Inventory-centralized Retail

By Augustine Fou

This article examines several current trends and economic forces that are
converging to change retail as we know it. We extrapolate into the future and
take a look at what retail might be like down the line.
Current Trends In Retail More and more stores have recently been
increasing the number and variety of their product offerings in an attempt to
attract a wider customer base and potentially to keep them in stores longer. For
example, Wal-Mart continues to add grocery and gasoline offerings to more and
more of their store locations in an effort to bolster their "one-stop shop" value
proposition. But there is a corresponding increase in redundancy, inefficiency,
and waste. As Wal-Mart continues to encroach upon the domain of local grocery
stores and gas stations, all retailers in the area are hurt. Having redundant
inventory in the same geographic location means greater inventory costs and
waste because consumers are not going to buy more or change their typical
purchase patterns. Consumers suffer too because these increased costs and
inefficiencies are ultimately passed along to them as higher prices.
Another trend in retail is that low-cost providers such as Target and Wal-Mart are
expanding further into categories like branded clothing. Older retail brands or
department stores which have not connected well with trend-conscious
consumers will continue to lose business no matter what inventory they stock.
Informal surveys of today's young people reveal that they "never" shop or shop
very infrequently at department stores like JCPenney's, Kohl's, Nordstrom's,
Foley's, or Federated; in fact, some have never even heard of these store
brands.
Single-line retail stores like Tower Records (which sells music) and Sports
Authority (which sells sporting goods) are also being forced to change the way
they do retail. They must move beyond the traditional definition of retail and
expand their value proposition to become "destinations" for entertainment or
sports, respectively. Music stores can no longer be merely stock rooms for
thousands of CDs because today's consumer can easily browse thousands of
CDs online, listen to samples, and make purchases at better prices from the
comfort of their own home. Physical retail stores have to deal with the extra costs
of real estate, inventory management, and labor. One striking example, however,
of a store which continues to innovate new in-store value propositions is Barnes
& Noble. Their in-store CD-sampling stations allow customers to sample ANY
music CD or get more info on any DVD simply scanning the UPC barcode at a
sampling station; the samples start to play instantly and information about the
product is displayed on the small 6-inch flat panel display. While sampling is
already widespread online, the immediacy, efficiency, and "user-friendliness" of
the Barnes & Noble system provides enough incremental value to make a trip to
the store worthwhile.
Another entire category of retail, namely malls, are also being forced to
reevaluate their value proposition to consumers. In the '70s and '80s malls
became popular because they centralized many small stores under one roof and
added conveniences like food courts and movie theaters to make a trip to the
mall something of an excursion. They also quickly became places for teens to
hang out for free (as opposed to bars or restaurants, where they felt obliged to
buy something). But most often visitors to malls are just that -- visitors -- and not
buyers; they hang out, socialize, browse the merchandise, and leave.
Furthermore the individual stores that have been aggregated inside malls are still
not able to compete with Wal-Mart on price for commodity goods; centralization
of stores for one-stop shopping is no longer unique to malls since Wal-Mart
already does a better job of it; and the food courts and movie theaters are no
longer enough to make malls destinations.
Economic Forces There are also strong economic forces at work to reshape
retail as we know it. While there can be dramatic fluctuations of economic
condition, there are always downward pricing pressures from the competitive
environment which continue to reduce margins or eliminate them altogether.
There are inherent inefficiencies built into traditional retailing because displaying
a large number of items on physical store shelves or racks and allowing
customers to browse through, to try on, or to otherwise handle these items is
extremely inefficient way to sell. In other words, the sale of one item is the
convergence of several relatively small probabilities -- e.g. the probability that a
consumer has a need and is actually ready to buy, the probability of that
consumer takes the time and trouble to go to a retail store, the probability that the
item of the right size, color, or feature set is in stock at that time, the probability
that the price is "right," and potentially even more factors. These probabilities
combine to make the chance of an item being purchased very small indeed.
Retailers have to essentially be "fortunetellers" to purchase and stock the right
products and product mix in anticipation of consumer demand; retailers have to
have the foresight to locate a store near enough to consumers for them to
actually make the trip; and, of course, retailers have to play the pricing game.
While in the past, sufficiently large margins allowed for such inventory and pricing
games, razor-thin margins of today's retail mean that inefficiencies of traditional
retail will no longer be viable.
On the demand side, consumers are continually gaining power through
technology, more efficient sharing of information, and alternative retail channels.
For example, online shopping bots and price comparison engines help to
consumers find the best price anywhere. This dramatically increases the speed
at which prices are driven down to bare-minimum commodity prices. Mass
consumer feedback on particular products or manufacturers can be shared with
millions virtually instantaneously online; this means that positive reviews of
popular products will drive rapid spikes in demand while negative reviews can
send sales of a particular product spiraling down. Finally, online stores provide
consumers a convenient alternative to making a trip to a physical store and often
offer better prices and hard-to-find items, too. People go into stores like Best Buy
and Circuit City and play with products, but then go home and buy online
cheaper.
Consumers have also been conditioned to make purchases only when there are
"sales" going on. And in response, retailers have been conditioned to put on
"sales" more frequently or even continuously. Not only do such sales annihilate
margins for retailers, but they also make consumers wary and jaded to these so-
