Tuesday, March 2, 2010

Who Needs a Hundred Varieties of Toothpaste?

In a story about the retailers’ efforts to optimize assortments, NRF reports that several retailers are reducing the number of SKUs they carry. This is expected to help trim the assortments and enhance the overall efficiency of operations including the shelf-space usage in the stores. The article mentions Wal-mart, CVS, Supervalu, and Kroger among retailers that are possibly starting a rationalization process for their assortments.

I believe this is long overdue. Think of all the products in categories like detergent, dish-washing, personal hygiene, cleaning supplies, breakfast cereal, bottled water and many more that are similar as in “utilitarian” products – there is so little differentiation among the competitive products that a little less variety is almost certain not to affect the retailer’s sales in any significant way. While brand-loyalty has historically contributed substantially to sales, it is losing its edge in the utilitarian segments. I believe this will continue because the underlying reason for the phenomenon is the overall quality improvements through standardized manufacturing practices and standardized inputs. Such standardization has been facilitated through mass-production and globalization of businesses that are becoming truly global in all respects: global customer base, global manufacturing facilities, global manufacturing standards, and stringent quality control processes that are very similar across most larger companies. The result is product homogenization: while the product positioning, packaging, advertising, and marketing practices are still developed for local audience, the products themselves are getting more and more homogeneous and un-differentiated.

Irrespective of the place or the manufacturer, the ingredients and the manufacturing processes for most of the world’s utilitarian products are consistent. It is not lost on the consumers that a lot of products sold under different brand names are actually manufactured in the same factory, on the same equipment, using the same ingredients, and so on. As consumer awareness grows, the branding will become less of a factor in making the buying decisions, except for few specific items that individual consumers may continue to prize due to personal preferences for flavors, fragrances, and other similar traits.

The growing popularity of the store brands in the last few years is the proof of the larger trend described above.

Brands, however, will not disappear. Stronger brands will survive and thrive, but the world may just not have the space for the “also-rans” any more.

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