more.

This article is part of our 2023 "Crystal Ball" Trend Predictions report. Download the report here and discover more exciting topics we'll be exploring throughout the year!



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