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Deep Dives 18 minutes

US Retailer Survey: Revealing the Hidden Costs of Poor Inventory Management

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Coresight Research

Key Points

This report analyzes findings from an October 2018 survey by Coresight Research and Celect of 200 senior decision makers at US retail companies. Respondents were surveyed on the subject of managing retail inventory, including how much inventory their company sells at full price, factors impacting their markdown rate, factors prompting them to make better inventory decisions and how they think advanced analytics tools could help their retail sector.

  • We estimate that markdowns cost US nongrocery retailers approximately $300 billion in revenues in 2018, equivalent to around 12% of all US nongrocery retail sales.
  • Misjudged inventory decisions—including overbuying, buying the wrong type of products and misallocating inventory—account for an estimated 53% of unplanned markdown costs for retailers.
  • The average full-price sell-through rate among US nongrocery retailers is 60%, according to our survey. In total, some 50% of survey respondents cited inventory misjudgments as a barrier to selling at full price.
  • Our findings underline the intense competitive pressures that retailers face due to rapid changes in the retail and consumer landscapes. Survey respondents ranked competition and greater consumer choice regarding where to buy as the top external pressures prompting them to make better merchandising decisions.
  • The vast majority of retailers—some 86% in total—can identify specific uses for advanced analytics in their retail sector, such as to inform decisions regarding how much stock to buy, how to formulate promotional activities and which products to buy.
Introduction: To Avoid Markdowns, Retailers Need Better Inventory Strategies

Today’s retail environment is marked by more intense competition and rapid changes in consumer preferences, both of which pressure retailers to make smarter inventory decisions. To minimize unplanned markdowns that impact the bottom line, retailers must ensure that they deliver products consumers want to buy to the locations where they want to buy them.

Many retailers have an abundance of in-store and online data that can be used to inform business decisions, but analyzing this information can be challenging. Traditional merchandise and financial planning systems, including manual data entry systems, often generate only partial results, which can be hard to interpret and can ultimately lead to suboptimal business decisions.

Some retailers are already using advanced analytics to inform their decisions. These systems are typically online platforms or software that employ combinations of predictive analytics and machine learning to forecast demand or make intelligent recommendations for optimizing inventories. These technologies enable advanced analytics platforms to make the most of the vast and complex array of retail data available today, providing retailers with the tools they need to understand and anticipate shopper demand and hedge external factors that can impact sales.

Retailers often deploy promotions to beat the competition or sell slow-moving inventory. Planned discounts can help companies generate sales at times when shoppers expect to get a deal—for example, on Black Friday. But unplanned discounts, or markdowns, are the result of needing to clear excess stock, which is often due to inventory decisions that are based on incomplete or inaccurate data.

In this report, we dive into the findings of an October 2018 survey by Coresight Research and cloud-based predictive analytics provider Celect. We surveyed 200 US retail decision makers and asked them specifically about inventory management at their respective companies. Among the data points we discuss in this report are:

  • The estimated cost of markdowns in terms of lost revenues for retailers in the US.
  • How much product retailers, on average, sell at full price.
  • The main barriers retailers see to selling more product at full price.
  • The main pressures prompting retailers to make better decisions regarding inventory.
  • The top inventory-related challenges that retailers think their companies face.
  • How retailers think advanced analytics could benefit their particular retail sector.

For a number of data points discussed in this report, we focus on nongrocery retailing, as markdowns tend to differ fundamentally between grocery retailers (which face the challenge of perishability) and nongrocery retailers (which face different challenges, such as seasonality and inventory accumulation). Our data for nongrocery retailers refer to all US retail sectors apart from grocery retailers.

Markdowns Cost US Retailers an Estimated $300 Billion in 2018

In today’s complex and competitive retail environment, poor merchandising decisions can easily lead to high levels of unsold inventory, forcing retailers to turn to unplanned markdowns to clear stock. Failing to sell at full price translates into missed revenues and, in turn, margin losses for retailers.

We asked the US retailers in our survey pool what proportion of their sales are typically made at full price, and found that the average across nongrocery retail is just 60%. Extrapolating from that figure, we estimate that markdowns cost America’s nongrocery retailers some $300 billion in lost revenues in 2018, equal to around 12% of all US nongrocery retail sales.

Estimated cost of markdowns is modeled on an average 30% discount across nongrocery retail.
Source: Celect/Coresight Research

 

We also asked respondents what factors contributed to unplanned markdowns at their company and how much each factor contributed to these markdowns. Based on the responses, we estimated how much each factor contributes to the overall cost of unplanned markdowns. Our analysis suggests that the biggest contributor is reduced demand due to external factors such as unseasonal weather, sudden changes in consumer behavior and competitors’ unplanned promotional activities.

