Amazon is taking note of c-store deficiencies. Can retailers and suppliers work together to overcome inventory challenges?
By Bill Scott
A full-line grocery supplier’s job is to deliver merchandise to a retailer that the retailer can sell and earn a profit. The advantage the supplier offers to the retailer includes credit (normally 10 days), product availability (mostly), delivery (more times than required), and the occasional assistance in promotions aimed at increasing sales, which have an ambiguous effect on other products affected by those promotions.
But, there are also disadvantages, none the least of which is that retailers must pay for the stock they receive, and sit on it until the consumer carries it out of the store and takes it home. The growing costs of procurement, investment and the carrying costs is the furthest thing from the retailer’s mind.
In the convenience store and small grocery market, the amount of money the retailer pays up front can be substantial. A single convenience store must pay anywhere from $10,000 to $30,000 or MORE each and every week.
With roughly 52% of the retailer’s profit going towards salaries and payroll expenses, and a large chunk toward maintenance and administration costs, the dismal profit being earned in the convenience industry (2.1% net) leaves little room for error.
For example: the cost to initially stock a convenience store could be in excess of $66,000 (depending on the size of the store), and the retailer must borrow the money in order to open his/her business.
In this typical investment, 30% of the inventory will sell and be responsible for ALL of the store’s profit, 10-15% will lie there like a box of rocks and take up space where other more profitable inventory could be displayed; and, the remainder of the inventory will make a little, lose a little, and barely pay enough to cover the costs of having it in the store.
Since the supplier has little to no knowledge as to what the store will sell once a delivery is made, this results in a large amount of overstock, and significant occurrences of out-of-stocks.
Nothing turns customers off quicker than searching through a vast array of products, only to discover the retailer is out of his/her favorite brand. Overstock breeds out-of-stocks simply by camouflaging the non-existence of faster-moving products. Our data proves the average convenience store has twice the inventory needed to satisfy customer service level.
A recent study found at RetailWire.com reported:
Overstocks and out-of-stocks cost retailers $1.1 trillion globally in lost revenue
Overstocks are responsible for 3.2% in lost revenue for the average retailer, and out-of-stocks, 4.1%.
In North America, the loss from OVERSTOCKS in the region is estimated to cost retailers $123.4 billion annually and OUT-OF-STOCKS $129.5 billion.
I often envision retailers and suppliers as being an integrated pipeline with the purpose of delivering manufacturers’ goods into the hands of consumers, and the process should be one continuous stream of unobstructed product flow. But this pipeline more resembles a rusty waterpipe with twist and turns, narrow channels, dead ends, dams and log jams that account for the tremendous loss of money mentioned above.
Retailers: You’ve got way too much of the wrong stuff in your stores.
I am convinced that suppliers never intended it to end like this, and most of the blame can be put onto the retailers, as most retailers just don’t care what’s in their stores or how much. They erroneously expect suppliers to perform a miracle by managing their inventory for them; and it has become clear, this is an impossible task for the suppliers.
Suppliers try to solve the problem by shoving anything and everything into the stores that manufacturers claim will sell, but the demographics of each store is highly unique, and how is a supplier supposed to know every individual store’s market? They can’t.
Pre-salesmen and DSD jobbers, who work on commission, have taken advantage of this chaotic situation by participating in all-out wars to see how many products they can cram into every nook and cranny, where overstock has resulted in yet another problem… out-of-dates.
I have often stated that if you painted a door on the inside wall of a cooler, a drink pre-salesperson would freeze to death trying to open it.
Two years ago, I had a frank discussion with a cigarette rep that told me he was ashamed to admit that cigarette displays have gone completely out of control, and he did not believe the rebates and buy-downs were sufficient to compensate his retailers for the cost of space and the investment in tobacco products the retailer had to purchase in order to remain compliant.
Amazon has taken notice of this, and is working like the dickens to construct a high-speed interstate highway to bypass the mess and go directly to the consumer, cutting the retailer and the supplier out of the picture entirely.
However, due to the nature of convenience stores catering to impulsive shoppers on their way from one location to another, it will make it difficult for Amazon to steal convenience stores’ customers; but, if they can sell and ship me a $6.99 stereo headset for my Galaxy S8 cell phone through UPS, USPS or Fed X overnight, I can foresee the day when suppliers may go the way of the buggy whip. Never say never!
We are working on ways to address this problem and we are almost there. Suppliers need to take note of this threat and start working on solutions to counter their moves. As I am getting more inquiries from suppliers looking for solutions, I am convinced there is a growing concern. It is clear to me that we may have already reached that tipping point.
Bill Scott is the president at StoreReport LLC.