The two companies had different goals. A leading meat producer wanted to expand across many countries in Europe, so it set out to build scale and create efficiency in its supply chain. A beverage company wanted to close six plants throughout Europe and focus on improving the performance of its top-selling brand. Both companies quickly realized that their extensive product assortment had created complexity that was keeping them from achieving their goals. There was no getting around a nagging fact: They needed to streamline their portfolio of SKUs.

By smartly doing so, the meat producer not only improved its supply chain and the beverage company not only reduced its manufacturing footprint, but both also incurred a benefit they didn't set out to achieve: With fewer products to push out to the market and support on the shelves, they were able to turbocharge growth. (For their full stories, see below: "Are 63 different bottles really necessary?" and "Simply too much sausage.")

Like those two companies, many consumer goods players, particularly in developed markets, suffer from a host of painful aches that can include stagnant growth, unwieldy supply chains and out-of-control organizational costs. Companies may choose different terms to describe their symptoms. We hear everything from "low marketing ROI" to "complex and ineffective trade terms system" to "an inability to effectively deploy commercial strategies at the point of sale." In addition, we hear "high conversion costs," "high overhead” and "low-capacity utilization." Despite these different descriptions, when we dig deep we often find the same root cause for these symptoms: the overabundance of brands, SKUs and product specifications—and constant changes to what consumers are offered (see Figure 1).

For consumer goods companies, however, assortment simplification can dramatically change things. When done right, it can unlock significant benefits. First and foremost—and contrary to conventional wisdom—selling less often leads to selling more. Revenues for a food category in Belgium grew by 17% despite a 42% reduction in SKUs. Similarly, a candy category in Sweden achieved a 19% increase in sales despite selling 18% fewer items (see Figure 2). In addition to achieving such revenue gains, a simplified product portfolio often translates to significant supply-chain savings and organizational efficiencies.

The trouble is that unlocking such benefits takes time, patience and careful planning. Perhaps more important, it requires a new way of thinking. Assortment simplification, unfortunately, still comes across as counter-cultural in many consumer goods companies.

Why more isn’t more

Over the years, consumer goods companies have instinctively beefed up their portfolios as a way to grow, amassing offerings to serve every conceivable consumer preference. In doing so, however, they’ve often just added two different forms of complexity: above-the-skin and below-the-skin. Above-the-skin complexity is the proliferation of brands, products and SKUs that’s apparent to shoppers on the store shelf. Below-the-skin complexity is the abundance of product features and specifications—variations and nuances in recipes, ingredients, packaging materials and the like—that are not necessarily discernible to shoppers.

In the past decade, both forms of complexity have steadily crept into the portfolios of consumer goods companies. In Spain, for instance, Bain research has shown that the total number of SKUs offered in the consumer packaged goods market grew by 40% between 2000 and 2011. Sales per SKU per square meter of store surface, however, did not grow commensurately. In fact, most branded goods experienced productivity declines, with average sales per SKU per 1,000 square meters eroding by more than 2% over the period.

Similarly, below-the-skin complexity has somewhat spiraled out of control, as demonstrated by one of our clients. The company, which we’ll call FoodCo, recently came to the shocking realization that between 2010 and 2013 its number of recipes grew by 12% and its number of containers grew by 36%. Container caps increased by 28% and its number of labels grew by 51%. But during the same period, its volume shrunk by 2%.

In a robust economy, the costs of complexity often are offset—or ignored—by impressive top-line growth. But when the economic environment cools, as it has in Western Europe and other mature markets, complexity’s problems become more evident and the impact of those problems can become deadly. Companies that initially set out to grow by offering meaningful product diversity with more consumption occasions are starting to realize that they have created only minor variations of a similar product or overlapping versions of complementary products. Eventually, the resulting complexity attacks growth and profits in its own devious way.

The proliferation of brands, products and SKUs, for instance, confuses shoppers at a time when studies show that they make more purchase decisions in stores but prefer to spend as little time there as possible. Above-the-skin complexity also allows low-rotating SKUs to steal valuable shelf real estate from best-selling SKUs, slowly but surely eroding their performance—a problem that’s further aggravated as shelf space for branded goods shrinks with the rise of private labels and smaller-format channels like convenience stores.

Below-the-skin complexity, on the other hand, results in low procurement scale, excessive changeover times or low utilization in manufacturing plants. To top it all, managing an inflated product portfolio also often causes overhead to grow. Over time, eroded sales and incre-mental costs harm profits.

If the stakes are so compelling and the downsides so evident, then why are companies still reluctant to take action?

An inability to move

We see two groups of companies out there: those that are afraid to do something about it or don’t know where to start, and those that have tried to simplify but have failed to obtain significant and long-lasting results.

Even when some companies are aware that SKU and specification proliferation can be damaging, they can’t seem to make the dramatic moves they need to make to extricate themselves from the situation. The biggest reason: consumer goods players believe that their retail partners favor broad variety—every possible flavor, formulation and pack size—and continuous new SKUs on the shelves. They also fear that if they suggest removing SKUs from their shelf space, that space will be allocated to other, more prolific branded players.

Other factors also contribute to the inertia: The more-is-more thinking is deeply ingrained in marketers and sales representatives through incentive systems generally geared toward adding SKUs to shelves. Many supply-chain decision makers continue to wrongly believe that all volume counts—that each added SKU ultimately enhances manufacturing capacity utilization.

Meanwhile, some companies have tried addressing the issue but failed to generate material and long-lasting results. Among these, we typically see companies that embarked on a dire rationalization or cutting-the-tail exercise that failed to effectively mobilize employees and was quickly abandoned. We also see companies that have a siloed, one-sided approach. A marketing executive may make the well-reasoned choice to delist a SKU but it won’t really happen without the supply-chain decision makers on board—and vice versa.

