Product rationalization

A.T. Kearney 15/Prod.Depr./Aprile 97/ab

Agenda

Why product range strategic management is important A possible approach and next steps

A.T. Kearney 15/Prod.Depr./Aprile 97/ab

Product range strategic management: retailers point of view

In the next years shelfspace in traditional categories will be reduced to give space to new growth areas: fresh and non-food The fight for shelfspace will get tougher. SKUs will have to justify their own space either through high rotations or the margin they generate Marginal SKUs, even for leading brands, require excessive resource commitment (shelf management, warehouse, purchasing) compared to the benefits they generate... SKUs of new aggressive brands are often more interesting, both for the margins they generate and the impact they have in terms of innovativeness and image

Source: Interviews with retailers, Italy

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Product range strategic management: retailers growing attention to shelf profitability

Growth rate category revenues vs. total categories (index)

1
Fish 1,2

Clothes

Vegetables
Toys

Charcuterie

High potential products (growth, image) Growth of shelfshace and of n. of references Service products (Good profitability, but low growth rates) optimize profitability throu gh focus on rotations and margins. Introduction of private labels

1,0

Frozen food Ice-cream Pasta Wine Tuna fish Toilet paper Cleansings Canned food

Commodities (low margins and high management costs) Strong cut of recerences and shelfspace

Yogurt Spices

0,8 Sugar

Mineral water

0 Source: Marketing researches, press data

10

20

30 Gross margins (% of net sales)

A.T. Kearney 15/Prod.Depr./Aprile 97/ab 4

Trade margins have a high impact on the value chain for branded products
Consumer Price (sell out) 100% 25 30% Net Retail Price (sell in) 75% 25 30% 50% Brand manufacturers value added Trade margins

4550%
25%

Cost of good sold

Source: Grocery industry data, A.T. Kearney experience

A.T. Kearney 15/Prod.Depr./Aprile 97/ab 5

Trade margin is directly correlated to the n of SKUs in the suppliers product range
Leader trade margins vs. industry average (index)

Examples

Petfood

Yogurt

Pasta

0,5

Oil Mineral water

Coffee Soft drinks Cleansings

Margins of leader with focused product range that generate high rotations are significantly lower

0,25

Stock cubes

0,5 X

1X

2X

4X

Revenues per SKUs vs. industry average (index)

Source: Market shares analysis and store checks

A.T. Kearney 15/Prod.Depr./Aprile 97/ab

Leading brands product range very often presents significant opportunities for deproliferation
Examples
30
Ships biscuits

Average revenues per SKUs (index)

N of listed SKUs/ product family

25 20

Monodosi

Priorit dintervento

15 10

Bread substitutes Bisquits Soups Crackers Fresh pasta

5
Cakes

Bread-sticks Tomato sauce

Pasta

Leader listed SKUs 3 4 5 Leader shelf SKUs

Source: market research, store checks, press data

A.T. Kearney 15/Prod.Depr./Aprile 97/ab

An efficient produc range allows higher trade profitability even with lower % margins
Higher shelf profitability for an efficient product range
Efficient product range N of SKUs Total revenues (index) Margin percentage(1) Total margins (index) Shelf space (index) 5 100 25% 100 100 Fragmented product range 13 118 33% 146 250

resulting in a better product distribution

Share in handlers (%) 12

10 8 6 4 2 0 40 50

Efficient product range Fragmented product range

Shelf profitability (index)

100

59

60

70

80

90

100
Weighted distribution (%)

(1) Mark-up on sell in prices Source: Market researches, store checks

A.T. Kearney 15/Prod.Depr./Aprile 97/ab

An efficient product range allows for a better cost structure

Example

(Manufacturer profitability, % of net sales)

Consumer price Trade margin

133 125 33% 25%

Relevant drivers

Total volumes Rotation/SKUs Product range complexity (budget fragmentation/product or brand) Product range complexity Volumes/SKUs Total volume/POS

Net sales (sell in) = 100 Marketing (Adv. + promot.) Admin., sales and logistic costs

23% 23%

23% 25%

Cogs and production

38%

42% Total volumes per SKUs

Operating margin

16%
Efficient product range

10%
Fragmented product range 440 5 88 13 38
A.T. Kearney 15/Prod.Depr./Aprile 97/ab 9

Total volumes (index) N of SKUs (index) Volume per SKUs (index)

490

The freed resources should be re-invested into innovation and new product development without which banalization and price erosion is inevitable
Example
Total market value (index) 120
110
Total market

Growth rate (%)

