The Silent Killer in Your Assortment: Why Over-SKU'ing is Draining Your Margins

Retail doesn’t have a markdown problem. It has an overassortment problem that shows up as markdowns.

The distinction matters. Markdowns are the symptom: visible, measurable, and easy to budget for. Overassortment is the disease: harder to see, harder to quantify, and almost never owned by a single function. At its core, overassortment is a capital allocation failure hiding inside the assortment plan.

The industry's inventory reckoning in 2022 should have been a permanent wake-up call. U.S. retail inventories increased by roughly $78 billion that year alone — a 12 percent jump — sending shockwaves through earnings reports and stock prices. Retailers across categories acknowledged they had misjudged how quickly consumers would shift away from pandemic-era spending patterns.

But here's what most post-mortems missed: the inventory crisis wasn't caused by the pandemic. It was revealed by it.

How the Industry Got Here

Overassortment didn't happen because retailers are careless. It happened because the operating model of retail evolved faster than the decision systems that support it.

For two decades, the industry optimized for choice, coverage, speed, and risk avoidance. More SKUs meant more chances to convert. And for a while, the math worked — or at least appeared to.

Three forces quietly compounded the problem:

1. Digital shelf space removed the physical limits that once forced discipline. When shelf space feels infinite, assortment expansion looks cheap. That is until inventory, fulfillment, returns, and markdown costs surface downstream.
2. Data abundance created false confidence. Retailers had more information than ever (sales history, clickstream data, loyalty signals, promotional response), but most of it was backward-looking. Historical performance reinforced the belief that keeping marginal SKUs was safer than cutting them, even when velocity and margin were weak. The result? Assortments grew broader, not better.
3. Organizations optimized locally, not systemically. Merchants optimized for coverage. Planning optimized for turn. Marketing optimized for traffic. Finance managed markdowns as a budget line. No one owned the total cost of complexity across the enterprise so the long tail kept growing.

Consulting and industry research consistently show that a small percentage of SKUs drive the majority of revenue and profit, while a long tail consumes disproportionate inventory, operational effort, and markdown budget.

Why This is a Critical Issue in 2026

Inflation, supply chain volatility, labor costs, and demand swings have shortened the window to recover from mistakes. Overassortment amplifies that risk: inventory dollars spread thinner, underperformers identified later, markdowns deeper and faster.

Consumers have changed how they respond to choice, too. Today's shoppers decide faster, anchor on perceived fairness, and are influenced by culture, context and timing, not just availability. Too much assortment doesn't create clarity. It creates noise. And noise erodes conversion and trust.

Most damaging of all? Years of chronic discounting trained customers to wait. That's not a pricing problem. It's an assortment discipline problem that manifests as pricing pressure. Once customers stop believing full price reflects real value, margin erosion becomes structural, not cyclical.

The Proof That Less Works

The retailers and brands getting this right are demonstrating that cutting the tail doesn't mean sacrificing growth. It means funding growth differently.

Hasbro eliminated roughly half its SKUs, specifically products that were generating a minimal share of revenue. The result was a record operating margin of 20.3 percent in 2024, inventory down more than 50 percent, and larger investment behind fewer, winning brands. CEO Chris Cocks summarized the strategy simply: fewer SKUs, higher impact.

PepsiCo is making the same bet on the CPG side. The company announced plans to cut nearly 20 percent of its U.S. soda and snack SKUs by early 2026. But this isn’t just a cost play; it’s an innovation play. The savings from streamlined operations are being reinvested into new product development, including healthier reformulations like Simply NKD Cheetos and Doritos Protein, alongside pricing relief and advertising. PepsiCo now expects 2 percent to 4 percent organic revenue growth in 2026, up from 1.5 percent in the first nine months of 2025. The throughline: cutting the tail doesn’t starve the portfolio. It funds the innovation pipeline that keeps it relevant.

And then there's Costco, which has operated on the opposite model from the start. With roughly 4,000 SKUs — a fraction of what traditional retailers carry — Costco enforces relentless discipline. New items get a limited window to prove themselves; underperformers are cut without sentiment. The payoff is pricing power, operational efficiency, and membership renewal rates north of 90 percent year after year.

The Unlock: Confidence, Not Just Cuts

The goal isn't fewer products for the sake of simplicity. It's better allocation of finite capital against validated demand.

Every SKU in an assortment is a bet that customers will pay a certain price in sufficient volume to justify the inventory, space, and operational attention it consumes. Most retailers make thousands of those bets every season with incomplete information, then spend the back half of the year managing the losses.

Now, with predictive artificial intelligence, it’s possible to validate customer response before inventory is committed. When products are scored against real customer demand signals, not just historical sales, retailers enter the season with a leaner, higher-conviction assortment.

The Bottom Line

Overassortment became the industry default when choice was cheap and margin was forgivable. In today's environment, it's one of the fastest ways to destroy pricing power, capital efficiency, and customer trust.

The long tail is a choice. The retailers that learn to cut it with confidence — and reallocate those dollars into products and innovations that actually drive growth — won't just protect margin. They'll rebuild the pricing power that years of chronic discounting eroded.

The question isn't whether you can afford to cut the tail. It's whether you can afford not to.

Viki Zabala is chief strategy and growth officer at First Insight, a next-gen retail decision platform that helps retailers and brands create more profitable products and experiences.