Sobering State of Retail: Why Less Is Almost Always More
Walk down the aisles of your local grocery store or big box retailer, and you are faced with a sometimes overwhelming selection of thousands of products. But even then, that is only a small subset of the more than one million items available to consumers each year.
In thisIndustry Focus: Consumer Goodssegment, the cast considers the challenges of competing in an environment with seemingly limitless consumer options and what that implies for consumer staples manufacturers like UnileverandProcter & Gamble.
A full transcript follows the video.
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This podcast was recorded on Oct. 12, 2016.
Vincent Shen: I really wanted to hammer the point home in terms of how important these efforts can be for companies by stepping back a little bit and giving a little bit of a big picture context and calling out some numbers that I think can put things into perspective. For example, in 2008 research from the Food Marketing Institute the typical U.S. grocery store, or supermarket, stocked about 47,000 different products. That is up 50% from the previous decade and about five-fold since 1975. Keep in mind that a Wal-MartSupercenter, for example, their SKU numbers for a store that size is well over 100,000. And then if you go a step further, researching the case at any one time in the United States, there are at least one million products on the market for consumers to purchase. So that research might be a few years old now, so with some of the other trends that we've seen, you can imagine that number is likely much larger than one million at this point with customization, for example.
So the sobering reality I think for a lot of retailers, be it Unilever or Procter & Gamble, is that consumers only use about 340 unique items in a year out of that one million-plus. And making sure that you are maximizing your profitability, maximizing your product mix and what is on store shelves, to boost your revenue and make sure that that small subset of items that each consumer uses includes products from your portfolio, is just really important. Is there any other thoughts that you wanted to leave our listeners with, Asit?
Asit Sharma: Just one last thought. And by the way, those are some mind-boggling statistics and I think that really visually gives us an idea of how much supply there is out there of product and why it's a great idea to reduce as much as you can if you're a manufacturer.
My last point is that we see the Pareto Principle in life a lot, which is 80% of outputs are due to 20% of inputs. See that in so many different spheres of life, and manufacturers have found this to be very true ... SKU and brand rationalization, that a lot of times it's just a few products that are really driving your sales and your profits, so why wouldn't you put in the effort to pare those down and optimize your profit and optimize your cash flow? As investors, we should be looking for the companies which are actively trying to perform this exercise. And the two companies we've mentioned today are really into this. Their management talks about these concepts almost every conference call, we see it in the numbers, and it's a great way to evaluate a consumer goods company. Are they paying attention to the proliferation of products that they've got, and are they trying to make themselves more efficient as time goes on?
Asit Sharma has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble and Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.