Dollar General is taking a key strategy from Costco as it aims to lower costs

• Dollar General is sharply reducing the selection of products it sells in order to cut costs.
• The discounter previously stocked about 12,000 unique items, referenced by SKUs.
• The strategy has worked well for Costco.

Some Dollar General shoppers may see their favorite items disappearing from shelves as the discount retailer looks to control inventory costs.

The company said last week that it is slashing as many as 1,000 unique items, referenced by stock keeping units (SKUs), from its product line-up. Exact counts vary by location, but the company previously said most stores tend to carry around 11,000 to 12,000 SKUs.

As a so-called "limited selection" retailer, Dollar General's count is a mere fraction of the typical US supermarket, which offers about 30,000 to 40,000, or a Walmart Supercenter, which reportedly carries more than 140,000 items.

The move inches Dollar General closer to Costco's time-tested strategy for finding savings through simplicity — the wholesale club famously keeps its SKU count to around 4,000 in its warehouses.

CEO Todd Vasos hinted at how this looks in practice when he previewed the move in Dollar General's earnings call last December.

"We may have five or six different variants of mayonnaise on the shelf today," he said. "We can easily drop one or two of those. The consumer is not going to know the difference."

Because each flavor, color, or size of a product requires a unique SKU, there's often a fair amount of room for retailers to focus on a crowd favorite and skip the hassle of trying to match everyone's unique preferences.

Simplifying the selection also can drive more sales toward higher volume items, which can improve economies of scale, GlobalData retail analyst Neil Saunders told Business Insider.

"Low SKU counts with high volumes is a model that serves a lot of price-focused retailers very well," he said. "Costco uses this, as does Aldi. It's all about leveraging efficiency to reduce costs which enables lower prices."

At the same time, retailers need to make cuts with care to make sure they don't eliminate items that customers are especially fond of.

In fact, fewer options may come as a relief to some shoppers suffering from decision fatigue, as any Costco diehard will tell you.

And as Costco shows, retailers can still offer a staggering range of product categories without loading up on an infinite variety within particular products themselves.

The benefits of simplifying the selection also extend to store staff and the company's distribution teams, Vasos said, since that's one less product that has to be shipped, tracked, and stocked on a shelf.

That simplification could boost the retailer's efforts to clean up its stores: Some Dollar General locations have been awash in unpacked inventory, creating fire hazards and a nightmare for overworked employees. Some workers told BI that their stores were filled with Christmas decorations, dog food, and other products that weren't selling as fast as Dollar General's distribution centers were sending them to stores.

Last summer, Dollar General took a $95 million inventory write-down as it cleaned those stores up. It also invested more in worker pay to help. Analysts have pointed to the clutter as one factor weighing on the company's financial results.

Supply chain snafus during the pandemic threw a spotlight on the expense associated with offering a seemingly infinite array of consumer choices, and companies are still looking for ways to ensure that shoppers are buying enough of something to make it worth selling.

Several major consumer products companies have said in recent months that shoppers didn't really notice a lot of the items they stopped selling during the pandemic.

More recently, Hasbro — the maker of Play-Doh, Nerf, and more — said it has eliminated about half of the SKUs it used to offer.

"These SKUs were only 2% of our revenue and were duplicative and unprofitable, clouding the network and creating cost for us and our retailers," CFO Gina Goetter said.

Returning to Vasos' example, at the end of the day, how many different kinds of mayonnaise does a person really need?