Costco and Product Proliferation: In my book, Competing in Tough Times (New York: Financial Times Press, 2011), I discussed a number of issues relating to product proliferation, which reflects on the whole subject of product assortment, assortment planning, and assortment management. There are two major reasons why retailers offer their consumers too much assortment within any product category: 1. Too many retailers mistakenly want to "be all things to all people." Retailers with this orientation stock excessive assortments of products out of fear of losing sales and customers to other retailers. 2. Other retailers overly rely on trade deals and slotting fees in their merchandise decision-making. These retailers risk becoming selling agents for their suppliers, as opposed to purchasing agents for their customers.
Retailers that have been able to successfully reduce their selections to the most popular and best-selling items include: Aldi (with about 1,400 SKUs per store), Costco (that offers between 3,300 and 3,800 SKUs per unit), Stew Leonard's (with about 2,000 SKUs per supermarket), and Trader Joe's (which has about 2,500-3,000 SKUs per store). In comparison, the average supermarket has between 30,000 and 52,000 SKUs.
Advantages to a retailer's reducing product choice include:
1. Higher stock turnover (by virtue of eliminating slow-selling items);
2. Lower stockouts;
3. Higher bargaining power with vendors;
4. Higher sales per square feet (due to reducing slow-selling items and the ability to use smaller store formats);
5. Higher profits (due to lower costs associated with pricing, recordkeeping, and carrying additional inventory).
Costco's current inventory turnover is 14.1 times. Costco generates an average of $27.7 million in sales for its average SKU.
Costco also uses its limited selection model on its web site, which has 5,000 items. According to a senior vice-president of E-commerce Costco, "We will never have hundreds of thousands of SKUs. We have the same discipline online as we do in the warehouse, and you cannot really be best at what you are doing if you have too much to manage." In fiscal year 2011, Costco's Web site generated 2.1 percent of sales. Its total Web sales in 2011 were 12 percent higher than in its 2010 fiscal year. Merchandise categories items with a high proportion of online to total store sales in fiscal 2011 include: jewelry (30 percent), electronics (35 percent), and computers (36 percent).
Let's look at how Costco manages its Website using its edited choice model:
1. To make its limited selection of merchandise appear much bigger than it is, Costco may list the same item multiple times in different product categories.
2. As many as 85 percent of Costco's online assortment is unique to its Web site as these items are not available in its membership warehouse locations. This strategy ensures that Costco's Web site business does not directly compete with its stores.
3. Costco extensively uses drop shipping at its Web site. About 80 percent of the merchandise sold on its Web site is in stores and shipped by its vendors. This frees Costco from expenses associated with holding inventories, from markdowns and other related costs.
What are Costco's lessons relating to product choice that can be applied to your Web operation???
Editor's Note: Be sure to look at Barry R. Berman and Joel R. Evans' latest book, Retail Management: A Strategic Approach, Published by Prentice Hall.