Retail’s Biggest Threat – An Erosion of Trust
In a recessionary economy around the world, retail certainly is facing numerous daunting challenges as we look to the holiday period and 2023. Higher interest rates, slowing consumer spend, rising inventories (often with the wrong items) and inflation are facing retailers in the short-term, but it is a long-term issue that is more concern as an analyst.
In a recent survey, IHL asked consumers in the US and Canada if their trust in their local retailer having in stock the item they want to buy has increased or decreased in the past two years. We expected to see a certain level of decline based on challenges from COVID induced inventory shortages, however the actual results shocked us. In fact, for each segment measured, the number of consumers who said that their trust in their local retailer DECREASED was at a level 4x-35x that of those who said their trust INCREASED in their local retailers.
Time and time again, when we research why people shop in physical retailers instead of simply buying online, the #1 issue by far is because they need the product now. Whether it is for that last minute report cover their child needs for tomorrow’s school assignment or a weekend DIY consumer visiting the hardware store for the third time that Saturday, they are going to that store because they need the product now and expect the retailer to be in-stock for that product. Yet increasingly, consumers are finding their local physical retailer out-of-stock for what they want to buy leading them to increasingly go to online marketplaces to find what they need because that local retailer failed them when they had the need in the past.
In the same survey, we asked consumers how many chances they give to their local physical stores to be in stock before giving up on that retailer for that class of items? The answers ranged from 2-3 times depending on the type of retailer. Home Improvement and Mass Merchants get close to 3 chances while Department Stores and Apparel Stores only 2 chances to be in stock before no longer shopping there.
This is a critical loyalty issue for retailers. If you are out-of-stock…you truly will be out of luck for that consumer.
Further, the risk of waste of time to the consumers simply drives them online to marketplaces more and more. Worldwide we are already seeing that consumers are spending over 50% of their budgets for fashion and electronics online. And in Asia and Latin/South America, over 50% of the budget for Essentials like Groceries, Health and Beauty and Home Goods are already bought online. It is only in North America and EMEA regions where the majority of the budget for those categories are being purchased in physical stores.
Finally, this erosion of trust to be in-stock is having a critical impact on reducing impulse sales at the local store. Depending on the segment, consumers report that up to 20% of their shopping total when going to a local store comes from things they did not plan to buy. But what happens when they stop trusting the local store to have what they really need? Those impulse sales go away as well.
The bottom line is retailers can have the best marketing, best promotions, the cleanest stores, and the happiest and best trained associates, but if your consumers lose trust for you to be in stock for what they want to buy, they will stop coming to your stores and will buy from Amazon and other marketplaces.