The pandemic may be all but over, but the supermarket industry continues to battle the out-of-stocks it brought with it. The good news is retailers and manufacturers learned a lot during the past two years, and fast-tracked changes are already making a difference. The bad news is that in addition to pandemic-related supply chain issues that are finally starting to resolve, retailers are now dealing with a host of new challenges from staffing shortages and record inflation to the war in Ukraine and accelerating climate change.
But before we delve into solutions, let’s take a closer look at the problem. Prior to the pandemic, total on-shelf availability (OSA) lingered around the 94% level, according to Jean-Baptiste Delabre, vp of North American retail strategy and analysts at Chicago-based NielsenIQ. “However, in 2021, OSA fell to 92.6%, equal to $82 billion in lost sales.” Q1 2022 wasn’t much better (92.8%), he continues, but a year later, it’s back to 94.4%. And in the frozen department specifically, OSA is on track to hit 95.4% by the end of the quarter. Still, that’s close to $460 million in lost frozen sales in just one quarter. And that’s just the obvious harm. “It’s really a triple loss,” says Delabre. “Lost sales at the shelf, lost investment in everything from business planning to supply chain execution and lost consumer loyalty as frustration over out-of-stocks mounts.”
A 2022 study by KPMG revealed that 35% of consumers will switch brands when their favorite items are out-of-stock — though they may not be happy about it. But another 2022 study by Oracle found that 22% of consumers will go to another store to find a product they want that isn’t available. More recent research by SML RFID puts that number closer to 30%.
5-7% of skus are out of stock
“If you consider that 5% to 7% of SKUs are out of stock on average, a shopper with 20 items on his or her list is fairly likely to find at least one or two is unavailable,” says Ken Morris, managing partner at Cambridge Retail Advisors, Cambridge, Mass. If a quarter of those shoppers head to another supermarket — or hop on Amazon — to find that product…well, that’s a problem.
It’s no surprise, then, that 48% of retailers believe that frequently out-of-stock items are the biggest challenge in today’s retail environment, according to part one of SML RFID’s new report “State of Retail 2023: Order Fulfillment and the In-Store Customer Experience.”
So what’s causing all of these out-of-stocks? Pre-pandemic, poor forecasting was the primary culprit, answers David Wendland, vp of strategic relations, at Waukesha, Wis.-based Hamacher Resource Group, citing failure to consider differing regional sales rates, shifting consumer preferences and seasonal buying patterns. Today, however, there are a whole slew of contributors. But it all starts with the supply chain.
“The U.S. supply chain is inherently fragile,” says Wendland. “Not only did the pandemic reveal over-reliance on off-shore production and the systems associated with the receipt and transportation of finished goods but also shortages of raw materials, packaging materials and available labor,” the latter of which was a problem at every step along the way.
In fact, a fall 2022 report on grocery out-of-stocks from IHL Group, Franklin, Tenn., found that personnel issues were the second biggest cause of stockouts last year, after supplier/vendor issues. “Whether lack of personnel, lack of training or personnel making their own forecasts because they don’t trust the systems…personnel issues caused $26.2 billion in lost sales in 2022 for North American food/grocery and superstore/mass merchant retailers, up $18.0 billion (45%) from 2020,” according to the report.
Simply put, “Fewer people means less frequent shelf checks,” says Marty Whitmore, also a managing partner at Cambridge Retail Advisors. “The store might have plenty of stock in the back room,” he explains. “But the freezers and coolers aren’t getting replenished frequently enough.” Indeed, only 37% of respondents to a recent survey conducted by Retail Insight felt they had enough staff to adequately stock shelves in-store.
But the problem extends beyond restocking. When consumers leave a store without an item they intended to buy, 75% of the time it’s because the shelf is empty, reports IHL. But the second and third most common reasons are because shoppers can’t find the help they need (products are locked up or on a high shelf) or there was a price/offer mismatch. “Consumers report they arrive expecting one priced based on a circular or online price, but it is not the same when they get to the store,” according to IHL. “Retail workers have admitted that they don’t have enough people locally to change the prices on the shelves each week for promotional items.” For that reason alone, says IHL, North American grocers and mass merchants are losing $8.7 billion a year.
Wendland says store-level staff shortages also contribute to poor compliance with planograms, another key contributor to out-of-stocks. For example, if there aren’t as many facings of a particular product as the planogram says there should be, stockout is more likely. Lack of staff also means there aren’t enough people to rotate perishable inventory, leading to spoilage and expired products, which exacerbates out-of-stocks.
