Poor inventory position is having a disastrous impact on the physical store retailer. IHL’s latest study (The True Cost of Out-of-Stocks and Overstocks), Inventory distortion (the annual cost of overstocks and out-of-stocks) has risen to $1.9 trillion in losses for retailers across the globe. This is increasing Amazon US Households Marketshare.

To put that into perspective, if inventory distortion was equated to GDP, it would be the ninth-largest country in the world – roughly equivalent to the total economic output of Italy.

To solve this issue, retailers must adopt an attitude of engagement and accountability. While it is easy to blame the pandemic, inflation, the war in Ukraine, or other reasons for this issue, the retailers that will survive and thrive will be those able to continually adjust to meet consumer needs.

IHL’s 2022 consumer study confirmed that in a world with increasing online orders, the primary reasons consumers shop their local retailers are: they need the items now (75%) or they want to touch and feel or try on items before purchasing (57%).

In the last two years, these same consumers suggest that this has become much tougher as they are losing trust in their local retailer to have in stock what they want to buy when they want to buy it.

When consumers can’t find what they came into the store to buy, it erodes their trust in that retailer and that erosion of trust is increasingly driving them to Amazon and other online retailers/marketplaces.

A Closer Look at Segments

When IHL asked consumers if their trust in their local retailer increased based on the stores having in stock what they want to buy, the number of those whose trust decreased was 4-35x that of people increasing their trust.

Percent of US Consumers Increasing Trust in Retailers to Be in Stock – Last 2 Years

The best segment was Mass Merchants where 35.5% said their trust decreased in the stores they shopped and only 7% increased their trust in those stores.  The worst segment was Department Stores, where only 1% said their trust increased in the last two years compared to 35% reporting their trust decreased.

Of those same consumers, 32% said their trust in Amazon increased in the last two years, a number 4.5x higher than Mass Merchants and Electronics and as high as 35x higher than those who increased their trust in their local Department Store.

Percent of US Consumers Decreasing Trust in Retailers to Be in Stock – Last 2 Years

On its own, this data is concerning; but even more alarming is the shift in trust among the highest earning consumers. For households with incomes between $100,000 – 150,000, 50% increased their trust in Amazon in the last two years compared to a maximum of 9.4% for the best of local retailers (Specialty Apparel).

And for households with incomes over $150,000 annually, their trust in Amazon increased 35.9% with the highest physical retailers increasing trust being Home Improvement retailers at a 10.9% increase in this income range.

Trust in Amazon increased by percentage in the last 2 years by income in households with incomes between $100-$150k

Households with income between $100-$150k increased trust in Amazon in the last 2 years by 50%

Households with income over $150 increased trust in Amazon in the last 2 years by 36%

Thus, the in-stock position issues of local retailers are driving consumers to Amazon and other online marketplaces and the time for retailers to fix their issues continues to dwindle. When the number-one reason consumers come to your store is because they need something now and you don’t have it, it doesn’t matter how good your commercials are, how bright your stores are, or how friendly your associates are. You are losing those customers.

Power of Impulse

We have seen a lot of data regarding the loss of impulse purchases when customers shop online instead of in-store. But just how big is this loss?

Consumers report that between 13-22%% of their total bill in stores is made up of impulse items depending on the type of retailer shopped.

Electronics is the lowest percentage at 13.6% of the total expenditures per store trip being impulse items, but they are as much as 22% of items purchased at mass merchants.

Average Percentage of the Total Purchases That Are Impulse Items by Segment

With the growth of online shopping over 50% in some categories like fashion, this loss of impulse purchases is a major concern for retailers. And, when added to the erosion of trust in physical retailers, this becomes particularly critical.

Amazon Prime Impact

According to a recent IHL survey of US consumers, 80% of US households have an Amazon Prime membership.

Percent of US Households with Amazon Prime by Income Range

Percent Increase in Impulse Items in Local Store Purchases by Amazon Prime Members (compared to Non-Prime Members)

How much more?

For Amazon Prime Members from 30%- 71% more of their purchases at the store level are from impulse items. While they don’t impulse shop as much when they shop on Amazon, they go hog wild when they get to a physical store.

The challenge is that when Prime members go to local stores, they experience out-of-stocks up on up to 55% more of their shopping trips than non-Prime members.  As a result, they’re choosing to shop less and less at their local physical stores.

The bottom line is 80% of households have Prime, they spend 30-71% more on impulse items if you can get them to the stores, yet when they go to the stores for what they actually need, they experience up to 55% more out-of-stocks. So the retailers lose the initial sale, the impulse sales and increasingly lose that customer for the future. 

How do Prime Members act when the local store is out-of-Stock?

They take out their phone and purchase online from your competitor at 73% higher rates than non-Prime members. They are also 40% less likely to ask an associate to check other stores or your online site.

Customers report they will give up on your store after 2.5 – 3 out-of-stock experiences.

When they do, you lose out on the core shopping trip, the extra impulse purchases, and customer loyalty in the future as well.

How Prime Members Act when Physical Stores are Out-of-Stock

Quick-Win Improvements to the Shopping Experience Pay Off

North America retailers are losing $27 billion in sales because the lines are too long.

