Growth strategy for a trading company: SKU rationalisation first

Key Takeaways

• Adding product lines is the default growth move for a trading company, but complexity costs accumulate below the gross-margin line (in warehousing, purchasing and customer service) where most accounting systems never allocate them back to the SKU that caused them.
• A widely used heuristic in distribution puts roughly 80% of revenue on around 20% of a catalogue's SKUs; the long tail of C-items rarely earns its shelf and warehouse space, even when each one looks profitable in isolation.
• Three numbers decide which SKUs to cut: gross margin per SKU, sales velocity (inventory turnover), and the working capital the SKU ties up while it sits unsold.
• UAE distributors were already cutting stock levels through late 2025, with panellists citing reluctance to hold additional inventory: rationalising your range now works with that caution rather than against it.
• The point of cutting SKUs is not a leaner catalogue for its own sake. It is releasing the cash and operating capacity that funds the next growth channel.

Most trading companies treat growth as an adding problem: more SKUs, more suppliers, more shelf presence, more ways for a customer to say yes. It is the intuitive move, and it is usually the wrong first one. A catalogue that has grown for several years without a corresponding prune is carrying dead weight: SKUs that tie up warehouse space, complicate purchasing, and consume sales and finance attention in proportion to their count rather than their contribution. Rationalising that range before adding to it is not defensive housekeeping. It is how a trading company frees the capital and operating capacity that actually funds growth.

Why more SKUs rarely means more growth

The case for product breadth is straightforward: each new line is a chance to serve a customer you would otherwise lose to a competitor with a wider range. The case gets weaker once you account for what each addition actually costs. McKinsey's research on portfolio complexity found that the true cost of a broad product range sits mostly below the line finance normally measures, in more frequent changeovers, purchasing and supplier-management overhead, warehousing and transport handling, and customer service spread across more items, and that reducing unnecessary variety through standardization can cut those costs by a meaningful margin, up to around 7% in the cases they studied (McKinsey, "Finding the true cost of portfolio complexity", retrieved 2026-09-04). None of that overhead shows up on the P&L line for the individual SKU that caused it. A slow-moving line looks fine on a per-unit gross margin basis right up until you allocate the warehouse slot and the working capital it absorbs while sitting on a shelf, at which point plenty of "profitable" SKUs turn out to be quietly subsidised by the fast movers around them.

Harvard Business Review's account of unmanaged product proliferation makes the same point from the revenue side: unchecked line extension can erode the coherence of a business faster than it grows the top line, and companies that let their range expand without a matching discipline on which lines to keep have seen material revenue and margin damage over a decade of unmanaged growth (Mocker & Ross, "The Problem with Product Proliferation," Harvard Business Review, retrieved 2026-09-04). Variety itself is not the problem: variety without a pruning discipline is what compounds cost and dilutes attention faster than revenue growth offsets it.

The 80/20 pattern most catalogues already show

Pull sales-by-SKU data for almost any trading company that has operated for a few years and a familiar shape appears: a small share of the catalogue accounts for most of the revenue, and a long tail of items each contributes very little on its own. This is commonly described using the Pareto principle (roughly 80% of revenue from around 20% of SKUs) and while the exact split varies by business, the pattern shows up reliably enough across retail and distribution catalogues to be a reasonable starting assumption rather than a rule you need to prove from scratch.

The standard way to act on that pattern is ABC analysis: rank SKUs by contribution (revenue or margin) and split them into bands. A-items are the vital few that justify close attention and reliable stock availability; B-items sit in the middle and usually keep the status quo; C-items are the long tail. C-items are not automatic candidates for deletion (some exist to complete a range, satisfy a key account, or block a competitor) but every C-item should have to justify its place rather than survive by default because nobody has looked at it since it was added.

Three numbers, not gut feel

Deciding which SKUs to cut on instinct ("that one never seems to move") is how catalogues bloat in the first place; nobody notices decline SKU by SKU. Three measurable numbers do the job more reliably.

Gross margin per SKU. Not category margin, not blended margin: the actual margin the specific SKU earns after landed cost. A SKU with a thin or negative margin is subtracting from the business every time it sells, regardless of how much revenue it generates. Run your live numbers, including current freight and duty inputs, through the profit margin calculator rather than relying on a margin assumption set when the SKU was first listed: landed costs move, and a line that was comfortably profitable eighteen months ago may not be today.

Sales velocity, or inventory turnover. How fast the SKU actually sells relative to how much of it you hold. A SKU that turns twice a year ties up capital for roughly six months between replenishment cycles; one that turns twelve times a year recovers its cost in weeks. Gross Margin Return on Inventory Investment (GMROI) combines margin and turnover into a single figure (gross margin divided by average inventory cost) and is the standard retail and distribution metric for spotting inventory that is technically profitable but a poor use of capital: a GMROI below roughly 1 means the margin the SKU earns does not even cover what it costs to hold (Gross margin return on inventory investment, Wikipedia, retrieved 2026-09-04).

