It has been 15 years since author and cultural provocateur Malcolm Gladwell gave a now-famous Ted Talk about how it came to pass that supermarkets stock dozens of brands and flavors of a product as uncomplicated as tomato sauce. Until the 1980s, there were two leading brands (Prego and Ragú), each selling a single, plain formulation and recipe. By 2007, Gladwell said he had counted 36 different variations of Ragú spaghetti sauce — cheese, garlic, light, robusto, extra chunky, and so on.
That strategy by brands, to snag maximum shelf space by such proliferation, is today in full retreat as companies increasingly focus on SKU (pronounced “skew”) rationalization. SKUs (stock keeping units) are the bar-coded information on all products that are unique to the specific color, style, and features of each. When scanned, SKUs provide real-time data on sales and inventory.
Pandemic and supply chain issues have forced consumer-facing companies to reassess the buying and stocking of items that are slow sellers, less profitable, and take up valuable warehouse and shelf space.
SKU rationalization isn’t new. An analysis by two supply chain experts, which appeared in the Harvard Business Review in 2006, found that product proliferation tends to reduce profit margins. The researchers reported that at one company they examined, the bottom 40% of their products generated less than 3% of revenue, and the bottom 25% were highly unprofitable. At another company, Clorox, 30% of the stock-keeping units were falling short of sales volume and profit targets. After the company instituted a program to identify lagging items, retail sales per SKU grew by more than 25%.