Out-of-Stocks: Achilles Heel of Food Stores

April 17, 2015

This weakness leaves physical retailers vulnerable to alternative fast-rising meal and snack providers.

Originally published in our free, weekly e-newsletter, Facts, Figures & the Future.

The industry's persistent eight percent out-of-stock rate is outrageously costly to retailers, suppliers and frustrated consumers - in terms of lost sales, profits, trips, loyalty, and completed shopping missions. Everyone loses. There's no positive face to paint on this.

These are the short-term losses:

The eight percent average absence rate often exceeds 10 percent on promoted items. That's one item out of 12 on the shopping list every day or one item out of 10 on a deal that's missing. This translates into a potential eight to 10+ percent revenue loss in a low-net margin trade challenged by rising costs, state the Food Marketing Institute (FMI) and the Grocery Manufacturers Association (GMA). 

This is the long-term risk:

Since out-of-stocks damage the user experience, shoppers tolerate it less with each incidence. FMI and GMA report a "three-strikes-and-you're-out" pattern. The first time, 70 percent of shoppers substitute a different item; the second time, near-equal shares of shoppers substitute, buy nothing, or go elsewhere; the third time, 70 percent of shoppers switch stores.

Ingrained practices and technologies by trading partners keep both sectors of the supply chain apart, reveals new richly detailed research from FMI and GMA. Solving the Out-of-Stock Problem: A FMI-GMA Trading Partner Alliance Report, the study facilitated by JDA Software, urges the implementation of better metrics, more cohesive processes and accountability, integrated technologies, data sharing, and a faster insights-to-action cycle to improve on-shelf availability of products. 

While Facts, Figures & The Future (F3) feels the report's suggestions are constructive, we also recognize this problem has endured due to some distrust by trading partners on both sides, cultural mismatches, and competing and overlapping interests. It will take more than a list of well-founded suggestions to motivate parties to collaborate better.

The clock is ticking, in our view. Retailers and suppliers have wasted inordinate time not solving this issue. Meanwhile, the marketplace is racing past their intransigence. Online grocery ordering is on the rise by well-resourced players - often other than supermarkets and big-box formats - that are armed with data about consumer preferences. Subscription programs deliver pre-assembled meal components or finished dishes with no waste and no hassle. Many of these foods are locally sourced, chef-styled, nutritious and exciting.

People are finding the convenience, product availability and quality they want without trudging to the food store. And if they go to the store, millions aim to eat healthier today, so they make more perimeter purchases at the expense of center-store. F3 urges retailers and CPG to stop this self-inflicted damage before time runs out.

To optimize on-shelf availability of products everyday and during promotional trade events, FMI and GMA specify good-better-best activities and set these future goals:

  • In metrics/data, maintain perpetual inventory integrity so products are available to shoppers at each moment of truth, in the right part of the store, in saleable condition.
  • In process/practice, issue proactive alerts on shelf conditions, and leverage emerging technologies such as omnichannel, sensor and consumer and shopper insights.
  • In organization, be transparent, be able to execute and recover on joint plans, and share responsibility and accountability.
  • In technology, integrate across departments, functions and trading partners - to attain POS-integrated forecasting and replenishment.
  • Create a One Supply Chain model. Connect the supply chain to the store by integrating forecast-and-replenishment organizations and systems.