Becoming a True Market Leader in Retail

You will never become a true market leader unless you understand this subject

Overstock and Out-Of-Stocks cost retailers $1.1 Trillion a year. The relationship between the two conditions is interesting. You would think it would be a major concern for retailers. But, it is not.

Assuming the average convenience store contains around $66,000 of inventory at cost, $36,300 of that value is unprofitable, because it is not making enough profit to cover its carrying cost, or it is being sold at a loss. $9,900 of the value is DEAD, and will stay in the store until someone removes it, sends it back to the supplier, or takes it to the dumpster… leaving only $19,800 (mostly cigarettes) that are producing some, if not all of the profits and cross-subsidizing the losses from the rest.

An item is said to be overstocked when there is more inventory than needed to satisfy customer demand. A tiny amount of overstock is needed so that the retailer does not run out of an item his customers will buy. We refer to this overstock as ‘safety stock’, and should be assigned to each item based upon its turn rate, lead-time, and historical data. It is common to grossly overate the discounts received by agreeing to allow your suppliers to turn their overstock into your overstock.

Cigarette vendors are the worst offenders of all at enticing retailers to spend more money for stock and give up more sales space than all other vendors combined. Retailers have literally turned themselves into tobacco sales kiosks, operating in a constantly declining market. 45% of all sales transactions are said to be ‘non-profitable’, and by allowing themselves to be used in this way, retailers attract a greater number of poor clientele who cannot afford to buy anything else in the store.    

Fast-moving items require a greater percentage of safety stock than an item that sells once per-month. Slow-moving items require smaller amounts of safety-stock (if any), and lead time is not an issue in most convenience stores as the supplier is generally overstocked himself.

Overstock is a viral cancer that cripples the supply chain up and down the line

Suppliers suffering from overstock themselves, see no other alternative to removing their excess inventory, other than by taking it to their retailers. The myth that ‘stores that are not full, deter customers', supports this narrative. I agree, sparse shelves turn shoppers off, but nowhere does it say you are required to stock 10-15 times the requirements for a delivery cycle.

Since this condition in stores has become pervasive among retailers, they have come to believe overstock makes good business sense. All the while, overstock is a cancerous tumor that is gradually and insidiously eating them alive 

If limited to the average number of times an item sells during a delivery cycle, and weighted by the most items sold during a sales-cycle covering the previous 90 days, it would solve 99% of the overstock problems, and the negative effects of being out-of-stock occasionally are most certainly outweighed by the savings from eliminating the excess inventory, which is currently limiting the use of precious operating capital for the greater, overall good of the enterprise.

Once, when auditing a store, I found enough of a particular candy to last for 1,100 days, and that was not the exception, it turned out it was the rule. The effect of the amount of money tied up in buying and storing overstock will most definitely determine whether a retailer is profitable or not. If you are not making what you consider to be a reasonable profit, fix the problem by first identifying overstock and get rid of it. I didn’t know it at the time, but it turns out the real-time perpetual inventory system I created was one of, if not the primary value of the product.

When retailers abandon looking at categories, and start scrutinizing inventory at the item level, which few are; unprofitable stores will become profitable during the very first month. Assuming an item is priced to make a profit (or to drive a companion item to make a profit), the number of times it sold in a day, in a month, in the past 90 days… is the most important information you can have at your fingertips.

This information can vary from one store to another within the same neighborhood. Impossible to do manually, you need the tools necessary to monitor these variables in real-time and generate red flags when something needs attention.

For example: if something normally sells three times a day, and during the next day no sales were recorded, something is probably wrong. Maybe it’s hidden, maybe it was stolen, maybe the price is suddenly too high because of a nearby promotion being run by a competitor, MAYBE YOU’RE JUST OUT! Conditions such as these run through your stores 24/7, and you feel it when your bank account is short at the end of the month. Not knowing the reason is the greatest sin, as it will continue until you are forced to close your doors and seek employment elsewhere.

Several years ago, before a store began using ‘real-time inventory analysis’, the manager called me and asked me to find out when he last sold a particular item. A quick look told me the item was last sold three months prior. He remembered ordering that item twice, but each time the supplier was out. Then he forgot about it. So, he lost three months’ worth of sales on that item. That supplier, as so many others, did not have provisions for back-orders.

One of the most powerful tools in your toolkit should include the ability to define the relationships between products in your store. One thing I learned in the advertising business was that every product has a particular relationship with every other product. The strength of the relationship is paramount. For example, a sale on any product you sell has an effect on every other product in its environment.

We already know that a sale of Mountain Dew’s can affect the sale of Mountain Dew’s in a nearby competitor’s store, but did you know that the sale of a specific soft drink can have an effect on the sale of aspirin, or a particular brand of candy? Most retailers don’t have any idea, but it explains how sales can accelerate the item being sold and other items that may have some weird relationship to something in a completely different category. Choosing items by category alone has to stop now. If category managers continue to believe you need horseshoes just because you sell saddles, you need to know if anyone in your market is buying horseshoes to begin with.

In my book, “Retail is Detail” I wrote about an incident where I tracked the sales of Chocolate Muscle Milk to sales of quarts of Pennzoil. Taken one-on-one, these anomalies are rarely noticed by humans, but computers don’t possess the intelligence to care. They have no assumptions to deal with, and the retailer who has the right inventory system in place can track every item in the store and report on such things. The weight of an anomaly such as the one above requires a level of intelligence that computers do not possess, and it’s the main reason why retailers store tons of paper that no one ever looks at. 

We have taught our computers to look for these strange circumstances and move them to the front burner. Granted, this technology is fairly new, but in the decades to come, you will not be able to survive without it, and the sooner you start paying attention, the more likely it is that you will have the opportunity to become a true market leader... or not.  

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