Grocery ranging - are retailers missing the point?

The economic conditions that we are all now ‘enjoying’ have highlighted some interesting insights into the approaches that different retailers have to range strategy.  For years now the big supermarket chains have been growing their ranges year on year as they seek to capture sales in every category they can think of.  Then along comes a recession and customers start finding the Aldi’s and Lidl’s of this world a fine place to shop.

As we all know the attraction is lower price and as we also know a major factor in them being able to offer those lower prices is that they carry a much smaller range.  So isn’t it interesting that the response from the bigger chains has been to increase their ranges by adding new value lines with Waitrose being the latest to do so?  Is it possible that they have missed they point? Only Asda so far seem to have announced moves to reduce range.

The primary aim of a big range is to persuade customers that you do not need to shop anywhere else - its all available under one roof.  Also different customers do prefer different brands or on some occasions might be looking for value lines whilst on other want to treat themselves with a premium product.  But Aldi and Lidl have shown that with careful selection you can entice the customer to you by offering a fraction of the range.  And we are talking fractions - 5% or less.

What is less well understood is the full cost of offering the big range because it can be very significant, in major part because many of these lines are slow or very slow moving.  Just some of the costs, in no particular order, are:-

• more shelf space needed in store reducing the earnings per square foot
• increased wastage when shelf lives expire
• much more stock because these are often slow moving lines which have to be purchased in quantities that are out of line with their rate of sale
• sales of slow moving lines are harder to predict so this adds both to the over stock of some lines and to poor availability of others
• increased merchandising costs thanks to a much more complex and fragmented shelf layout
• more warehouse space needed to stock the greater range. The space required in a modern, low stock cover distribution centre is often more closely related to range than to stock holding
• higher inbound logistics costs - not always visible but certainly there
• smaller average order quantities meaning higher costs per unit.

And so on.  The question is, how many retailers understand the true marginal cost of adding an additional line?  In this writer’s experience not many even though the above mentioned are all calculable.  There are others that are less easy to calculate such as the consequences of possible confusion arising from having too many lines.  The consequences of all this therefore are that in trying to tempt shoppers back from the low cost operators by adding more lines the big retailers are actually adding to their costs.

So what should retailers do?  The first is to understand what the true cost of range is.  Without that knowledge no subsequent decisions will be based on sound information.  Cost-to-serve or activity based costing techniques can be used to do this feeding a logistics cost model.  Then its over to the category managers and marketeers for them to justify the process inclusion of each line  in the light of the additional costs that each adds.  In part this process is what some call Direct Product Profitability but we do recognise that some lines have to be stocked to complete the range or drive sales of other lines.  Our argument here is to make sure that each SKU is there for a good reason and has been selected with the full knowledge of the costs that come with it.

With information presented in the right way range planners should be working hard to reduce range, take cost out of the business and improve margin for the business.

THE LOGISTICS BUSINESS, a leading specialist supply chain and logistics consultancy, has experience in planning and developing supply chain, distribution and warehousing operations throughout the world. From supply chain and distribution strategy, to development of distribution operations, warehouse design and layout, as well as manufacturing logistics and IT systems design, its clients include many blue chip companies.

We have also worked on government initiatives on sustainable transport and waste minimisation.For further information please call:Helen Morris, THE LOGISTICS BUSINESS on +44(0)1527 889 060, email helen.morris@logistics.co.uk