Though the year is barely half over, the major story of 2010 is clearly the retailer rush to pare assortments, popularly known as SKU rationalization.

This exercise in reducing the number of items on retailer shelves has taken on a life of its own. It has been cited as a major impetus for the recent top management changes at Walmart, moves that have revived the retailer’s morale, realigned its priorities and given the company’s long-neglected suppliers a fresh reason to hope for the return of better days.

SKU rationalization has been cited as the primary reason Walgreens’ front-end sales have been so sluggish of late, and they have sparked new rounds of speculation about a senior manager realignment.

SKU rationalization has thus far been a bonanza to CVS, a drug chain that, until recently, had been the supplier community’s bête noire for its willingness to sacrifice the sales of leading brands in favor of the profit of the Nos. 2 and 3 brands while replacing second- and third-tier brands with private label equivalents.

Indeed, suppliers are suddenly embracing America’s largest health care retailer for its commitment to a strategy that depends less on reducing its SKU count than on emphasizing product relevance by extending its efforts to customize its stores to the customers that each store serves.

The rush by some retailers to pare health and beauty aids assortments has certainly helped others. Target, for example, has benefited from customer and supplier dissatisfaction with Walmart, with the result that the retailer’s H&BA assortment, generally viewed as a minor part of Target’s presentation, has gotten more attention of late from both shoppers and suppliers — and even from the merchants in Minneapolis, once resigned to playing second fiddle to Walmart where completeness in health and beauty products is concerned.

Regional food and drug chains have capitalized on the misguided SKU-reduction exercises of their competitors by emphasizing their assortments and promoting their willingness to stock those products missing from competitors’ shelves.

Indeed, among mass retailers, only the lame and the halt have failed to take some steps to capitalize on the mistakes their major competitors have made in cutting items too quickly and with too little attention to customer loyalties.

But the most confused, and confusing, reaction to SKU rationalization has come from the supplier community. SKU reduction has been the most powerful weapon suppliers have come upon in a very long time to establish or re-establish a dialogue with the retail community to convince that community that some products deserve to be sold in their stores even when not accompanied by heavy advertising and promotional programs simply because customers prefer them.

But with very few exceptions — most notably that of a top-level meeting of major retailers and small and midsize suppliers convened in New York City late last month to explore the impact of brands on shopper buying habits — this weapon has been largely ignored. With the exception of the New York City gathering, this inactivity or misdirected activity has been particularly apparent among smaller suppliers, those companies whose dependence on niche or specialty brands makes them particularly vulnerable to SKU reduction.

At bottom, there are two realities here. The first is that SKU reduction has become necessary, primarily because of the supplier community’s relentless and sometimes irrational quest to get more space by adding line extensions to brands already overrepresented on retailer shelves. Inspect the dentifrice, shampoo or cough/cold categories, and you would be hard-put not to identify sizes, flavors, strengths or product claims that cry out for elimination.

No, the retailer decision to reduce the number of SKUs on store shelves has not been a mistake; rather, the mistake was in the way retailers have approached that assignment.
Second is the fact that suppliers, despite their protests, threats and cries of discrimination, have not been all that badly hurt by SKU reduction. True, some sales have been lost — and some products have suffered. But shoppers are a loyal breed. To a significant degree, they are faithful to the products they have become accustomed to buying, especially when those products are unique or innovative.

True, some shoppers may find acceptable substitutes. But others will switch stores before they switch brands.

The admission by Walmart, and realization by Walgreens, that SKU reduction came too quickly and with too little thought about the shopper and supplier communities proves anew that the very best retailers are capable of realizing their mistakes and correcting them before too much damage has been done.

The sad news in all this is that America’s small and midsize suppliers — a community that, with good reason, had become defensive, frustrated and defeatist in its dealings with retailers — have been of little practical value in the SKU rationalization debate. Rather, it has been the shopper and, ultimately, the retailer communities that have risen to the occasion — while the suppliers with potentially the most to lose have, with a few notable exceptions, been content merely to feel sorry for themselves.