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CEO Forum

Growth through simplicity

Growth through simplicity

Why selling less often leads to selling more.

  • 2014년5월2일
  • 읽기 소요시간

Article

Growth through simplicity

This article originally appeared on CEO Forum.

Many consumer goods players, particularly in developed markets like Australia, suffer from a host of painful aches – everything from stagnant growth to unwieldy supply chains to out-of-control organisational costs. When we dig deep we often find the same root cause for these symptoms: too many brands, SKUs and product specifications.

But the act of thoughtfully simplifying their assortment can dramatically improve things. When done right, 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. In addition to boosting revenues a simplified product portfolio often translates to significant supply-chain savings and organisational efficiencies.

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 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. 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 metre 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 metres eroding by more than 2% over the period.

Similarly, below-the-skin complexity has somewhat spiraled out of control. One company, which we’ll call FoodCo, recently determined 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%.

Companies that set out to grow by offering product diversity with more consumption occasions are starting to realise that they have created only minor variations of a similar product or overlapping versions of complementary products.

The proliferation of brands, products and SKUs 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 eroding their performance—a problem that’s 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 utilisation in manufacturing plants. To top it all, managing an inflated product portfolio also often causes overhead to grow. Over time, weakened sales and incremental costs harm profits.

Breaking the vicious cycle

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

The biggest reason for inaction: consumer goods players believe that their retail partners favor broad variety. They may fear that if they suggest removing SKUs from their shelf space, the space will be allocated to other, more prolific branded players.

Also, many supply-chain decision makers continue to wrongly believe that all volume counts—that each added SKU ultimately enhances manufacturing capacity utilisation. 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.

To win over the long term, companies must join forces across the organisation 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.

Consider the European beverage company that sold one of its main brands in 63 different bottles across Europe. It found ways to reduce that to 20 bottles—a step that allowed it to improve procurement options (it could consolidate volumes and use fewer suppliers) and boost productivity by concentrating production across fewer factories and producing larger batches. It also learned that it was using four slightly varying recipes for a specific beverage sold in four neighboring countries. By settling on a single recipe, it could enjoy benefits of scale by pooling sourcing and production, and could sell the same beverage to different countries by pasting on a single label that accommodated the different languages. The company also narrowed its portfolio to only its top sellers by channel – a move that improved sales execution. A broad range of simplification initiatives led to 16% gains in revenues-per-SKU and a 45% reduction in complexity costs.

Heroes to the rescue

Rationalising an assortment starts with bringing sales, marketing and supply-chain decision makers together to design the range that will win on the shelf. Most consumer goods companies simply cut underperforming SKUs – but sometimes 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. 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. 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. 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 the new mango pudding really adding incremental growth or would it be more effective to focus on the old strawberry flavour but sell it in different packs to tap into different occasions?

Identifying and prioritising hero SKUs is a powerful way to overcome the typical trade objections. Retailers want products that bring traffic to the store, 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.

After identifying the fewer core SKUs that can win, the next step for most companies is to craft a plan to make them grow. We assess 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 realise 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 utilisation. 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 organisation fit

Companies must then make sure their organisation 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 organisation.

As many are surprised to learn, they also generate faster growth, outpacing competitors even in sluggish markets. Whether the region’s economy remains slow 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.

Aside: Simply too much sausage

Did customers really care if a sausage was a few millimeters shorter or thinner than another available product? For a European meat producer, most of the time, the answer was no.

This meat producer had grown steadily over the decades, liberally adding new varieties of sausage to its portfolio, which it sold in a few countries in Europe. The company decided to expand across the continent but realised its supply chain wouldn’t support the move. Plants served local markets and were equipped with old technologies running at about 60% utilisation. What the company needed was a new regional supply-chain model to consolidate its manufacturing footprint, provide technological upgrades and bring it to scale leadership. But the new supply chain’s benefits would be lost the minute it had to produce the company’s existing portfolio, with its host of minor variations in recipes, forms, sizes, pack types and the like.

Portfolio complexity had never been an issue with underutilised plants and an excess number of lines. But it would quickly become a headache in a supply chain that had to run long batches at full speed to be efficient—and that had to do so without the possibility of stopping every hour to accommodate slight changes in recipe or product size. Producing the current portfolio would soon require the addition of new lines and capacity, which would diminish the entire point of the company’s supply-chain initiative.

The company had no choice. It needed to reduce the number of SKUs. More important, it had to simplify and standardise the number of unique features each SKU could have. To do this well, it first had to understand what product features created the biggest trouble in the line and forced it to stop production for the longest periods of time. In sausages, the answer was changes in recipes, link sizes and pack sizes.

The full extent of their SKU complexity—the vast array of sausage varieties and the toll it was taking— stunned leaders. Many sausages in the portfolio were only a few millimeters longer or thicker than others. Standardising SKUs around common platforms became critical for a strategic overhaul that put the company on the path to rapid growth.

The meat producer did not stop there. In sourcing and procurement, it reconsidered unique ingredients that were difficult to source and those requiring special treatment. In recipe preparation, it used more common ingredients, tried to lower the cost of formulations and harmonised recipes. It also eliminated packaging that needed special handling. In shipping and logistics it reevaluated SKUs that resulted in low truck utilisation and potential space constraints. In addition to these cost-saving changes, it redirected investments, ensuring that hero SKUs received more support.

By modifying approximately 80% of its SKUs but eliminating fewer than 10%, the meat company can streamline its manufacturing footprint, operating with half the number of plants at higher utilisation levels and reducing costs by 15%. With better margins to reinvest, trimming the fat from its portfolio is likely to lead the company to sell more sausage.

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