However, misjudgments regarding inventory account for a total of 53% of unplanned markdown costs for retailers, according to our survey results. The inventory “mistake” with the biggest impact on markdowns is overbuying inventory, which we estimate is the primary impetus for around 30% of all markdowns. Buying the wrong type of products also accounts for a double-digit share of unplanned markdowns, while the misallocation of inventory accounts for a further 6.9% share, as we show below.

Source: Celect/Coresight Research

 

Retailers face a selling environment that is more complex and hard to navigate than ever before, with multiple factors affecting consumer demand and the ability to sell the maximum number of goods at full price. In this environment, ever-expanding choice and rapid changes in consumer behavior are increasing the pressure on retailers to make smart merchandising decisions, and we see little prospect of these pressures easing. Our research underlines the scale of the challenge retailers currently face—as well as the opportunity to sell more products at full price.

Average Full-Price Sell-Through Rate of 60% Suggests Opportunities to Sell More Product at Full Price

Our survey finding that only 60% of all US nongrocery retail sales are made at full price suggests that better inventory management could help retailers sell far more product at full price. In line with the nongrocery average, apparel retailers also register a 60% average full-price sell-through rate, according to our study.

We asked survey respondents what proportion of their sales were typically made at full price, and found that:

  • Just 15% said that they were able to sell almost all of their inventory (90%–100%) at full price.
  • In total, only 49.5% said that they sold between 70% and 100% of inventory at full price.
Survey question summary: Approximately what percentage of your company’s total inventory is sold through at full price during your company’s typical reporting periods? Respondents could select one option.
Source: Celect/Coresight Research

 

We found that retailers that sell both online and offline show an even lower propensity to sell product at full price than retailers on average:

  • Among multichannel retailers, only 6.3% said that they are able to sell 90%–100% of their inventory at full price, versus the 15.0% average.
  • Only 28.5% of multichannel retailers said that they sold between 70% and 100% of their inventory at full price, versus the 49.5% average across retail.

This suggests that the complexity of omnichannel operations makes inventory management more challenging, as retailers selling through multiple channels must consider more variables that can affect sales. The added complexity appears to make it more difficult for retailers to make productive inventory decisions, and adds urgency to the need for optimized inventory management.

Half of Retailers Say Inventory Mistakes Are Costing Them Sales

To gauge what is driving retailers’ disappointingly low sell-through rates, we asked our survey respondents about the barriers they encounter when pursuing full-price sales, and found that:

  • In total, some 50% of survey respondents cited inventory misjudgments—which include buying too much inventory, buying the wrong type of products and misallocating inventory—as a barrier to selling at full price. Of these, overbuying was the most-cited inventory mistake. The scale of such misjudgments highlights the runway for improvement in merchandising decisions.
  • Some 36% of those surveyed said that external factors such as unseasonal weather, sudden changes in consumer demand and unexpected discounting from competitors are the main hurdles to selling through products at full price.
Survey question summary: Which, if any, of the following are challenges to your company’s ability to achieve a high number of products being sold through at full price? Respondents could select multiple options.
*Total proportion of respondents selecting “overbuying inventory,” “buying the wrong type of products” or “misallocated inventory”; it removes duplication of respondents who selected more than one of these options, so it sums to less than the figures broken out for each of these options.
Source: Celect/Coresight Research

 

The Pressures Impacting Retailers

Retailers are facing these challenges at a time of rapid change in the industry, and multiple factors are impacting consumer demand, including external pressures that are outside individual retailers’ control. Specific factors affecting retailers’ ability to sell the maximum amount of goods at full price include:

  • Increasing competitive pressures in all retail segments from challengers such as Internet pure-play retailers, new direct-to-consumer brands, fast-fashion retailers and discounters.
  • The presence of multiple retail channels. Consumers can choose from nearly unlimited product options available through a variety of digital and physical retail formats, and retailers must be able to serve shoppers wherever and whenever they choose to shop.
  • The availability of large consumer data sets. If used correctly, these data sets can help retailers better understand shopper trends, but they can be overwhelming and confusing if retailers don’t have adequate data analysis tools to help make sense of the information.
  • Shoppers are becoming more demanding and harder to influence. More consumers are deciding what to buy based on what they see on social media and what influencers recommend, but retailers and brands have less control over these influences than they do over traditional marketing channels.
  • More frequent discounting and promotions. Shopping events such as Black Friday and Cyber Monday mean that traditional end-of-season sales are no longer the most important promotional periods. Retailers are also using discounts more often in order to beat the competition and sell slow-moving inventory.

