Updated: May 8
The grocery industry has been significantly disrupted by the speed and scale of COVID-19. Since the onset of the pandemic, customers and retailers alike have faced the challenges of empty shelves, social distancing, face masks, rising costs, and overwhelmed supply chains. But times of crisis and uncertainty are often the best times to discover better ways to do business.
Reducing a store’s product range to simplify operations and stock the products that are most in demand has been a pivotal measure in helping traditional retailers manage during the height of the crisis. As grocery retailers emerge from the unprecedented strain of COVID-19 on their businesses, offer simplification will be an essential strategy for improving both the customer experience and operational efficiencies.
A TURNING POINT FOR SIMPLIFICATION Long before the COVID-19 crisis hit, grocery chains have been struggling with the climbing costs and complexity produced by unprecedented product proliferation. This trend has created larger stores stocked with 80% more SKUs on average than a typical store would have offered 30 years ago. Although customers may appreciate having more choice, they also value the ability to easily and quickly find what they want—an experience that has been lost as more products appear on shelves.
Although customers may appreciate having more choice, they also value the ability to easily and quickly find what they want. Product proliferation has also become a competitive disadvantage for grocery retailers. BCG research conducted in 2020 shows that regional US grocery chains carry an average of 50% more SKUs per linear foot of shelf space than their mass and value channel competitors. And they have been losing market share to value-priced wholesale clubs and mass retailers—and even small, no-frills convenience stores, which are more expensive but provide a much faster, easier shopping experience. Simplification can create a virtuous cycle that scales end-to-end (E2E) efficiencies from the warehouse to the grocery cart. Many grocers have resisted offer simplification because they mistakenly believe that removing products from the shelf hurts sales. Our work proves this is not the case. We recently led an offer simplification trial where our client reduced 20% to 25% of SKUs across 30 categories. Sales across the impacted categories increased by 2%.
But the benefits of offer simplification go much further than increasing sales. Simplification can create a virtuous cycle that scales end-to-end (E2E) efficiencies from the warehouse to the grocery cart. Handling fewer products frees up space in warehouses to store products in ways that streamline the supply chain. Relationships with suppliers improve. And customers find the products they want.
THE COSTS OF VARIETY There is a fine line between just enough variety and too much duplication and complexity. On the one hand, variety is key to a successful retail grocery business. Offers that appeal to different customer tastes are important, especially in high-innovation categories such as salty snacks and frozen meals. Variety can also stimulate impulse buying. On the other hand, in most commoditized categories, such as vitamins, frozen vegetables, and canned soup, too much variety overwhelms customers.
Over the years, numerous consumer psychology studies have pointed to a phenomenon known as “decision paralysis,” or “choice overload”—that is, when customers have too many choices, it feels harder to decide what to purchase and diminishes the retail experience. According to a 2020 National Retail Federation customer survey, 63% of respondents said that “convenience” is important to them—and 47% included “making it easy to find options” as part of their definition of convenience.
Looking beyond the customer experience, the costs of product proliferation affect multiple facets of a traditional retailer’s operations:
Stocking. Too many products on the shelf means that grocers have less space for staples that drive sales and for the unique products that increase customer loyalty. In addition, undue variety requires complex inventory processes that can increase out-of-stocks of the products customers depend on. Both crowded and empty shelves frustrate shoppers. This is a hazard for traditional retailers because it has the potential to drive their customers to competitors.
Merchandising. Consumer packaged goods companies provide funding incentives (including new-item slotting fees) to make sure their products are kept on the shelf. But under these arrangements, retailers yield too much control over merchandising decisions to suppliers. Their own teams have less power to craft offers and develop Private Label branded articles that are of most value to customers.
Purchasing. Too much variety and too many new products reduce grocers’ ability to consolidate their purchasing power to obtain the best costs. This puts them in a difficult spot. They can either compete with value and mass stores on price, but at the expense of margins, or they can maintain margins at the expense of customer transactions and traffic.
Store Operations. The growing number of SKUs increases the time needed to restock