+2

100

90

Total market without new products

-3

80

70
Retail price without new products (index) Note: deflated data Source: market research, press data

Years

100

96

92

90

88

A.T. Kearney 15/Prod.Depr./Aprile 97/ab

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Without product innovation the risk of private label penetration will increase
Some examples
High
Aluminium rolls Jams Toilet paper Canned food

Private labels penetration

Juices

Soups Wet Food dog

Coffee Soft drinks Cereals

Detergents

Low Low
Note: Data 1994, markets USA and UK Source: market research, press data

Product innovation

High

A.T. Kearney 15/Prod.Depr./Aprile 97/ab

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The example of pasta in Italy: retailers point of view

Pasta is not a strategic category anymore ; the sales director decided to cut shelfspace The goal is to reduce n of brands from present 9 down to 5 focusing an high-rotation SKUs

The leaders role will be to supply the very high-rotation SKUs and to push innovation in order to develop the category non just simple changes in packaging
We will push private label penetration, against leader SKUs ... ...management of the remaining brands will be strongly oriented to shelf profitability and purchasing conditions...

Source: interviews with retailers, Italy

A.T. Kearney 15/Prod.Depr./Aprile 97/ab

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The example of Barilla product range re-focusing

Difficult situation with decreasing volumes and profitability in all product families (94 and 1st half of 95) Private labels penetration De-listing of some items Strong product range re-focusing (2nd half of 95) Cut of 30-40% of references for some product families Focus on high rotation and specialties Strong cost reductions related to product range deproliferation Internal economies (some tens of billions Lit.) Trade margins renegotiation and benefits transferred to consumers Important consumer price reductions (more than 10% for some basic SKUs)

Source: Press data

A.T. Kearney 15/Prod.Depr./Aprile 97/ab

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The example of Barilla product range re-focusing (contd)

Product renewal Packaging innovation (new window packs ) Product innovation (selezione oro) First results already in 1996 Strong volume recovery Stop of profitability decreasing trend with slightly increased revenues and net income

Source: press data

A.T. Kearney 15/Prod.Depr./Aprile 97/ab

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The virtual cycle of an efficient product range

Efficient product range Differentiated Focused on high-rotation SKUs with high value added (Lit/Kg)

Lower costs for manufacturer Lower % margins to retailers

Free resources for product innovation Category rivitalization/growth Increase of value-added (Lit/Kg) Differentiation

Higher marketing appropriation: Lower consumer prices Higher marketing investments

Leadership consolidation Total market share

A.T. Kearney 15/Prod.Depr./Aprile 97/ab

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Agenda

Why product range strategic management is important A possible approach and next steps

A.T. Kearney 15/Prod.Depr./Aprile 97/ab

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5 Key questions to be answered

What is the performance of the existing product range?

What should be the optimal product range given today positioning?

What is the saving impact related to the rationalization of the product range?

What is the optimal implementation path to rationalize the product range and obtain the projected savings?

Where to look for new areas of growth and where to focus new product development efforts?

A.T. Kearney 15/Prod.Depr./Aprile 97/ab

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The analytical modules to be developed

What should be the optimal product range given today positioning? What is the optimal implementation path to rationalize the product range and obtain the projected savings? Implementation Path Where to look for new areas of growth and where to focus new product development efforts?

What is the performance of the existing product range?

What is the saving impact related to the rationalization of the product range?

Product range Diagnostic listed vs on shelf channel variants analysis comparison with competitors volumes per item/ channel Profitability analysis by product after full cost allocation estimated shelf profitability for retailers simulations and benchmarking with best compatitors

Analysis of Product Role/Positioning core vs specialities identification of duplications low volume variants ... Analysis of required different formats/packs per channel / typology sizes primary and secondary packs country/channel variants opportunities per standardization

Simulations of turnover at risk linked to product deproliferation Volumes replaceable vs cost Cost structure evaluation and quantification of possible savings Raw materials production logistics obsolescences ... Simulation of impact for retailers on shelf space on rotations on cost structure

Product category segmentation (features, price ranges ...) identification of gaps in existing product range Identification of new areas for growth/ development of new segments similarities with other product categories trends abroad focus groups and customer needs analysis

planning phase out investment requirements impact on workforce (deployment) negotiation with retailers/suppliers timing and feasibility of cash in of potential savings

A.T. Kearney 15/Prod.Depr./Aprile 97/ab

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What has been done and the possible next steps

What has been done conceptual framework (first elements) cost structure modelling (first elements) press article (to be published next month in Italy) Estimated resources required to complete the methodological approach circa one senior resource and 2 consultants at 50% for 3-4 months best if with a paid client job

A.T. Kearney 15/Prod.Depr./Aprile 97/ab

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