How Out-of-Stock Items Impact Your Business

It is a situation that we have all been through, at some point in our lives. We run out to grab our favorite brand of snack or worse a can of formula for our baby. Maybe even drive a little further than usual, because we saw it advertised on special and then get to the store and the shelves are empty.

As a consumer, it can be very inconvenient, if not infuriating, when you walk into a store and the item you are looking for is out of stock (OOS). As a retailer or a brand they effect can be much worse; it can be devastating to your bottom line.

How do consumers react?

Consumers can react in many different ways to items; they were hoping to buy, being out of stock.

Consumers respond to out-of-stock items in different ways:

  • They may switch stores and buy the same item at another retailer.
  • If they are a very loyal customer of the store and it is not a dire need, they may wait and buy the item later.
  • If they are loyal to the brand, they may substitute a different size or variety of the same product.
  • They may switch brands all together.
  • They won’t buy the item anywhere.

These are reactions that can be immediately seen at the POS (Point of sale), but the emotional or mental reaction can be much more telling. If the product has been heavily advertised and promoted, consumers may be left with a feeling of being let down or in extreme cases, of being baited. Both of these reactions can be detrimental to both the retailers and the brand’s image in the public eye.

Actual Cost; By the Numbers

It has been estimated in the FMCG sector alone that at any one time 7-10% of items are off the shelf due to being out of stock. According to the Food Marketing Institute and Grocery Manufacturers of America promotional and fast selling items average being OOS in excess of 10% of the time and cost the retailers of the country a full 4% off of their annual sells margin.

In one recent joint study by Goizueta Business School at Emory University, The College of Business and Administration at the University of Colorado and the Institute of Technology Management at the University of St. Gallen in Switzerland, it was reported that customers will buy the same item at another retail outlet 21%-43% of the time, 25% of the time not make any purchase period and the rest of the time will opt for a similar but lower priced alternative. From the point of view of either a brand or a retail establishment, these add up to major profit losses, without even mentioning the loss of consumer confidence they may experience.

People are creatures of habit and operate as much on an emotional level as they do on a logical one. That is the basis of most modern advertising theory. By not delivering the product as promised, you may actually be doing more harm than good by advertising products that are not delivered and these wasted expenditures should also be factored in when calculating the impact that OOS products have on your company’s bottom line.

Conclusion

This is just most cursory of looks at a subject that, in fact, many books have been written on. It doesn’t even consider such factors as the disruptions that rush orders cause to warehousing centers and distribution networks trying to make up the missing stocks or the administrative cost associated with customer complaints.

Thankfully, though, with the help of evolving technology and the widespread availability of information sharing, through the use of cell phones and other modern devices, it is now much easier to monitor and correct stock shortages before they have a chance to disrupt your business or disappoint your customers.

Companies like Shelvspace make it possible to not only monitor and correct inventory levels before they become critical, even while you are on the go, they offer reporting and data mining opportunities the likes of which have never been available before.

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What frequency should you be auditing your stores?

Shelvspace is working with several companies that are using their own field teams to audit stores.  We also have several companies that use outsourcing or crowdsource as a way to monitor their activity to our partners.   

One of the first questions we often get asked is, “How often are others going out to stores and performing audits?”

Our answer to them is, “It varies greatly and for several different factors.” However, in our experience, the common Industry approach usually falls into one of these buckets:

Spot Check – Let’s collect information randomly when we can and share it.  Unfortunately, many that leverage broker networks and don’t have their own field teams, or those that have not truly baselined their retail execution fall into this trap. Initially, It feels good to get some extra visibility, but tends to fall short when it comes to finding and fixing root causes. This technique however can be effective for cases like validating a new product launch or confirming execution of new promotions.

Random Sampling – This is the most economical.  A company does a sampling of their key accounts on a periodic basis. Some managers are skeptical of this approach since they are not getting a full picture of the entire retail coverage, however, so long as you set the right sampling size and frequency this can be very effective at systematically finding issues and providing facts to the people needed to fix them.Remember that retail execution doesn’t always require hardcore statistical modeling.  You just need to make sure your products are placed correctly on the shelf, and to know whether or not they are your best selling accounts.  Doing as little as 10-20 audits per month or every two months across a wide set of accounts will provide your team with a good foundation for problem and opportunity identification.

ABC Sampling – Brands might use many methods of sampling, but one method is to group their stores into A, B, and C accounts based on top selling brands.  One of the best examples of ABC Sampling is to sample 10% of the top accounts and then 10% of the bottom accounts.This allows you to collect additional facts beyond data to help improve your sales team.   With additional information, you’ll be able to answer questions like, “Are the sets different?  Are stores having out of stock or other issues? Are your competitors doing things differently?”  Pictures can also help answer many questions compared to relying only on what the data provides you.

Full Account Audits – The last approach is auditing all of the stores.The economics of this sometimes w ork if you are a top selling brand and/or there are a large number of retail execution issues that require resolution.  The ability and ease of doing this has greatly increased recently do to crowdsourcing options and is also sometimes effective for doing initial baselining before moving to a more sampling based effort.

In summary, don’t just spend money to spot check accounts without a game plan, or use a repeatable system of performance management.  Instead, have a process to actually fix it. The last thing you need is another random data point that tells you things are off with no way to take action.    

The good news is doing all of this has become way easier today, compared to the past. For more information on audits or on execution fixes to common store condition problems, please reach out to us at shelvspace.