Overall the retailer has to discount (in our example) 30% and he has missed 840k of full price sales! What does this mean? The table below shows the effect – of not missing any sale (discounts have not been reduced). In the table I assumed that the 30% that is discounted has an average of a 40% discount. In reality this number will be between 100% (the article doesn’t sell) to articles that need only a 10 or 20% discount. Play with the numbers – assume an average discount rate you are comfortable with.
The 840k (missed sales) are also just an assumption. In my model I assumed that the top articles are so popular that the shops could have sold 2.5 times as many. In reality this will vary a lot from retailer to retailer and season to season. We know its going to happen and experience tells us its usually big. Determine the (popular) articles missing from stock and for how long they are missing and create your own number to estimate missed sales.
The damage can be and usually is enormous. If we could just cut the damage in half, our profit margin would be almost 15%.
The damage to the supplier in our example is 3780k€ of sales (the variable cost of missed sales for the retailer). If the supplier’s variable margin (materials cost) is 50% then he has lost almost 1.9m from his bottom line. Wouldn’t a supplier that helps his retailers avoid surpluses and shortages get a greater share of the retailers’ business?
Wouldn’t it be worthwhile to invest some money to capture sales retailers miss today?
Retailers can quite easily check for shortages. Just list and keep track of all articles missing from shops’ shelves. Whether they make only one or several purchases for a season knowing what and how many articles are sold out is quite a good indication of missed sales. It won’t tell the whole story, but it will tell us a lot nevertheless. (The analysis cannot tell us the impact of promoting the less popular products on the sales (or potential sales) of the really popular items.) If the analysis shows products disappearing from inventory and sales statistics early in a season, then (a lot of) sales are likely missed. (Stores that have taken appropriate action to eliminate missed sales have seen 30-70% increased sales!)
The example is for fashion or similar retailers. However other retailers that do replenish stocks in their stores can easily make the same analysis and see whether they have the similar problems. The picture will look different, but there is still a good chance of (considerable) missed sales due to shortages.
Retailers apparently have a problem, but how can they fix it? Suppliers demand huge order quantities to try and offset the low prices retailers demand with a lower cost structure from big batches. Retailers demand low prices to counter the impact of surpluses and the season end discounts they must give. The solution seems to be obvious – pay a little more and get regular replenishments based on actual sales. Avoiding missed sales is so valuable that some extra cost is well justified.
The same concept will reduce discounting. Since products are being replenished according to actual sales there will not be that much left over for discounting. On top of that, special promotions of slow movers will be drastically reduced. Stopping promotions will also eliminate their effect on the popular items. (Promotions take up the best store space – where the popular items should be).
Clients will learn that some retailers always have the good (desirable) stuff in stock. Wouldn’t this have a strong positive effect on consumer traffic and push our retailers sales up even further?
Posted from Sandra Schmadtke, 18.10.2009 00:00 retail
