Americans were shocked at the sight of empty shelves during Covid and subsequently due to supply chain issues and labor shortages. America is the “land of plenty” and these were scenes that were never supposed to happen in this country. The history of retail in the US is full of success stories of big box stores that had the room to have huge selections and omnipresent full shelves. That’s what separated the Walmarts, Targets, and Trader Joe’s from the smaller retailers. They were big enough to buy smart and efficiently and to pass the savings onto consumers. Recently some of these stores who had months of empty shelves were able to replenish the stock but soon found that profits were waning. In other words, full shelves did not necessarily translate to profitable shelves.
Recently retail giant Target began cutting prices in an effort to get rid of excess inventory. They are taking steps to “right-size its inventory for the balance of the year.” They are canceling orders from suppliers, including for home goods and clothing, and cutting prices to clear out inventory. Target was letting out the word that they want to use the space in their stores more efficiently and far more profitable.
The Target move is an example of what retailers are doing in the wake of inflation and changing consumer habits as shoppers return to pre-pandemic routines where customers are not only focused on what they wear at home and home goods that boosted Target’s sales during the COVID-19 pandemic, for example. As a result, Target cut its profit margin expectations for the second quarter and saw its shares fall.
For retail, the fully stocked shelf vs. the profitable shelf is not new but it has taken on added importance in recent months due to supply chain issues and even labor shortages when they suddenly did not have the employees to restock shelves and even more importantly to keep them tidy. Retailers have long learned that a fully stocked shelf is an important visual for customers and helps not only attract customers but maintain their loyalty. Contrast that to the recent past when customers frowned at the sight of finding empty shelves. Simply put, full and neat shelves define a store. One customer put it this way: “What I hate to see most is boxes all over the floor, messy or empty shelves.”
But what if the items on the shelves are not making money or have tiny profit margins? The obvious answer is to replace those items with better selling and more profitable items. Retailers will tell you that it is easier said than done because of a variety of reasons that include being forced to use paid for items that are overstocked in storage or inventory, good purchasing, and long-term relationships. Well stocked shelves combined with good merchandising is a secret many successful retailers share. Discarding or returning some items that are not profitable can amount to a big loss for a retailer.
What the shelf looks like is critical, particularly in items like food. Mega-brokerage Acosta’s recent “Shelf Management Report” reveals that more than half of grocery buying decisions by consumers are made at the shelf, and that manufacturers spend $100 billion annually on promotions, versus $300 million on shelf management, which actually represents 66% of sales and 85% of profits. The Acosta study also notes that “fixing the shelf” achieves a sales lift of 6%, while there has been a decline in lift from promotional tactics in the past several years. What this study says is that well stocked and neatly set up shelves can make a difference between profitable shelves and weakly producing shelves.
Retail experts point out that a great deal goes into shelving decisions, including space allocation, design, color and even strength. Retailers must pay attention to more than their shelving solutions, advises Bill Bender, sales VP at Corona, Calif.-based Uniweb Inc. – they must perfect their display and storage solutions as a whole. The experts agree that items being out of stock (OOS) hinders the customer experience and makes them likely to spend less or even start shopping elsewhere. When an OOS situation occurs, a third of people will buy the product they need elsewhere, a quarter will buy a different brand, while others wait for a later date or even buy nothing at all. In every case, the supplier, retailer, and the customer all lose. Indeed, I was told by many retail experts that they noticed considerable defections from consumers when they found empty shelves.
But the experts also caution that bad shelving is not necessarily a result of the supply chain problems. Instead, they say, retailers make some colossal mistakes. For example, goods may be in stock in the warehouse, but the store shelves remain empty simply because a member of staff hasn’t yet noticed or lately the employee comes down with Covid and doesn’t show up for a week. Many of the Help Wanted posters in retail stores are looking precisely for personnel that can mind the shelves.
Every retailer places orders ahead of time based on their anticipated needs, but these orders are often based on little more than guesswork. In fact, inaccurate demand forecasting is one of the number-one reasons why supermarkets end up throwing away vast amounts of spoiled food every day. On the other hand, underestimating demand results in empty shelves, much to the frustration of customers. That’s why retailers must have an accurate forecasting system.
Lately the supply chain issues have been the leading culprit for bad planning. What is a retailer to do when he puts in an order only to be told that it is stuck in a California port? Or how does one deal with a distributor that suddenly explains that his overseas factory has been closed for several weeks due to Covid. This all adds up to chaotic times for retailers but most importantly they must figure out the shelf in terms of its making money. The retailers are after all in business to make money. One retailer said plainly: Every square foot of empty space amounts to not only a loss of profit but potentially loss of customers. The next time you look at a shelf, think of it more as a financial issue rather than just a convenience of finding the goods you need, which of course is important to all of us.