Stockouts can also result from successful marketing campaigns and promotions, says Morris. “New and especially effective ad campaigns can essentially catch retailers by surprise,” although that type of demand is hard to predict, he says. Out-of-stocks due to promotions, on the other hand, should be expected (and planned for). In fact, reports NielsenIQ, out-of-shelf rates double when products are on promotion.
Another common cause of out-of-stocks is poor inventory management, says Wendland. “The vulnerabilities of legacy inventory tracking, forecasting and purchasing were really exposed during the pandemic,” he explains. “Some retailers are just now beginning to update back-office systems and incorporate the use of artificial intelligence, RFID, effective product substitution practices and the like.” Theft also makes maintaining accurate inventory counts challenging, if not impossible, adds Wendland.
Similarly, many out-of-stocks stem from inconsistent or inaccurate data management, continues Wendland. “As the expression goes, ‘garbage in, garbage out.’ This is especially true for those attempting to manage the demands of today’s retail pace with an outdated product information management system. Ensuring accurate UPCs/GTINs, descriptions, categorization and key attributes would be a giant step forward for many retailers struggling to manage product data integrity.”
COMMUNICATE WITH YOUR VENDORS
Once retailers can identify the root causes of out-of-stocks in their organization, fixing them becomes a lot easier. And while some solutions require significant investments of both time and money, there are plenty of things chains can do right now to improve in-stock conditions. Perhaps the easiest is to simply open up the lines of communication with vendors.
One retailer reportedly doing it right is Kroger. “They do a phenomenal job managing relationships with manufacturers,” says Adnan Durrani, founder and CEO of Stamford, Conn.-based Saffron Road. Unlike some chains that don’t share any information, “Kroger clearly communicates what’s in stock,” he explains. “They’re very transparent, which helps ensure a smooth flow of inventory into the warehouse.”
Instead of viewing their relationship as merely transactional, retailers and manufacturers should start to regard each other as partners, continues Durrani. “It would be very beneficial to retailers to work directly with manufacturers and outline what they see for the next six months. That way, we could plan out that inventory cadence with them so no one misses a beat.”
“Collaborative planning, forecasting and replenishment (CPFR), which showed promise as a model for better coordination between retailers and suppliers, hasn’t been on many people’s radar for a while,” adds Whitmore. “But the vision is still valid.”
Durrani also suggests retailers take a long hard look at their suppliers and prioritize those that are consistently delivered on time and in full (OTIF). “They say OTIF is one of the four most important criteria they use to rank their vendors…. But when it comes down to it, they often still give those brands shelf space, even when they’re frequently out of stock.” And even though the supermarket — not the manufacturer — typically gets the blame. Retailers should also take a look at whether brands in short supply are also out of stock at competing chains. If they’re not, it suggests a supplier has made a conscious decision to prioritize certain retailers over others. “Retailers need to bring that up — or change vendors,” says Durrani.
Identifying alternative sources in key categories is a smart move even if you’re not thinking of eliminating a vendor, says Wendland. If the pandemic taught us anything it’s that even the best manufacturers can sometimes find themselves in a jam. “But satisfying shoppers with an alternative product from a different supplier may just keep them from choosing a different store,” says Wendland. Better yet, he continues, consider a local, regional or U.S.-based supplier for top movers to reduce the likelihood of supply chain snafus. He notes that retailers that were paying a premium to import certain items while also managing lengthy lead times are often pleasantly surprised by lower shipping costs and better reliability when they source closer to home.
To ensure more consistent, on-time delivery, retailers may also want to consider bringing brands with good track records directly into their warehouses, since problems may lie with the distributor, not the manufacturer, says Durrani. By essentially cutting out the middleman, the supply chain becomes a little less complex with fewer opportunities for disruption.
THE CASE FOR ‘JUST-IN-CASE’
Adding back-up suppliers to the mix highlights a continued shift from just-in-time to just-in-case inventory replenishment. Although just-in-time is more cost-effective, “It doesn’t work in a world that hoards, which is a bad habit consumers developed during the pandemic,” says Morris. “But grocers can’t react to changes in demand fast enough, so they’ve had to resort to keeping back stock ‘just in case.’ Then they’re forced to use promotions to get rid of excess inventory when it’s not needed.”
“Keeping safety stock is expensive, especially frozen and refrigerated items,” adds Whitmore. “That said, the closer managers can get to seeing real-time inventory and stock levels, the less likely they are to experience stockouts.”
