RETAIL STOCKOUTS

Matthew Waller, ph.d.

Consumer goods companies spend tremendous amounts of money each year building brand equity through advertising, promotions and other marketing methods. Unfortunately, the impact of this spending may be mitigated in some cases by retail stockouts.

This is often hidden from the consumer goods supplier. The supplier gets summary reports of sales by region and account. What these reports fail to reveal are the sales that were lost as a result of stockouts at the retail store level, and more importantly, the impact of these lost sales on the consumer goods supplier's brand equity.

For example, suppose I always buy a certain brand of face wash and that I prefer it because it cleans well and does not dry my face, even if I use it frequently. One day as I was packing for a business trip I found I was about out of the face wash. On the way to the airport, I stopped at a retail outlet and found my preferred brand was out of stock. Because I was in a hurry, I picked up a private-label brand (I usually buy three or four bottles at a time but since I was buying the private label and wasn't sure about its quality, I only purchased one bottle). On the fifth day of my trip, I realized that my face was just as clean, and it wasn't drying out, and I actually preferred the scent of the private-label face wash. The cost of this stockout to the brand equity of this consumer goods supplier's brand was very large. The company lost all future revenue from my purchases of face wash because of a store-level stockout. Maybe some of the money that was going into building the brand should have gone into making sure retailers were in stock at the retail shelf.

Consumer goods suppliers also spend millions of dollars each year on building brand equity in new items. Yet, stockouts on the shelf in the retail store can reduce the impact very significantly.

A consumer goods supplier may conduct significant market research into a new frozen pizza item, convinced that it will sell, on average, 20 units per average grocery store per week.

However, because it is not given enough space on retail store shelves, it stocks out every Saturday just before noon, all over the country. As a result, they only sell 12 units per average grocery store per week. Eventually, the brand manager gets summary reports of sales in regions where the new product was introduced and finds that its sales are significantly below what was anticipated and the product is discontinued. The money that went into building brand equity into this failed new item should have just as well been put into an existing product.

While most stockouts are probably the result of retailers not allocating enough shelf space to a product to support weekend demand, demand variability, and lead time uncertainty, some shelf-level stockouts are a result of poor supply chain management by suppliers.

Still, some consumers may blame the supplier even when the retailer could have prevented the stockout. In those cases, the consumer may begin to associate poor service and availability with a particular brand. Over time, this may erode the competitive advantage of the brand and may reduce the price premium that the brand allows the supplier.

This may be particularly costly to a new product where the goal is building brand recognition but it can potentially also reduce the level of brand preference by consumers of mature products.

Consumer products suppliers can reduce stockouts on the shelves of their key retailers by helping them understand the trade-offs associated with shelf space allocation between products, even if the supplier is only considering the products they sell through the category.

As more space is given to a product on the shelf, the inventory-holding cost increases for the retailer. However, as more space is given to a product on the shelf, the chances of a stockout decrease. The retailer must manage this trade-off carefully. Suppliers usually don't help retailers manage this trade-off that so greatly impacts the return on assets of the retailer.

Additional space for new items requires that space of other items be reduced or that items be discontinued. Suppliers must begin to think through these trade-offs so that they can collaboratively create plans with retailers to reduce stockouts in ways that are cost effective for the retailers. This is critical to building and maintaining brand equity.

Two empirical studies showed that stockouts have a significant negative impact on brand share: Katherine Straughn, "The Relationship Between Stock-Outs and Brand Share," Florida State University (1991); and Philip B. Schary and Boris W. Becker, "The Impact of Stock-Out on Market Share: Temporal Effects," Journal of Business Logistics, (1978) vol. 1, no. 1.