In the mind of consumers, an out-of-stock is any time that they visit your store and leave without purchasing what they came in to buy. It’s that simple but complex in execution for retailers.

However, there are two specific technologies that can be deployed almost immediately to improve your perceived stock position.

In our recent research, when people leave stores without buying what they intended to purchase, 14.5% of the time it was not because of empty shelves, but that the checkout lines were too long.

To put that into perspective, this means that in North America retailers are losing $27 billion in sales simply because the lines are too long, and consumers walk out the door. Adding items like Self-Checkout or Scan & Go technologies can convert those shoppers who are already in your stores and want to buy.

Retailers lose $90 billion in sales a year worldwide due to discrepancies at the shelf.

Another area where consumers find great disappointment is in the area of pricing disconnects.

Retailers are losing close to $90 billion in sales worldwide at the store level simply because the pricing on the shelves didn’t match the price in the promotion or online.

Retailers have admitted that the personnel shortages are so acute in some regions of the US, they simply don’t have the people to update prices.

Here, electronic shelf labels (ESLs) are a no-brainer. These devices also allow retailers to dynamically price against their competitors and change prices based on cost of last shipment.      As a result, retailers not only minimize sales but can recapture the best profit margins.

Further, when factoring the tremendous savings in labor costs, smart retailers are deploying ESLs as fast as possible. Recent IHL research among the fastest growing retailers showed a plan to adopt ESLs at a rate 843% faster than the average retailer in the next two years.

Healthy Inventory Wins Customers and Improves Profitability

When we look at the tremendous $1.9T cost of out-of-stocks and overstocks worldwide, we must first admit that there are many reasons that are out of the direct control of the retailer.  But there are also many that are controllable by the retailer.

Approximately 50% of the total cost of inventory distortion can be controlled through training, processes, and systems.

Technology can be a great enabler of retail differentiation and the flawless omnichannel execution that wins customers and accelerates retail growth and innovation.

Demand forecasting

Digital demand planning and forecasting technology takes into consideration the uncertain realities in the market. The latest solutions provide a range of possible outcomes and their likelihood of occurring so you can balance inventory accordingly.

AI-powered solutions further the ability to model customer demand based on promotions, seasonality, and both internal and external factors. A single plan is no longer an option; forecasts need to account for uncertainty and adjust the inventory mix accordingly.

Inventory optimization

To maintain healthy inventory, inventory mix optimization is crucial. Inventory optimization enables you to decrease the amount of working capital by reducing unnecessary inventory buffers and safety stock. Other cost reductions can be seen from a decrease in backorders, overstocks, and stockouts.

Optimized order fulfillment and real-time inventory visibility

With increasing selling channels, it’s crucial for retailers to capture events across systems to create a real-time record of inventory. This is used for centralized availability and eligibility management and to display accurate and real-time inventory across channels for a consistent customer experience.

Order fulfillment systems evaluate fulfillment options automatically across multiple objectives to select the ideal fulfillment location.

Automated replenishment and demand sensing

For those staple items that are needed to be in stock regardless of the season, automating replenishment is a critical capability of the best-performing retailers. Demand sensing uses external data streams to continually monitor points of sale and fine-tune the forecast in response to demand and supply changes.

In IHL research, we have found that retailers that use demand sensing technology have sales increases that on average are 18% higher than their competitors.

AI decision support

From forecasting to assortment planning and allocation, AI takes complex internal and external data to automate micro decisions and uncover insights and opportunities otherwise overlooked. With AI decision support, retail planning tools eliminate time-consuming manual work and provide increased efficiency, while making the most of inventory and product assortments. The future of retail is the race to clean and unify data so that artificial intelligence and machine learning can enhance the overall operations.

A New View of Inventory Going Forward

We fully expect the largest of retailers to do their own analyses of their markets, suppliers, and products to decide which investments are essential and which are more discretionary to be better prepared for the next external disruption. They will choose more domestic suppliers and near-shoring for the most critical categories, perhaps even increasing warehouse space.

These discussions of just-in-time and just-in-case are turning into a decision on just enough.  It is that healthy inventory balance that will characterize the most successful retailers going forward.

These discussions are being held in executive boardrooms around the world. In doing so, retailers can be better prepared so as to not be caught off-guard due to a lack of raw materials or port shutdowns.

As we look at the entire inventory distortion issue, it is often hard to cut through the news to understand performance is actually improving on an individual retailer basis when systems are deployed properly.

The most significant challenges to inventory distortion are the availability of workers and the disruptions outside of the immediate control of the retailer.

But $1 trillion of the $1.9 trillion inventory distortion issue is the result of inflexible inventory systems and overreliance on production in a small handful of countries. Add a pandemic, port shutdowns, governments determining who is an essential retailer and who is not, and an unexpected war between two countries controlling raw materials significant to the economies of the world, and the job of getting inventory correct is a nearly impossible job at the moment.

And yet, the smartest retailers are not only investing in the improvements necessary, but they are also doubling down on these improvements to create differentiation and revenue growth despite protracted disruption.

They are moving from being reactive to being proactive in their preparations. They have engagement and accountability around their inventory issues, they control the immediate controllables, they are learning to be comfortable being uncomfortable by deploying systems, processes, and training to be flexible.

And they plan to not only survive but thrive in whatever conditions the future brings.