Working capital tied up. Multiply average stock-on-hand by unit cost for each SKU and look at what that number represents in aggregate for your C-band. It is common for a trading company to find that a fifth or more of its inventory capital sits in SKUs generating a small fraction of revenue: capital that is not available to fund a new product line, a marketing push, or simply better terms with a key supplier while it sits in slow-moving stock.

A SKU that scores poorly on all three (thin margin, slow turn, meaningful capital tied up) is a clear cut. A SKU that scores poorly on one but well on the others usually deserves a second look before deletion: a low-margin, fast-turning line might be a legitimate loss-leader that pulls in higher-margin business alongside it, and that context matters more than the single number.

Doing the range review before scaling, not after

The instinct to expand a catalogue and the instinct to fund a new growth channel come from the same place: the belief that more inputs mean more output. The go-to-market guide for growth and advertising makes the equivalent case on the acquisition side: a channel is only worth funding once you know the ratio of what a customer is worth against what it costs to win them, not by assumption. SKU rationalisation is the inventory-side version of the same discipline: know what each line actually returns before deciding whether it deserves more shelf space, more purchasing effort, or a spot in next quarter's catalogue at all.

There is also a timing argument specific to the current UAE environment. Distributors across Dubai were already pulling back on stock levels through the end of 2025, with inventory levels falling at one of the steepest rates in the survey's history and businesses citing a reluctance to build stock further, preferring to work through what had already landed before committing to more (S&P Global Dubai PMI, December 2025, retrieved 2026-09-04). That caution is a reasonable response to freight costs and routing disruption that changed how landed cost is calculated for anything imported through the region this year: the import logistics guide covers how the surcharge stack and customs reclassification now move landed cost independently of your supplier's headline price. A range review is a natural companion to that caution: rather than holding less of everything indiscriminately, hold less of what was already a weak performer and protect stock availability on the SKUs that actually carry the business.

Once the cut is made, the freed capital and freed operating attention are what should fund growth, not a general top-line target. Redirect the cash that was sitting in slow-moving stock toward the SKUs and categories with the best margin and turnover combination, and redirect the purchasing and warehouse time that used to go into managing a long tail toward reliably stocking the range that actually sells. Growth funded this way compounds from a narrower, more profitable base rather than diluting itself across an ever-wider one. The growth strategy track for trading companies is where that redirected capital gets mapped to an actual next channel, rather than sitting as an undirected cash buffer.

Frequently asked questions

How many SKUs should we cut in a first rationalisation pass?

There is no fixed target that applies across trading businesses, and any percentage quoted without knowing your specific margin and turnover distribution should be treated with suspicion. Run the ABC classification on your own catalogue first: the C-band, typically the bottom-ranked items contributing a small share of revenue, is where the review should start, and the right number to cut is whatever fails the margin, velocity and working-capital tests once you have actually run them.

Won't cutting SKUs mean losing customers who want those items?

Some, occasionally. That is why C-items need a second look rather than automatic deletion: a SKU that completes a range for a key account or blocks a competitor from an easy win can be worth keeping even at weak individual economics. The point of the review is to make that a deliberate decision with the numbers in front of you, not to keep every line by default because removing one feels risky.

How often should a trading company repeat this review?

At minimum annually, and ideally aligned to your supplier renewal or catalogue-planning cycle, since new SKUs added between reviews are exactly how the long tail rebuilds itself. A range that was rationalised two years ago and never revisited is likely back to where it started.

Does SKU rationalisation apply to a distribution business the same way it applies to a manufacturer?

The mechanics differ slightly: a distributor is not carrying tooling and production-line changeover costs the way a manufacturer is, but the underlying logic holds: every SKU you carry consumes purchasing time, warehouse space and working capital regardless of whether you make it or import it, and a distributor's landed cost and inventory turnover data map directly onto the same margin-velocity-capital framework.

The bottom line

A wider catalogue feels like growth while it is being built and behaves like a drag once it is in place. The SKUs worth adding to fund expansion are easier to identify, and the capital to fund them easier to find, once the ones that were never earning their space have already been cut. Rationalise the range first (using margin, turnover and working capital rather than instinct) and the growth strategy that follows is funded by real numbers instead of a general belief that more is better.

Figures were verified on 4 September 2026 against McKinsey, Harvard Business Review, S&P Global and Wikipedia. Inventory-cost and margin figures are illustrative frameworks rather than UAE-specific benchmarks. Run your own catalogue's numbers before acting on any cut.