Supermarkets cull their food product offering

In a massive dumbing down of Australia's pantries, Coles, Woolworths and wholesaler Metcash are shrinking the number of products in supermarkets by around 10 per cent to cut costs, improve on-shelf availability, clear space for fresh foods and make the weekly grocery shop simpler for consumers.

Known in the trade as assortment reduction, the cull has been under way since the number of packaged food and grocery products peaked in 2014.

But it will pick up pace this year as major retailers attempt to reinvigorate sales and cut costs amid margin-sapping grocery price deflation.

Coles has unveiled plans to cut its product range by up to 15pc in the next few years and Metcash by up to 3000 products, or 12pc, in its largest IGA stores.

Woolworths is believed to be targeting an 8pc to 12pc reduction in stock keeping units (SKUs), including private label products.

This is well below the 30pc SKU reduction under way at Britain's largest grocery retailer, Tesco.

However, given the relatively small size of the $90 billion Australian grocery market and the level of retail concentration, the strategy is ringing alarm bells at food and grocery manufacturers already struggling to recoup rising costs amid intense price competition.

"I absolutely get why they're doing it, but I think it's a high-risk strategy," says Australian Food and Grocery Council chief executive, Gary Dawson.

"The rationale is they want to simplify their ranges in order to improve on-shelf availability and through that drive higher sales velocity.

"But there are also downsides.

There's a risk that as consumers lose choice they go elsewhere, he says, especially if the number of brands in a category is reduced to two –  one national brand and a retailer's private label brand –  which appears to be Coles' strategy.

"They're laying out the welcome mat to Amazon, which offers a very extensive range,” Mr Dawson said.

“The other risk is it turns into a Dutch auction amongst suppliers –  who can offer the retailer the most to stay on the shelf.

“We've already had reports that has happened in categories."

Retailers are well aware of the risks, particularly when fast-growing discounter Aldi is expanding its range of 1300 mainly private-label products and adding well-known national brands such as Nescafe, Nutella and Weetbix, so customers can do a full basket shop.

Consumers are quick to take to social media and threaten to shop elsewhere when retailers take their favourite brands or products off the shelves.

For that reason, retailers are now taking a more scientific approach to range rationalisation, deploying tools including data from customer loyalty programs and market research firms such as Nielsen, IRI and Quantium, customer surveys, in-store trials and good old store manager/owner nous before they make decisions that may come back to bite them.

"We won't want to do what Coles did prior to the (Wesfarmers)] acquisition, which is just unilaterally take products out and that gets your customers off side," Wesfarmers group managing director, Richard Goyder, told investors in August.

"We want to take our customers with us and that's why it takes a bit longer but as a consequence we'll be more efficient.

“Every additional SKU you put through the supply chain creates complexity, and therefore creates a cost."

There is no doubt Australian consumers are spoilt for choice.

According to IRI, there were 52,763 "active" food and grocery products on the market in 2016, including tobacco and private-label brands but excluding fresh produce and fresh meat.

The average full-service supermarket stocks between 20,000 and 25,000 SKUs.

"There are a lot more products around now –  the range was in the single thousands decades ago," says veteran retailer, Steven Cain, the head of supermarkets and convenience at Metcash.

"When you look at the sheer variety of food that's available now it's unprecedented ... the consumer has never had more choice."

But choice comes at a cost –  taking up space on shelves, in distribution centres and on trucks, tying up working capital, impeding the introduction of new products, adding complexity in the supply chain and making it harder to keep shelves fully stocked.

In most categories there are three or four brands, each of which offers multiple product variations in two and sometimes three different pack sizes.

Take baked beans.

Woolworths sells 60 different products from five suppliers – Heinz, SPC, Watties, Weight Watchers and Woolworths' Homebrand and Macro private labels – in a multitude of pack sizes and multi-packs.

Woolworths head of buying Steve Donohue said the limited range consolidation taking place in stores is equal across branded and own-brand products.

"Woolworths will always be a house of brands," he said.

"We are constantly listening to our customers and working hard to ensure we have the most popular products at the correct quantities on our shelves."

Another example is brie.

Earlier this year Coles sold 22 types of brie cheeses under seven brands, including King Island, South Cape, President, Castello and the Coles own brand.

Now the range appears to have been reduced to 17, according to Coles' website.

"I doubt that anyone would expect us to have 22 brie products," Coles boss, John Durkan, told investors earlier this year.

"I would imagine we could take 30 or 40pc out of that range easily and drive more demand through better availability and the right products."

Retailers are primarily reducing SKUs in low-growth and no-growth categories where there is a proliferation of brands and pack sizes, a high level of product duplication and low customer loyalty.

They are handing shelf space over to fast-growing categories such as organic and health foods, health and beauty products, fresh foods, and in some cases locally made brands, which are growing in popularity.

"As people are moving to healthier and fresh foods we are reducing processed foods like canned goods where you might have less differentiation and where as a category you're making less sales every year," said Metcash’s Mr Cain.

"According to IRI almost half of what you'd call traditional grocery categories are in decline, in particular processed foods, canned goods, and more people are buying more fresh.

“Fresh is almost 50pc of the basket now."

He uses UHT milk as an example.

The overall category is flat, despite strong demand for soy and nut-based UHT drinks such as almond and coconut milk.

"You still have five or six brands in classic 1-litre UHT milk," he said.

"In a category that's not growing overall if you want to introduce some of the more health-based varieties you have to reduce the core range, which might be in decline."

Eliminating SKUs does not necessarily lead to falling sales for retailers and suppliers, but arbitrarily culling products can be a recipe for disaster, says IRI.

IRI's client service team leader, Adam Vine-Hall, said manufacturers who reduced SKUs can focus their above-the-line and below-the-line marketing and promotional efforts on products that are more likely to appeal to customers and achieve clearer brand architecture. He points out that several categories that experienced an overall reduction in SKUs last year achieved above-average sales growth.

For example, in men's skin care, the number of SKUs reduced 18.1pc, but sales rose 4.3pc.

In chilled pet food, SKUs fell 9.9pc but sales rose 3.8pc, and in dental floss the number of SKUs fell 9pc, but sales rose 6.7pc.

Companies such as Masterpet, which owns the Vitapet brand, reduced SKUs by 10pc but sales rose 16pc, PharmaCare, which owns brands such as Bioglan, Natures Way, Brut and Rosken, shrank SKUs by 1.2pc, but grew sales 4pc.

"Those that have grown have picked the winners and cut the losers," Mr Vine-Hall said.

However, a large number of suppliers had culled products and seen sales go backwards.

"The key for manufacturers is that with increased range-reduction pressure from the retail space, their ability to launch and innovate new products grows more challenging," he said.

"Previously most manufacturers could operate on a one-in, one-out policy.

“Now they're under pressure to not just take lines out for the new ones they put in, but take more lines out.

"So manufacturers are having to justify not just poor-performing items but their OK-performing items as well."

The competition watchdog has also raised concerns about the way retailers are treating suppliers when products are permanently dumped.

ACCC chairman Rod Sims said in some cases the chains failed to give reasonable notice or reasons before delisting products –  some suppliers were given less than a day's notice.

Grocery retailers needed to improve the way they notify suppliers when delisting products to avoid breaching the Food and Grocery Code of Conduct.