Several years ago a study was done to calculate the lost opportunity due to out-of-stocks in mainstream grocery. It was estimated that out-of-stocks cost retailers and manufacturers tens of billions of dollars each year. As a result, reducing out-of-stocks has been a major focus for traditional CPG.
Shelves full, customers happy
It continues, however, to be a huge problem in the natural channel, especially during promotions. From the consumer point of view, this is very frustrating, even causing them to shop elsewhere when they can't find what they want. To the retailer and manufacturer, that equates to lost sales and/or missed opportunity to bring new customers into the category.
Besides, promoting a brand that a consumer can't find on the shelf is a huge waste of money for the manufacturer, creating a negative impression for the consumer. Some customers will only give a brand one opportunity to convince them they deserve a shot in their shopping cart.
A favorite natural brand of mine is frequently out-of-stock in both conventional and natural; even more so when it's on sale. This is due to poor planning by the brand and a lack of shelf-holding power at the retailer. This makes the brand especially vulnerable to being discontinued at retail. Natural stores need brands that commit to keeping their shelves full and their customers happy. Brands failing to meet this basic objective will disappear from retailer shelves... and not in a good way. Once a brand gets kicked out of a store, it is almost impossible to get back in.
This is one of the main reasons the practice of category management started. Its mission was simply to reduce out-of-stocks, increase consumer takeaway and increase contribution—the profitability of a brand. Category management has now evolved to fully understanding consumer buying habits and helping brands meet consumer needs.
First impressions, done right
There are several tools to help eliminate the out-of-stock problem. Most topline reports won't point out distribution gaps and opportunities for improvement. In order to address this issue, you need weekly or daily item-level sales data by store. You need "line-of-sight" data for each store selling the item to identify and correct potential out-of-stock issues. This will help you calculate the expected lift (sales increase due to a promotion) for a planned promotion and help you pre-sell enough product so that the retailer can meet all the customer's needs.
For example, a store typically sells 14 items on an average week. The item comes 12 in a case and there are 1.5 cases on the shelf. When promoted, the sales are 21 items per week. The item should be reordered every five days under normal conditions and every three days when promoted—assuming next-day delivery. This will keep product on the shelf with no back-stock.
Understanding your sales at this level of granularity will help you reduce out-of-stocks, maximize promotions and ultimately reduce overstock issues after the event. Remember that consumers have a lot of choices, and most won't give you a second chance to make a first impression.