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Are Big Box Stores Running Too Lean This Holiday Season?

Written by RetailWire Staff

We all know that supply chain optimization is a Holy Grail for retailers, with just-in-time delivery a goal few will quarrel with. And, Big Data and little data are supposed to eventually tell us what each shopper wants, when and where they want it, and what they might want if they only knew it existed.

For now, however, we haven't gotten to the point where we can tell exactly what shoppers are going to buy and when, so running too lean can cause out of stocks. And, according to a recent CapGemini study, 73 percent of shoppers will go elsewhere if an item is out of stock, and 29 percent would not purchase the item at all. Regarding e-commerce, 93 percent of shoppers are frustrated when a retailer delivers an order late.

An article this week in the StarTribune says that Target shoppers are frustrated with the chain's out of stocks, and that Target.com was out of stock on almost 60 percent of top holiday toys after Black Friday weekend. The piece also says Target historically keeps inventory leaner than its rivals, Amazon and Walmart. Coincidentally (or not), sales have barely grown in the first three quarters of 2013.

Analyst Gerald Storch attributes some out of stocks to Target's apparel background, because too much inventory is a killer in that business. According to the StarTribune, Target execs are also paid incentives based on sales profitability, which depends in part on keeping inventories lean. With Target's PFresh grocery format becoming core to the company, replenishing inventory infrequently can be a liability, as consumers buy those categories much more often than they do apparel and electronics.

Of course, earlier in the year, Walgreens and Walmart were criticized for their own failures regarding out of stocks. "The answer is simple — any retailer that continues to make margin by shaving labor hours is going to end up with stock outages," wrote RetailWire BrainTrust panelist Ryan Mathews at the time.

In 2012, a Walmart exec said the retailer could sell up to an additional $5 billion a year in merchandise with improved inventory management. But in March 2013, a spokesperson said that news reports of bad out of stock situations were isolated examples.

"Walmart's $5B out-of-stock problem is prime evidence of retail's paradox of scale," commented RetailWire BrainTrust contributor Jamie Tenser in March. "In brief: The bigger the chain, the greater the distance between headquarters and the shopper. Centralized replenishment systems are probably the culprit here. Not that the technology is unsophisticated. It's just that they build a time-lag into the reordering process that confounds accuracy. Add in-store implementation breakdowns to that and you wind up with a lot of stubborn holes."

Mr. Tenser advocated chains use computer assisted-ordering that takes into account in-store conditions to improve the situation.

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