Given current challenges, “Just-in-case is a good strategy,” says Durrani. But in addition to costing more, it can also take away warehouse space that might have been used to bring in new innovation. So retailers need to proceed with caution.
When the pandemic hit, many chains pared back their assortments to ensure top sellers stayed in stock. In fact, says Wendland, a landmark 2007 study Proctor & Gamble revealed that lost sales associated with out-of-stocks are six times higher for fast-moving items than their slower-moving counterparts. And that hasn’t changed. So it’s critical to identify what he calls “Never Outs” and then make sure they’re… well, never out. “These are the items within the category that represent the majority of sales (think 80-20 rule) and/or are game-changing new products that are heavily promoted, differentiated and incremental,” he explains.
Nielsen IQ’s Delabre agrees that streamlining the assortment can help boost on-shelf availability. Yes, retailers need to differentiate. Yes, new products create excitement. And yes, consumers like variety, he says. But it’s much more important to have the right items than the most items, especially nowadays when many new brick-and-mortar stores have smaller footprints. “So identify those KVIs [key value items], offer them at good everyday low prices and make sure you have enough facings — because the lost value associated with not having them on the shelf is way too high to ignore,” says Delabre.
The trick is finding the right balance, says Durrani. “SKU rationalization is a slippery slope,” he explains. While it made sense at the height of the pandemic, NielsenIQ data reveals that the number of items sold in stores fell 12% from 2019 to 2022. “But from 2022 onward, consumers were back in stores in a big way and they’re looking for innovation again, especially now that dining out has become so expensive,” says Durrani. “Frozen meals — even premium brands like ours — are such a value proposition, but consumers want the same variety they see at restaurants.” He adds that retailers that emphasize SKU rationalization at the expense of innovation risk losing customers to chains that offer the variety they crave.
TECHNOLOGY YOU CAN ADD TODAY
Not surprisingly, experts say various technologies can also go a long way toward improving out-of-stocks. IHL identifies a handful that can be deployed almost immediately and aren’t affected by supply chain disruptions. To prevent consumers from leaving empty-handed due to price discrepancies caused by store level employees’ failure update changes, “Electronic shelf labels are a no-brainer,” says the company. Not only do they keep customers happy and save labor, “These devices also allow retailers to dynamically price against their competitors and change prices based on the cost of last shipment.” IHL research reveals that the fastest-growing retailers plan to adopt ESLs in the next two years at a rate 843% faster than the average retailer.
The company also suggests retailers add self-checkout or Scan & Go technologies to capture the 14.5% of shoppers who leave stores without buying what they intended simply because checkout lines are too long — not because of empty shelves. That translates into $10 billion in lost sales in North American supermarkets and mass merchants every year. “It may seem unrelated [to out-of-stocks], but in the minds of consumers, it’s not,” says IHL.
Another “immediate and important” step retailers can take is to improve inventory visibility and accuracy, says IHL. “Gone are the days when you can rely solely on an annual wall-to-wall inventory count to keep track of inventory levels,” notes the company. “But with turnkey inventory kits, store associates can be mobilized to perform targeted cycle counting as frequently as needed. Keeping closer tabs on high value or high turnover items to ensure they are always available is a good way to keep consumers happy.”
There are plenty of next-level technology solutions as well, though they can’t just be dropped in, and they aren’t cheap. Real-time inventory is the real key to reducing out-of-stocks, says Morris, citing several options for increasing visibility of products already in-store (RFID, sophisticated bar code scanners, computer vision, etc.).
IHL also suggests computer-aided ordering (CAO), “a technology that recognizes trends much faster than humans can.” Its research showed that retailers that use CAO saw sales increase 18% compared to competitors in the same categories. The company also supports applying prescriptive analytics to operations and forecasting to detect irregularities so retailers can resolve problems before they lead to out-of-stocks.
However, IHL says improvements to processes and systems are already starting to pay off. In just the last two years, it reports, “Retailers have enjoyed over $100 billion in improvement in out-of-stocks due to better systems and processes in forecasting, merchandising and order orchestration.” But there’s still plenty of work to be done.
“This is complex stuff, with lots of moving parts,” says Whitmore. “Limiting stockouts has been a challenge to grocers forever. But that doesn’t mean they shouldn’t take active steps to eliminate the problem.”
“Ensuring a well-represented in-stock condition will separate winners from losers in 2023,” adds Wendland. “Winners will earnestly put their focus on the productivity of inventory, space and people.”