Hidden within the $14.5 trillion retail economy is an ominous-sounding shadow, one that siphons off $1.7 trillion in lost revenues.
IHL Group calls this netherworld the “ghost economy” in a new report and attributes it to inefficiencies such as marketing mistakes, forecasting blunders, supplier issues, internal personnel issues, government legislation and that perennial retail favorite, the weather.
Overstocks, defined as sales that occur at a price point where the retailer takes a loss, account for $472 billion of lost profits; returns, $642.6 billion and out-of-stocks, $634.1 billion, according to the report IHL published with DynamicAction, “Retailers and the Ghost Economy: The Haunting of Overstocks.”
Forecast failures account for the lion’s share of overstocks, or $170 billion. “Bought too many” is the most common excuse. John Squire, chief executive officer of DynamicAction, said of overstocks, “It certainly impacts the bottom line and consumer expectations and consumer experience. Some retailers are grossly overstocked and some are understocked.”
Supply-chain issues are many and varied, but can be as simple as delivering too many units of a product or delivering the product too late. Suppliers not delivering the right quantity at the right time results in more than $42.5 billion in losses globally.
“Cole Haan, Eddie Bauer, Nine West and Express are looking for places where they’re overstocked in one size and bringing it to digital and exposing it to more customers than would have walked into their stores,” Squire said.
A theme throughout the report is harnessing Big Data to make better retail decisions. “Retailers can use forecasting capabilities to better understand consumer need,” Squire said. An example is a retailer selling white shirts in every size, but one size is getting returned. “Something’s wrong about the size 6,” Squire said. “But the returns data is not connecting to the sales data.”
The Internet and digital have made many things more complicated for retailers, including marketing. “Once you’re in an overstock situation, the coordination of silos between marketing and buyers is important,” Squire said. “They need to promote products in stores and online in different ways. Digital can move at a very fast pace.”
The merchandising organization touches everything, and it’s evolving to be much more scientific-minded, Squire said. Are the days of the merchant prince over? “We’re seeing a shift occurring,” Squire said. “The merchandisers we’re working with understand the need of big data. Folks understand the evolution of the system is art and science.
“We’re improving marketing and how retailers place products in their digital business,” Squire added. “We’re a software provider that helps retailers better align what customers are coming in to buy and what inventory they have.”
DynamicAction connects data from every part of the organization, across channels. It said it’s “enabled retailers such as Neiman Marcus, Brooks Brothers, Nine West, Cole Haan and Tesco to make more accurate decisions and to get to fast, profitable action on more than $15 billion of consumer transactions each year.”