Breaking the vicious cycle

The only way for companies to radically and successfully simplify their portfolio is to realize that they can benefit from growth and profit if they adopt a joint, all-encompassing approach. Companies can’t beat complexity if they focus on attacking only one aspect: They can’t just cut low-rotating SKUs in an attempt to streamline or accelerate their portfolio, nor eliminate painful-to-produce SKUs in an attempt to reduce costs. Similarly, they can’t beat complexity if they tackle it from only one side of the company.

For most consumer goods players to win over the long term, they must join forces across the organization to revive growth by focusing on better-selling SKUs while reinvigorating profits by reducing complexity. Eventually this should translate into fewer but fully supported brands; fewer but fully activated SKUs; fewer but better and longer-lasting innovations; and fewer but fully at-scale product specifications. It also should mean fewer changes initiated by fewer people (see Figure 3).

Heroes to the rescue

Rationalizing an assortment should start with bringing sales, marketing and supply-chain decision makers together to design the range that will win on the shelf. Most consumer goods companies that aim to simplify their portfolio act on instinct: They simply cut under-performing SKUs. But there’s a fundamental flaw in this thinking: It does not generate growth. In occasional cases, some delisted SKUs may actually have been important for channel or retail partners.

Instead of concentrating on cutting off the tail, we counsel companies to adopt a more inspirational shelf-back view that focuses on the head. They identify critical hero SKUs that have the highest potential to win with shoppers and retailers today and tomorrow.

In general, hero SKUs are not just those that are most important to a company’s business (be it in size, rotation or profits). They also typically include SKUs that are most strategic to retail customers and most meaningful to shoppers. They are the products that help the category grow. Their success builds on itself. They generate higher volumes that increase scale, leading to bigger margins that finance investment to fuel growth.

Identifying such critical SKUs requires a careful understanding of shopper behavior in a category, both now and in the future. The fact is, in most categories shoppers want to choose from a complete range of products, so it would be ineffective to eliminate all but the single biggest seller. Companies also need to understand what specific product features contribute to actual growth in their category: Is it another pack size? Is it an extra flavor? Is the new mango pudding really adding incremental growth or would it be more effective to focus on the old strawberry flavor but sell it in different packs to tap into different occasions?

Identifying and prioritizing hero SKUs is a powerful way to overcome the typical trade objections. As we mentioned, many companies are afraid to move. They fear that retailers favor new and endless variety on their shelf and will retaliate against any company that tries to play by different rules. But what retailers truly want are products that bring traffic to the store (through scale or newness), rotate quickly and nurture some form of distinctiveness. A few hero SKUs, continuously renovated and fully supported, fit the bill better than a long tail of low-rotating SKUs with limited differentiation, lifespan or impact over time. Companies that identify their hero SKUs are usually able to convince retail partners that stocking more of them while eliminating low-rotating SKUs will be a win-win for both parties.

After identifying the fewer core SKUs that can win, the next step for most companies is to craft a concrete plan for how to push and make them grow. We start by assessing their room for growth through a set of specific tools. For instance, a matrix that plots SKUs based on weighted distribution vs. rate of sales helps pinpoint SKUs that sell well but aren’t fully distributed, or those that are largely available but could be refreshed to sell faster. We complement that assessment with a detailed analysis of store-by-store data for trade customers, including how to push distribution and grow shelf share in specific key accounts. This helps companies figure out what they can do from a commercial standpoint to make more of their existing products and shelf assets. They typically realize that they’ll need to free up shelf space and support resources to make core SKUs grow. This gives them incentive to delist slow movers and irrelevant variations in their portfolio. Unlike with the typical tail-cutting exercise, though, there is now a positive and inspiring reason to do it: It will unlock growth.

Finally, in addition to transforming their portfolio shape, they need to eliminate unnecessary or hidden complexity: The product overlaps in specific shopper consideration sets, multiple different pack types with high changeover costs, or nuances in formulation that take a big toll on procurement costs or plant utilization. When products are directly competing with one another or costs are too high, it’s time to delist or reengineer. Again, the best way to do this is to bring together sales, marketing and supply chain decision makers, and have them agree on a number of standard platforms to share among brands and SKUs, whether they be ingredients, product forms or packaging materials. They will also agree on discontinuing SKUs that are too similar or too painful to produce and can’t be fully reengineered. The only condition: that the changes don’t harm shopper appeal or customer interest.

Making the organization fit

Companies must then make sure their organization reflects their simplified assortment. They won’t require the same number of people to manage a portfolio that is now much simpler.

They must also elevate assortment discussions to the top management level to ensure continued alignment and collaboration among sales, marketing and supply chain on decisions to add, alter or eliminate products. They must put in place guidelines and tools to track and control complexity, ensuring, for example, that new products meet high performance hurdles and make the most of existing platforms, or that they stick to a one-in-one-out rule when introducing a new product.

The benefits of such an integrated approach are numerous: Companies reduce supply-chain costs and out-of-stocks on their hero SKUs at the points of sale. They gain more manufacturing capacity and create a more effective organization.

As many are surprised to learn, they also generate faster growth, outpacing competitors even in slow markets like Western Europe. Whether that region’s economy continues at its sluggish pace or gains momentum, players that have simplified are prepared to win.

François Faelli is a Bain partner based in Brussels, Eduardo Giménez is a Bain partner based in Madrid and Odd Hansen is a Bain partner based in Copenhagen. All are members of Bain’s Consumer Products practice.