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Shoppers with tastes, or sizes, that fall outside the mainstream may have more trouble finding what they want in stores as retailers attempt to shift low-volume items to Internet sales.
According to Wharton faculty and industry analysts, retailers are paring back in-store selections of odd sizes or offbeat colors in order to save inventory handling costs as well as precious floor space. At the same time, stores are trying to coax shoppers looking for low-selling merchandise to special order those items or buy them through the retailers’ web sites. The merchandise is then shipped directly to customers’ homes.
Retailers have always feared operational problems leading to stockouts (items and/or sizes that are out of stock) and lost sales. Now, stores are generating intentional stockouts because they have the opportunity to capture lost sales through the Internet. “Slow-moving items can be efficiently sold using the web site, but not the stores. So when the customer comes into the store and wants an item that is a slow-seller, he or she can get redirected,” says Gérard Cachon, Wharton professor of operations and information management.
Items with few takers can clog a retail supply chain, add cost to the distribution system, waste expensive retail square footage and, ultimately, lead to costly markdowns.
As retail operations have expanded into mega-stores across the country and the world, a handful of losers in the merchandise mix at each location can grow into a big problem, says Cachon. “When there’s so much variety and you have an item that sells maybe four or five times a year, millions of those items can add up to substantial amount of sales. You can effectively sell those items through a consolidated warehouse, but you can’t put them in hundreds of Best Buys.”
Wharton marketing professor Barbara Kahn says retailers who intentionally don’t stock some items still run the risk of turning off individual shoppers. She notes also that because retailers can offer a better assortment of merchandise through the Internet, consumers benefit overall. “From the single consumer point of view, the one who wants the odd size, this is not the best approach: It would obviously be preferable to have the item right there,” says Kahn. “But if you think of the portfolio of consumers, then it’s a different story. I would imagine the savvy retailers are maximizing their floor space to appeal to their best, high value, loyal customers rather than catering to every taste, but at the same time they are servicing those one-off transactions by facilitating the online purchase.”
Getting the Tangible Experience
Daniel Corsten, a former visiting professor at Wharton who now teaches at the London Business School, says he’s not convinced the new strategy of pushing in-store customers to the Internet will work. “What happens is the store turns an impulse buy into rational buying. You come into the store and you want to buy something, but it is not there. You realize you were intrigued about buying [the item], but now you have to rationalize it. You ask, ‘Do I really want it?’ This breaks the purchasing process. All of a sudden you think twice.”
The new strategy stems from retailers’ desire to consolidate in-store operations with Internet sales, which now account for 10% to 15% of revenue, says Corsten. He warns that while retailers are wise to give the Internet more attention, the two channels do not necessarily appeal to all customers. “People go to a store because they like going to a store. They already chose not to go to the Internet,” says Corsten. “If I go to the Internet and make a purchase, I’m happy. If I go to the shop and make a purchase, I’m happy. But if I’m being shifted from the store to the Internet, then my purchasing process changes. Yes, I get the full assortment virtually, but I wanted the tangible experience.”
According to Corsten, retailers that do not stock a full assortment of items risk losing direct sales, but also sales of complementary items. A retailer choosing to pass on carrying certain sizes of jeans will also lose sales of belts and tops to the customers who wear those sizes.
Strategically, he says, if all stores sold only the best sellers, all retailers would begin to look alike. Retailers would lose their competitive advantage and customers would then shop only for the cheapest price or at the closest store.
In order to identify customers who have not found what they are looking for — because it’s not there — and then convince those shoppers to special order or buy over the Internet, requires sophisticated, well-trained salespeople, he adds. “Finding great staff is always critical,” he says. “And a knowledgeable staff is expensive.”
Serguei Netessine, Wharton operations and information management professor, says Wharton research has found that out-of-stocks are more of a problem than retailers think. Computer records often indicate an item is in the store, but if the customer can’t find it, or it’s in a storage area or was shoplifted, the shopper leaves with the impression the store is out of stock.
According to Netessine, retailers typically believe their in-stock rate is 95% to 98%, but when customers are surveyed, they report the rate to be 75% to 80%. “It’s only half the story to have the item in stock,” he says. “The other half is to make sure the customer is able to find it.” Research indicates the most important factor in determining whether customers are able to find an item is having knowledgeable employees on the shop floor that can locate it, he adds.
Finding the Size 13 Shoe
Kevin Freeland, president of Optimal Advantage, a Minneapolis retail consulting firm and a Wharton guest lecturer in operations and information management, agrees that the trend toward shifting marginal sales to the Internet increases overall consumer selection.
