About $1.75 trillion in global sales are slipping through retailers’ fingers because of out-of-stocks, overstocks and returns, preventing stores from adding about 11.7 points to their revenue growth.
A study conducted by retail analysis firm IHL Group by London-based cloud software and big-data firm OrderDynamics looked at the “ghost economy” of lost sales in the global retail market of $14.5 trillion and found the biggest slice of retail sales is lost to returns, a $642.6 billion drain, followed closely by out-of-stocks, which exacts a $634.1 billion toll.
Overstocks — losses which come from lost pricing power as discounts are applied to move slow-selling merchandise — account for $471.9 million of the losses.
“The 11.7 percent is a staggering number,” said Kevin Sterneckert, chief marketing officer of OrderDynamics. “It means that retailers don’t have to go out and acquire a single customer to sell more — they can add an average of 12 points to their sales growth, nearly all of it going directly to the bottom line, simply by plugging these holes.
“And as lost sales diminish and the benefits go to the bottom line, you can build your business, online and off, based on creating a better environment for your customer,” he added.
Dividing up the losses as they might apply to a single retail company, returns cut 4.4 percent from sales, on average; out-of-stocks 4.1 percent, and overstocks 3.2 percent.
Regional differences are clear in the report, titled “1.75 Trillion Reasons to Be Afraid,” to be released Wednesday. North America’s losses to the ghost economy are estimated at $499.2 billion, below the $558 billion registered in Asia-Pacific and $534.7 billion in the Europe-Middle East-Africa region, owing in part to the better forecasting tools employed in North America in recent years.
The EMEA, which includes Russia, has seen challenging economic conditions increase the level of returns, while Asia-Pacific has in a sense been a victim of its own success on one hand — with a growing middle class often confronted by out-of-stocks — and a lack of infrastructure in emerging markets contributing to food spoilage and higher returns on the other.
While out-of-stocks were responsible for $263.8 billion in losses in Asia-Pacific, the figure for North America was slightly less than half that amount, $129.5 billion.
OrderDynamics estimated that about 40 percent of the retailers studied by Franklin, Tenn.-based IHL sold apparel, either exclusively or as part of a broadlines assortment. The figures included three categories: general merchandise stores and specialty stores; food/grocery, drugstores and others, and occupants of the hospitality market, including hotels, fast food establishments, amusement parks and related establishments.
OrderDynamics, which provides software systems that unite retail systems that often cover disparate parts of stores’ own systems, provided a number of examples in which its services were focused on spotting potential ramifications of the ghost economy. For instance, if a size 6 dress was generating substantial returns from online sales and not selling well in stores, it could indicate a problem with the make of the dress, rather than something attributable to point-of-sale problems.
“In most situations a merchant might not be aware of that, but our algorithm alerts the store of a general sizing problem,” he said. “We connect the disconnected data.”
In another example, a store or distribution center could have a high amount of stock in one location but not in another. “The tendency would be to ship the item from the location closest to the customer, but that might be the one where inventory is high and prices have been cut,” he said. “Even at the cost of higher shipping, it would help the retailer to ship from the location with less stock at full price.”
OrderDynamics refers to out-of-stock and overstock situations as “inventory distortion.” The IHL study helped them put a price on that portion of the “ghost economy,” just over $1.1 trillion, and also the causes of it.
Internal process failure accounted for $284.9 billion of the distortion and personnel issues for $259.1 billion. Data disconnects generated $222.7 billion in lost revenue and supplier issues $158.5 billion of the amount. Employee and consumer theft were responsible for $85.1 billion and $76.5 billion, respectively, and other issues for $18.9 billion.
OrderDynamics intends to issue four subsequent reports focusing on individual issues covered by IHL’s research
“So much is being put on the plate of the merchant these days,” Sterneckert, a former retail analyst, said. “We’ve asked them to manage more [stockkeeping units] and more channels, while in many cases they’re still managing by zones and clusters. But they can’t manage by exception or average anymore and remain competitive. They need to be customer-based with the tools that allow them to manage by precision.”