Ranking the Top External Pressures that Prompt Retailers to Make Better Merchandising Decisions

We probed how retailers perceive these challenges in the retail environment by asking our survey respondents which external pressures prompt them to make better merchandising decisions. Our findings underline the intense competition that retailers face due to rapid changes in the retail and consumer landscapes:

  • Respondents indicated that the leading external pressures in US retail are competition (cited by 59.5% of those surveyed) and greater consumer choice regarding where to buy (cited by 45.5%).
  • Greater unpredictability in consumer demand (cited by 43.0%) was also a leading factor, underscoring that changing consumer behaviors are prompting retailers to seek out better ways to merchandise goods.
Survey question summary: Which three, if any, of the following do you think are significant external pressures put on your company to make better merchandising decisions? Respondents could select up to three options.
Source: Celect/Coresight Research

 

External factors clearly impact retailers and the inventory-related decisions they make, but basic analysis tools are insufficient when it comes to understanding and predicting consumer demand. Our findings suggest that retailers could benefit from deploying advanced predictive analytics tools that use artificial intelligence (AI) and machine learning in order to make more informed inventory decisions and anticipate where, when and what consumers want.

Getting the Quantity Right Is a Key Challenge for Retailers

We asked our survey respondents what kind of inventory challenges their respective companies face, and overbuying inventory was the top response, chosen by 43% of respondents. However, underbuying inventory was the second-most-chosen option (cited by 36% of those surveyed), highlighting the tightrope that retailers walk when deciding what volumes to buy. In total, some 59% of respondents said that their company faces either or both of these inventory challenges.

But volume is not the only inventory question that plagues retailers, as almost one in three US retail decision makers we surveyed thinks that buying the wrong type of products is a significant risk. In total, 73% of retailers surveyed thought that their companies faced one or more of these inventory challenges.

Survey question summary: Which, if any, of the following do you think your retail company has challenges with? Respondents could select multiple options.
Source: Celect/Coresight Research

 

Despite advances in technology, including AI, many retailers are still making inventory decisions based on data that has been manually or automatically entered into spreadsheets. Our survey identified users of basic software tools and looked at their perceptions of challenges versus those of the average respondent.

When asked what inventory challenges their companies face, respondents whose companies rely on basic analytics and inventory management tools such as spreadsheets recorded meaningfully higher response rates across all options:

  • For example, underbuying inventory is an issue for 36% of all respondents surveyed, but it is an issue for nearly half of respondents who rely on data entry/manual input tools, as shown in Figure 7, below.
  • In total, some 72% of respondents who rely on data entry/manual input tools said that their company faces challenges from underbuying and/or overbuying inventory, compared with 59% of all respondents.

These findings indicate that companies using traditional inventory management tools are likely to face greater hurdles in selling at full price.

Survey question summary: Which, if any, of the following do you think your retail company has challenges with? Respondents could select multiple options.
Source: Celect/Coresight Research

 

Focusing on the Challenges Apparel Retailers Face

Apparel retailers have acutely felt the impact of new channels, emerging competitors and changing consumer spending priorities. Competitive pressures, rapidly changing consumer trends and the complexity of multichannel retailing affect operators in this retail sector more than they do retailers in many other sectors.

To better gauge the difficulties that apparel retailers face, we looked specifically at how respondents in the sector answered two of our survey questions versus how all retailers answered them:

  • Which, if any, of the following are challenges to your company’s ability to achieve a high number of products being sold through at full price?
  • Which three, if any, of the following do you think are significant external pressures put on your company to make better merchandising decisions?

With regard to selling product at full price, our survey revealed that buying the wrong inventory is a much greater problem for apparel retailers than it is for retailers overall. Some 37.1% of apparel retailers we surveyed said that buying the wrong type of product is a key challenge, compared with 26.5% of all retailers surveyed.

Survey question summary: Which, if any, of the following are challenges to your company’s ability to achieve a high number of products being sold through at full price? Respondents could select multiple options. Apparel retailers include department stores.
Source: Celect/Coresight Research

 

In terms of external pressures, speed to market is much more important for apparel retailers than it is for retailers overall. While just 26.5% of all respondents said that the need to get products to market more quickly is a key external pressure prompting them to make better merchandising decisions, among apparel retailers, that percentage rose to 42.9%.

Greater consumer choice over where to buy also rates much higher as an external pressure among apparel retailers, reflecting the industry disruption wrought by newer competitors such as off-price retailers and online retailers such as Amazon.