Earlier in his career, he worked in inventory management at Payless Shoe Source, where the average store was just 2,400 square feet. Even in the late 1980s and early 1990s, the chain’s inventory was undergoing triage as managers eliminated low-selling size 12s and 13s from their assortment. Back then, he says, the customer had no alternative. “The salesperson would have said, ‘We don’t carry size 13,’ and the person would have gone home disappointed. There has always been rationalization in the retail store. The significant difference is that today there’s an alternative way to purchase those items.”
Michael Zisman, a Wharton guest lecturer and managing director of operations at Internet Capital Group, says this emerging retail strategy would never have been possible without the rise of FedEx and UPS to carry out the final phase of the distribution process. He notes that stores have different policies about shipping payments. Many offer free shipping if the customer orders the item while they are still in the store. Internet shoppers usually must pay.
Zisman says shipping costs are no longer a barrier to consumers who are willing to spend some money in order to save time. Consumers are also now comfortable with ordering over the Internet, he adds. “People are acclimated to using the Internet now. If a store doesn’t have what you want in stock, you’re not insulted, whereas 10 years ago you would have said, ‘I’ll go somewhere else.’”
To make distribution more efficient, new companies are springing up to carry the inventory and ship it, according to Zisman, who is a director of Vcommerce, an Arizona firm that handles logistics for retailers. These companies, he says, can take on the responsibility for carrying inventory and reduce the time it sits on retailers’ books.
He argues that the shift toward more efficient inventory handling could invigorate the overall economy, citing February 2006 U.S. Census figures showing that retail sales make up about a third of the nation’s $12 trillion economy. Retail goods inventory is about $472 billion. At a carrying cost of 30%, this represents a real cost of $150 billion, or 3.75% of sales. “The economy can’t run with that sort of inefficiency…. If the whole economy can reduce its investment in inventory, everybody wins.”
Beyond the logistics implications of shifting in-stores sales to the Internet, there are some marketing boons to planned scarcity. Zisman says he recently skipped a trip to his local computer store on a Saturday to purchase a Lynksys router from Dell online. The delivery was shipped by Dell on Monday and was installed and working on Tuesday, leaving Dell with very little cost of carrying the inventory.
On top of that, two days later, Zisman received an e-mail advertising a sale on PCs from Dell, which had now acquired his email address and other marketing information. Zisman points out that Dell took no brand or credit risk in the transaction and faced only a slight risk that he would return the item.
Pushing the Quick Buy
According to Netessine, some retailers, like the Spanish retail chain Zara, keep inventory low to make the most of scant retail space, but also as a marketing strategy. Quick inventory turns encourage shoppers who might be waffling on a purchase to buy, or risk losing out completely. “If you have low inventory and update fashions very quickly, then the customers know that when they come into the store, whatever they see is not going to be there tomorrow,” says Netessine.
The strategy helps the retailer in two ways, he suggests. First, it prevents consumers from waiting for an end-of-season sale to buy the item — at a lower profit margin for the store. Second, it encourages more frequent store visits by customers who don’t want to miss out on new merchandise. Once they are in the store, there’s a chance they will buy.
William Cody, managing director of Wharton’s Jay H. Baker Retailing Initiative, says some retailers are attempting to pare down in-store inventory to maintain a clean, boutique look. Stores that are crammed with merchandise send a signal to consumers that clearance sales are soon to follow. “The old retail adage was, ‘Pack it high and let it fly,’” says Cody. “But that’s a discount mentality.”
Many clothing stores, he adds, are following Zara’s lead and trimming back what they carry on the floor. “Apparel retailers are moving away from racks and racks of clothing to a cleaner presentation of the merchandise. It moves the store away from a discounter image. That’s important to give more price credibility.”
The approach may work for Zara or other fashion-oriented retailers with the technological capability to turn merchandise quickly, Netessine says. The strategy might not work so well with a grocery chain selling a basic item, like detergent. “If you go to the store and just want to buy detergent, you are more interested in the detergent being in stock than some new and improved version,” he says. “With clothing, often you don’t go in with a specific product in mind. So it will be easier to substitute.” Cody adds that grocery stock-outs could also damage the retailers’ relationship with its partnering vendors.
Corsten agrees that shifting low volume sales to the Internet may be more effective for some items, such as electronics, which are standard brands, or appliances, which would be delivered days later anyway. But for apparel and more impulse-driven decisions, the push to limit inventory might backfire. He says research on consumer reactions to items that are out of stock shows that people are willing to switch stores or come back for planned purchases for ‘high-involvement items’ such as cosmetics or hygiene products. For ‘low-involvement’ products and impulse purchases, they may simply not make the extra effort — and the sale is lost for good.
Coaxing shoppers from store aisles to the Internet might work for many items, he adds, “but it will definitely take the magic out of the shopping experience.”