Contributed by ReposiTrak Senior Vice President, Customer Success, Derek Hannum
Substitutions caused by out-of-stock (OOS) items are the Achilles heel of online grocery shopping and leads to shopper frustration, lost sales for retailers and suppliers and increased operating expense for third-party shopping service providers. The pandemic didn’t cause this problem—it simply brought it into sharper focus as shoppers by the millions, motived by convenience and safety, placed their first online orders.
With billions invested in new e-commerce technology and hundreds of billions in sales at stake, why is the industry still struggling with a decades-old problem? More importantly, why are so few retailers, suppliers and shopping services failing to avoid taking the necessary steps to address and overcome what is arguably the single biggest challenge for online grocery platforms?
The recent explosion of pandemic-induced online grocery shopping hit an all-time high of $7.2 billion in June 2020, according to Supermarket News, as more consumers opted for what they perceive as a safer and more convenient option to visiting a grocery store. And the news of product shortages, bare shelves and retail supply chain woes were all well documented in the media.
While some of the OOS and substitutions experienced during the early weeks of COVID-19 were definitely a result of hoarding and copycat panic-buying, the painful truth is that OOS have been a chronic problem for at least 30 years, and many stores and suppliers are still struggling to improve on-shelf availability. Even the most sophisticated retailers face substantial demand forecasting challenges, with OOS rates as high as 8% to 10% across the store, and up to 35% for DSD items, where margins are generally higher and products are a key driver of regular store traffic.
Unpacking the Product Proliferation Paradox
One of the major causes of OOS is SKU proliferation. SKU counts have grown exponentially as suppliers and retailers add new products as a strategy to appeal to changing consumer tastes. Grocery stores that once carried 7,000 SKUs now carry up to 40,000 different SKUs, which means fewer items of each SKU in the store. This translates to a loss of safety stock and leads to what we call the “product proliferation paradox.”
The product expansion strategies designed to make shoppers more loyal can paradoxically drive shoppers away when SKU expansion results in too many out-of-stock experiences that disappoint and frustrate shoppers. From the consumer’s perspective, they now have a much greater chance that their favorite yogurt flavor will be out-of-stock. But “on the bright side,” they also have 250 substitution options to choose from.
The good news is, there are simple, cost effective steps that can be taken to address all these negative outcomes; identify and attack chronic out-of-stocks at the root cause. Fixing chronic OOS requires three steps:
- Sophisticated analysis of daily POS data to recognize patterns of chronic OOS at the store/SKU level.
- Prioritize this data into top opportunities that are actionable.
- Work with suppliers or retailers to address the forecast and order inaccuracies to reduce or eliminate chronic OOS.
While all the steps are required, the critical—and most often neglected step—is the last one, which most time starved category managers simply can’t do by themselves. So, we do it for them, and with excellent results.
Currently, 72% of all DSD suppliers using our OOS management solutions have reduced their OOS by more than 50% on average. And those results are across many categories, including dairy, bakery, grocery and even general merchandise.
Out-of-stock driven substitutions needn’t be the bane of online grocery retailing. Chronic out-of-stocks that lead to substitutions can be dramatically reduced, to the benefit of all stakeholders, and particularly for retailers who are fighting to maintain shopper loyalty across a rapidly evolving omni-channel strategy.
The necessary steps to make online shopping more satisfying for consumers and profitable for trading partners include:
- Choosing a solution partner with proven experience who can bring technology and expertise. Success requires technology, and a whole lot of human follow up.
- Start with DSD, which is the biggest lost sales and margin opportunity in the store.
- Get the buy-in of all stakeholders, especially the supplier, where the problem likely originates.
- Begin with a manageable group of supplies and when it works, expand it across more categories.
The formula is simple, but execution is the secret to success. By following these steps, retailers can overcome the product proliferation paradox and dramatically reduce OOS and the related negative customer experience issues.