Survey question summary: Which three, if any, of the following do you think are significant external pressures put on your company to make better merchandising decisions? Respondents could select up to three options. Apparel retailers include department stores.
Source: Celect/Coresight Research

 

Traditional manual tools such as spreadsheets are no longer adequate for apparel retailers that need to anticipate shopper trends and run smooth inventory operations. Retailers in this highly competitive sector particularly benefit from predictive analytics and advanced inventory optimization tools that can help ensure the products shoppers desire are always in stock.

Most Retailers See Advanced Analytics as Key to Making Better Inventory Management Decisions

Our survey found that a large majority of retail decision makers see advanced analytics as beneficial for planning and running operations. Fully 86% of respondents were able to identify specific ways in which advanced analytics could help their retail sector sell more product at full price. Those surveyed view the technology as particularly helpful in informing decisions regarding how much stock to buy, which promotion schedules are optimal and what kind of products to stock. Just 14% of respondents could not identify a way in which advanced analytics could support full-price sell-through in their sector.

The chart below illustrates respondents’ views on the different ways advanced analytics could help their retail sector sell more product at full price:

  • The largest group of respondents (43.5%) considers advanced analytics useful in informing key inventory management decisions such as how much stock to buy.
  • Respondents also see advanced analytics as useful in formulating promotional activities: planning promotions was the second-most-chosen factor, cited by 36% of those surveyed.
  • Advanced analytics can also help retailers anticipate trends and, so, make better decisions regarding what products to buy. Some 34% of respondents said that these tools can help retailers in their sector choose what types of products to buy, making it the third-most-popular factor cited.
  • A very limited proportion of respondents said that they see advanced analytics as helping retailers in their sector decide the best location from which to fulfill online orders. This likely reflects retailers’ more limited awareness that advanced analytics can help solve such fulfillment challenges.We think it also suggests that the proportion of retailers deploying multiple fulfillment options (such as shipping from stores and from fulfillment centers and offering buy-online, pick-up-in-store services) is limited. In our view, there is an opportunity for retailers to reduce markdowns by using multiple fulfillment methods to distribute slower-turning inventory.
Survey question summary: In which three, if any, of the following ways do you think advanced analytics tools would most benefit your retail sector with selling through products at full price?
Source: Celect/Coresight Research
Conclusion: Advanced Analytics Can Help Retailers Navigate the Current Complexity of the Industry

The complexity of today’s retail environment heaps pressure on retailers to make smarter merchandising decisions—and our survey confirms that there is much room for improvement. We found that only 60% of US nongrocery retail sales are made at full price, and we estimate that discounting cost America’s nongrocery retailers around $300 billion in lost revenues in 2018, equivalent to about 12% of all US nongrocery retail sales.

Our research underscores the scale of the challenge retailers currently face—and the opportunity to sell more products at full price. Our survey specifically found that:

  • External factors such as unseasonal weather, changes in consumer preferences and competitors’ activities add significantly to the total cost of unplanned promotions for retailers, accounting for an estimated 31% of all markdown costs. However, inventory misjudgments in total account for fully 53% of unplanned markdown costs for retailers.
  • Respondents to our survey indicated that overbuying and underbuying inventory are key challenges for retailers aiming to sell at full price, with 43% of those surveyed citing overbuying and 36% citing underbuying as a key problem. Retailers relying on basic analytics and inventory management tools such as spreadsheets and other data entry and manual input systems cite these inventory challenges at higher rates than average.
  • For apparel retailers, buying the wrong type of product and speed to market are the top challenges in terms of making sound inventory-related decisions. Retailers in this sector face more competition than retailers overall do, and they are more vulnerable to shifting consumer trends.
  • Most retailers who participated in our survey (86%) are aware of how their companies can benefit from deploying advanced analytics, particularly in terms of informing decisions regarding how much stock to buy, how to best formulate promotional activities and what products to buy.
  • Only 14% of retailers surveyed said that they could not identify a specific merchandising application for advanced analytics in their sector. This suggests that there is a significant opportunity to increase awareness of the benefits that such tools can provide in terms of helping retailers make smarter merchandising decisions.
Methodology

The data in this report come from an online survey of 200 decision makers in US retail companies. These decision makers include heads of divisions, business units, large organizations and teams within retail companies. The survey was undertaken October 3–8, 2018. Our 2018 sales figures for nongrocery retailers refer to estimated total retail sales (excluding automobile retailers and gasoline stations). Grocery retailers’ sales are as estimated by Euromonitor International. The estimated value of revenues lost to markdowns includes planned and unplanned promotions.

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