Inefficiencies at retail which give rise to out-of-stocks can translate into a loss of $634.1 in sales annually for the retailer industry.
That conclusion was from a study conducted by retail research firm IHL Group, which was completed on behalf of data analytics firm OrderDynamics, a multinational company with offices in the U.S., Europe and Asia. The initial data from May indicated that $1.75 trillion is lost through returns, out-of-stocks and overstocks. The study referred to the losses as part of a “ghost economy.” The June report drilled down on the loss of sales from returns, a $642.6 billion drain on the $14.5 trillion global retail market. The latest report focused on out-of-stocks, which has a $634.1 billion toll on the sector. The final category regarding overstocks, with the drill-down data expected in October, accounts for a loss of $471.9 billion. The report analyzed data from three retail channels: general merchandise such as department stores and specialty retailers, fast-end checkout systems such as at drugstores, mass merchants and warehouse clubs, and the broad hospitality group that includes hotels and casinos.
John Squire, OrderDynamics’ president, said the last time the study was done was in 2012. The latest is the sixth time overstocks and out-of-stocks were part of the study, with returns a new component in the latest commission.
Squire noted that the out-of-stock situation has gotten worse over time. The total cost of out-of-stocks has grown by $177.8 billion in three years from $456.3 billion in 2012. One contributing factor is the “proliferation of products at the online channels, which is making it harder for retailers to predict how much inventory to have to meet supply and demand,” Squire said.
In the drill-down for the out-of-stocks category, the survey takes into account any time customers leave without buying something that they intended to buy for any reason other than price.
Empty shelves account for a loss of $238.1 billion in sales. North America seems to have fewer issues with this because of retailers’ propensity to err on the side of having too many items rather than not enough. The problem when there are empty shelves is usually due to forecast issues or planned scarcity by vendors. Worldwide, the question is centered more on availability of product. Retailers that aren’t as well capitalized tend to maintain fewer items in stock. North America contributed $37.1 billion in lost sales for the category, while Asia-Pacific accounted for $108.4 billion in the loss column.
Customers who can’t find the help they need also sometimes walk out empty-handed, contributing $120.8 billion in lost sales. Common in North America due to inadequate staffing, the conclusion was that proper labor scheduling technology could help in lowering the cost. Here, North America contributed $29.6 billion to the overall category, while Europe-Middle East-Africa saw a loss of $31.8 billion. Asia-Pacific led the way with a $47.6 billion loss, while Latin and South America contributed the least amount of loss in the category at $11.8 billion.
Another subcategory under out-of-stocks is when employees can’t find the products, which contributed a $68.1 billion loss to the overall category. Lack of training, disconnects in inventory count and product that is misplaced in the stockroom are common problems. Here, Asia-Pacific led the way, accounting for $26.8 billion in losses, followed by the EMEA at $19.6 billion. The loss tally in North America was $14.7 billion, with LATAM at $7 billion. Improvement in training and inventory accuracies can help, such as through better systems and radio-frequency identification at the item level. The study said when RFID is used, “retailers have seen this number reduce by 50 percent in tagged categories.”
Another area that hurts retailers is when there are pricing mismatches compared with promotions, accounting for a loss of $74.1 billion. “Linking pricing and promotion systems goes a long way here,” the report said. The report notes that “bait and switch is very common around the world and is actually done on purpose in [a] lot of countries.” In the general merchandise category, Asia-Pacific led the way with lost sales of $15.7 billion, followed by the EMEA at $9.6 billion, North America at $6 billion and LATAM at $3.4 billion.