called "sales" that go on all the time, and even then they usually don't think the
sale price is all that good. This is a devastating cycle which leads to further
concentrations of demand, centered around calendar-based holidays like
Valentine's Day, birthdays, and most especially Christmas. Such concentration
means that retailers have fewer and fewer chances to "get it right" -- in other
words, it is imperative that they get the right product mix and inventory for these
small number of occasions; otherwise they won't make the sales numbers. But in
recent years, it is well-publicized that popular items are always in short supply
and not-so-popular items remain on shelves and must be "disposed of" in often
below-margin fire-sales after the holidays.
The economic forces of continuous downward pricing pressure, increasing
consumer power, and demand concentration are combining to make retail ever
more Darwinian. The inefficiencies and "slowness" of traditional retail is no longer
economically viable. This calls for a new way of looking at retail and executing it.
Inventory Centralized Retailing We propose a new concept called
"inventory centralized retailing." Unlike traditional retail where individual stores or
chains of stores purchase, distribute, stock, and sell specific inventory at specific
geographic retail locations, in "inventory centralized retailing" most of the
inventory is left in highly automated regional distribution facilities -- extremely
common and efficient having been refined and streamlined since the advent of
Internet shopping. The individual retail stores then become highly specialized
showcases of products, where consumers go to experience or "try on" products.
They can also make the purchase in the store, but the item will be delivered
directly to their homes from the regional distribution facilities. The retail stores will
no longer stock aisles and aisles of product; they will no longer need to use large
amounts of real estate for inventory storage; and they will not need to handle
large numbers or variety of products. Retail stores can instead spend money on
showcasing products in their "natural environments" and allow people to
experience these products in the proper context, thus increasing the probability
of making the sale.
"Inventory centralized retailing" also means that existing retail stores can
selectively increase the variety of their product offerings to attract new customers
and retain existing ones without an associated increase in inventory related
costs. For example traditional music stores can now offer consumer electronics
such as stereo systems, home theater systems, and even TV's without having to
manage such inventory themselves. They can set up a showcase of these
selected products which complement their primary product lines and are on-
brand, on-theme, or generally related to the same target consumer that visits the
store. The consumer can try out or experience these relevant products in the
retail environment and in association with other relevant products such as the
music being offered for sale. And, if appropriate, they can even make the
purchase in-store. They will then receive a card with a unique code on it or some
other form of proof of purchase. The product will be then drop-shipped directly to
their homes or an address the customer specifies, which could be particularly
convenient for larger items like TVs.
The economics of "inventory centralized retailing" are also attractive to retailers,
manufacturers, and consumers. There are many components of a retailer's cost
structure that can be attributed to inventory -- 1) capital costs of acquiring the
inventory, 2) logistics costs of getting the inventory to stores, 3) real estate costs
of warehousing the inventory, 4) labor costs of stocking and restocking inventory,
and finally 5) costs of inventory risk -- i.e. not all retailers can predict demand
with 100% accuracy which means that popular items will inevitably be
understocked and "dud" items will be overstocked. With inventory centralized
retailing, retailers can do away with most of these costs or significantly reduce
them. For example if a retail store did away with the costs of moving large TV's to
particular store locations, warehouse them until they are sold, or disposing of
unsold inventory, they could probably significantly lower the price of such TVs
and still make more money. The economic argument for inventory centralized
retailing is that for particular categories or types of products the cost of drop
shipping individual items to individual consumers is still less than the combined
costs of capital, logistics, real estate, labor, and inventory risk attributable to such
products. In this scenario retailers can earn more profits; manufacturers can
potentially achieve higher wholesale prices; and consumers might get better
prices and a better retail experience.
Another benefit of inventory centralized retailing is real-time sales data.
Historically, manufacturers don't have timely sales data to do accurate
forecasting. In other words, while they may have data on large, aggregate
shipments of product to retail stores or chains, they typically don't have detailed
consumer sales data from the point-of-sale or they get such data many months
after the fact, again in aggregate. Their lack of timely data leads to oversupply or
undersupply, and thus adds to the inefficiencies of traditional retail. With
inventory centralized retailing, manufacturers can have detailed and real-time to
information about individual consumer sales as they happen. Such data leads to
more accurate forecasting, manufacturing, and even better products or product
mix.
Conclusions Given the known inefficiencies of traditional retail, the general
trends which are making retail ever more Darwinian, and other economic
arguments, inventory centralized retailing might become a significant new way of
doing retail which has benefits for all parties involved -- manufacturer, retailer,
and consumer. If a retailer can increase the variety of their product offerings
without an associated increase in inventory-related costs, then they have a
chance to attract more customers into their stores, and perhaps keep them there
longer. The other macro benefit is that these inventory related costs are not
passed on to the consumer in the price of the item. Increasing efficiency through
the use of technology and other methodologies can help retailers survive and
gain a competitive advantage while giving consumers better value -- i.e. lower
prices and better shopping experiences. And finally the manufacturer makes
sales with better margins and gets real-time data for more accurate forecasting
and planning, thus completing the entire cycle to increase the efficiency of the
retail cycle.

Dr. Augustine Fou is SVP Digital Strategy at MRM Worldwide