Talking tech: Improving out-of-stocks
By Petah Marian | 18 April 2011
Retailers are currently losing EUR4bn in sales a year over out-of-stocks
With retailers facing an increasingly cautious consumer, and doing all they to squeeze their supply chains, there remains a huge opportunity for incremental growth through improving out-of-stocks. Petah Marian reports.
While retailers continue to squeeze their supply chains to offset increasing input costs, other simple avenues still remain for them to improve their margins, with new research from SymphonyIRI and ECR Europe finding that European FMCG retailers lose some EUR4bn (US$5.7bn) each year due to out-of-stocks.
SymphonyIRI Group Technology Services business consultant John McGiffin believes that there are significant opportunities for the industry through incremental improvements in availability. "Out-of-stocks average at around 8%, they only have to move that down by a couple of per cent, and that's worth a lot of money," he says.
While the amount of data that goes into understanding out of stocks on a day-by-day - and product basis, may seem daunting the consultant believes that retailers will be able to make the most significant improvements from understanding exactly which of their products tend to be out-of-stock most regularly.
"A lot of retailers will be happy to say that their on-shelf availability is 98%, and therefore, that's great. But what they don't look at is that 2% [of out of stock products] could be their best performing lines, it could be their most profitable lines. As you drill down into that, you may find that 80% of your range is 100% available, but that the 20% that matters is only 50% available."
He added that many of the retailers who say that on-shelf availability is at 98%, are often referring to products being in the store, not necessarily on the shelf. "It doesn't matter if products are still in a trolley in the back room, or if they are merchandised in the wrong place. "If it isn't where the customer expects to see it, it's out of stock. And it's that we're trying to resolve," he says.
The issue is an important one for both retailers and manufacturers, as while consumers may blame retailers when products are not on shelf, McGiffin emphasises that manufacturers are the "big losers" when products are unavailable.
According to research conducted by ECR Europe, when products are out of stock, some 31% will buy the same product elsewhere, 26% will buy a different brand, 19% will buy the same brand but a different variant, 15% will buy the product at a later day, while 9% will end up buying nothing.
However, these averages change dramatically when different product categories are considered, with substitution levels on home care products at 42%, while frozen and fresh products experience 63% subsitution, which SymphonyIRI attributes to the "urgency of the purchase and the shelf life of the products". Meanwhile, subsitution rates on private-label items are higher at 65%, compared to 53% for branded products.
"The manufacturers seem to be taking more and more of an interest in trying to resolve this, because if brand A is not on the shelf, the retailer will be to blame in the customer's eyes, but the manufacturer loses out because their product doesn't get sold," he says.
He says that retailers are "realising now that giving the manufacturers this information and working collaboratively on their supply chains, is worth a lot more to them than their worry that manufacturers might use that information against them in negotiations".
McGiffin says that the key to improving out of stocks is in their identification. "It's the store manager, and the people on the ground knowing that a product is out of stock or being alerted to that so they can do something about it,"says McGiffin. Alternatively he suggests predictive analysis "to say that 'this product is likely to be out of stock on Wednesday' and be able to do something about it on Monday".
For manufacturers, this kind of understanding can have tangible impacts for their field sales representatives, as they can go into stores and look at maybe 10-20 key items that are likely to be out of stock, rather than looking at all of the 200 products that might be in their category.
"Let's not worry about the products that are only going to lose us GBP1-2 a week in sales, let's focus on the stuff that's worth thousands a week and get those right," he says.
McGiffin suggests that customers using SymphonyIRI's tools, like Wrigley, Yoplait and Unilever, are able to send their representatives into stores less often, from once a week, down to once a fortnight. "And that's saving them a lot of money, especially at this time, when they're trying to save every penny."
SymphonyIRI has partnered with ECR Europe to develop an On Shelf Availability Assessment Tool to help retailers and manufacturers understand their availability levels, along with best practice guidelines to help them improve the situation.
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Talking tech: Improving out-of-stocks