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Out of stock, out of mind, out of business

By Chris Olivier, CEO, The Smollan Group

It is one of life's great frustrations when you rush off to the shop to buy formula for your hungry and screaming baby at home, whom you have left in the desperate clutches of your partner, and your usual store is out of stock. It gets worse when you go to the next store and they do not have any either.

Or the windscreen wipers on your new BMW inexplicably snap on the first day of a weather system moving across the province that will see five more days of solid rain, and your diary is booked full with meetings that you have to drive to, and the dealer you go to does not have the wiper blades for your car in stock. He will not be getting them until the beginning of the new month either, even if he ordered them immediately, and that is three weeks and four days away!

Although both these examples are extreme situations, regardless of the urgency and need, out-of-stock is the bane of every shopper's life. It is also detrimental to brand and store loyalty, and the store's cash opportunities. Out-of-stock in one store equals a sale for another. After all, as the director of a large FMCG (fast-moving consumer goods) company in South Africa constantly reiterates at meetings: "If it is not on the shelf it cannot be bought".

How severe is the out-of-stock situation?

It is estimated that the state of affairs regarding stock off the shelves (out-of-stock) in the FMCG sector worldwide ranges from 7% to 10%. In fact, according to the Food Marketing Institute and Grocery Manufacturers of America, worldwide statistics place out-of-stocks at 8,3%, with faster sellers and promotional products at 10%. As a result, retailers lose around 4% of their sales.

Compounding the problem is the fact that promotional items usually experience twice as many out-of-stock occurrences as non-promoted items, making it particularly difficult to manage because of issues relating to assigned shelf space and advertising.

Paying the consequences

The consequences of this situation can be dire. For starters, many organisations focus their attention and advertising budgets on creating share of mind for their brands through the media and field marketing. An empty shelf can waste the effort and money spent.

Consumers respond to out-of-stock situations in different ways:

- They switch stores and buy the item elsewhere;
- They delay the purchase and buy the item later, at the same store;
- They substitute the product with another of the same brand, but different size or type;
- They switch brands altogether; or
- They do not buy the item at all, anywhere

According to research conducted at the Goizueta Business School at Emory University in the US, the Institute of Technology Management at the University of St. Gallen in Switzerland, and College of Business and Administration at the University of Colorado, customers are increasingly willing to go elsewhere if they find a product out of stock. The figures reveal that 21% - 43% of consumers will make the purchase at another store; 25% will not buy the product at all, or will delay the purchase; and the rest will substitute, usually with a cheaper alternative.

These decisions impact on a range of players in the market. From the retailer's perspective there is the risk of the shopper switching stores permanently. This means that the store with the lowest out of stock level will lose the fewest customers and gain the most from other retailers. The retailer also runs the risk of losing the basket sale due to the consumer cancelling the purchase altogether.

The manufacturer faces losses related to brand switching and sale loss; while the supply chain is also impacted by out-of-stocks due to irregular, fill-in or rush orders which are disruptive to schedules.

Understanding the dynamics and impact of out-of-stocks is the first step in reducing them. Understanding buying patterns is the next step. For example, in South Africa purchasing follows the cycles of people's remuneration. Therefore, out-of-stock at month-end has a greater potential for a lost sale than one in the middle of the month, while stock-outs on weekends are even more detrimental.

Improving management in the store will help improve the out-of-stock situation, as often retailers find that they have the stock available, but not on the shelf. This situation should never arise and can be easily remedied with the right shop-floor management. Also, building better relationships with suppliers and manufacturers, and then managing these effectively, will ensure out-of-stock events are alleviated.

For the sake of the consumer and everyone else involved, retailers, manufacturers and suppliers must take seriously the need to minimise out-of-stock events, or pay the price. For just a few seconds every morning consider what you would do if the store you shop at does not have what you are looking for. Then don't let it happen.

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Contact:

Colleen Rose, Smollan Group, 011 640 8000, rosec@smollan.co.za Usman Aly, Predictive Communications, 011 608 1700, usman@predictive.co.za