Smaller Is Beautiful

US CPG houses in general have been shedding brands for some time, and food marketers plan on sticking with that model in the current economic downturn. Kraft Foods Inc., the largest U.S. food maker, is dropping Handi-Snacks pudding in favor of its more-profitable Jell-O brand. Heinz has vowed to drop two items for each new one it introduces, with long-term cuts between 15-20% within 3 years. These follow a 50% decline in products from 2002-2006. Sara Lee plans on cutting their product lines 8% this year.

The tactics likely will not adversely effect consumers, since grocery shelves currently are weighed down with 50% more SKUs than a decade ago, often made up of new versions, flavors and sizes of existing lines. Line extensions have been a lazy way of growing brands for a long time, but pruning existing products is not enough for some manufacturers: J.M. Smucker Co. picked up Procter & Gamble’s Folgers coffee, Jif peanut butter and Crisco shortening as part of P&G’s downsizing of its portfolio. Other slimmer companies include Lance, Inc. who added 400 items when it purchased bankrupt Archway cookies, but has trimmed its entire portfolio to 350 total. Fiscal 2008 sales were $852.5MM, up 12% as a result.

Since it’s not uncommon for 20% of any company’s products to generate 80% of profits, eliminating SKUs reduces production costs, allows concentrating marketing dollars on successful lines, and by extension, cuts slotting fees. There are occasionally reprieves, though, for brands headed to the executioner’s block. Fanatical lovers of Kellogg’s Hydrox cookies used an online campaign to win at least a temporary return of the line, though MillerCoors decision to drop “malternative” malt-based Zima was met by silence. And cuts can reduce top-lines sales, often the chief yardstick used by Wall Street for rating publicly-held CPG companies. When Kraft made these cuts, sales unit volume fell 5.2% in the following quarter, though Kraft claims only 1.5% was due to the changes, with the remainder a reaction by consumers to higher prices and reduced retailer inventory.

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