Irrational SKU Rationalization. Can Promotions Save the Day?

As we entered 2010, I noticed an increasing amount of buzz around the phenomenon of SKU rationalization within retail.  By most accounts, the efforts by retailers to reduce the number of brands or SKU's they stock for a  given category is a direct response to recent shifts in consumer buying behavior.  As I mentioned in my recent post about predictions for 2010, consumers have begun flocking to store brands which they perceive as close in quality to brand name products but at a much lower cost.  A poll conducted by GfK Custom Research North America in June of last year revealed that 35% of shoppers are trying store brand products in a given category for the first time, and more alarming, nine out of ten plan to stick with these store brands once the recession is over.

Clearly the writing was already on the wall by mid-2009, but now we're starting to see the other shoe drop.  As retailers recognize this trend will transform to more permanent shopper behavior for the long term, they see less risk in weakening or even severing relationships with long-time suppliers.  The most recent and perhaps highly visible example was outlined in a CGT Inside News article this week.  According to the story, retail giant Wal-Mart is taking Glad and Hefty food storage bags off the shelves in favor of its own private label, Great Value.  The retailer is apparently rationalizing down to just one brand name provider (Ziploc) for the category.

I decided to do a little field research to find out exactly what kind of price differences we're looking at here.  Unfortunately my Wal-Mart had apparently already begun its rationalization process, as Glad remained in only one food storage category - cling wrap.  The Glad brand 200 foot roll retails for $1.97, while the same size Great Value retails for only $1.37- a healthy 30% savings.  I then compared the Ziploc 50 count quart storage bags to the same Great Value offering, and found an even greater savings of 39%.  So we're not just talking about a small difference in price here.  Clearly, Glad and Hefty recognized that trying to buy-down price was an exercise in futility and eventually left with their tails between their legs.

So what does this portend for the broader CPG market?  I'll be honest, I'm trying to find some silver lining here but I'm struggling.  In a previous post, I pointed to a recent interview by Allen Questrom, former chairman of JCPenney and current director at Wal-Mart, which encouraged manufacturers to compete on innovation rather than price.  While I suppose it may be still possible to innovate in some areas, many fast moving consumer goods companies sell near-commodity items in a market that values price over differentiation.

That being said, perhaps Questrom's advice wasn't limited just to product, but also price and promotion.  It's hard to argue that buying down price to compete on even footing with the store brands represents a good long-term strategy.  A recent BrandSpark Grocery Shopper Study found that only 39% of respondents believe that the best new product innovations usually come from brand names.  CPG firms need to let go of the price war, and spend their time and effort figuring out how to innovate and when to promote more strategically to win back the consumer.  These statistics show the store brands are winning on price, quality, AND innovation in the minds of shoppers.  The brand names will likely never win on price, but the time is now to take back innovation in the form of both product and promotion.