Why out-of-stocks should be part of a Total Retail Loss perspective
Why out-of-stocks should be part of a Total Retail Loss perspective

March 22, 2021
By Adrian Beck

The most recent iteration of the Total Retail Loss typology, published in 2018, maps out 42 categories of loss spread across four ‘centres’: the Retail Store, the Retail Supply Chain, E-commerce and Corporate. While there are undoubtedly more categories of loss that retailers can and do experience, these are considered types that are ‘Manageably Measurable and Meaningful’ (the 3 M’s Test). In other words, retail companies have a rationale and routinised methods in place to gather this data. Perhaps not surprisingly, the Retail Store is the place where the largest proportion of categories of loss are located: six types of malicious loss and eight types of non-malicious loss. These range from external theft, burglaries and arson, to damages, wastage and missed returns to suppliers.

out-of-stock shelves

One category of non-malicious loss in retail stores that has frequently raised the proverbial eyebrow is that of Lost Profit from Out of Stocks. This is based upon a calculation of the sales that have been missed due to products not being available for a consumer to purchase. Some have argued that this is not a ‘loss’ but simply an inevitable but regrettable cost of doing retail. However, if you consider the definition of loss set out in the Total Retail Loss concept: Events and outcomes that negatively impact retail profitability and make no positive, identifiable and intrinsic contribution to generating income, then it is hard not to conclude that it is a loss – what retailer sets out at the start of the day with the goal to limit sales by purposefully not making stock available to the consumer?

However, it is a statistic that can be difficult to calculate – estimates have to be made about what products would have been sold had they been available – would a consumer perhaps substitute the missing item with another similar product; might they return the following day to purchase the item when it is in stock again; or might they go to another branch of the same retailer to buy it? Thankfully, there has been a significant amount of research undertaken to understand the outcome of Out of Stocks (OOS) which can be used by retailers to estimate its impact upon their businesses.

Indeed, an ECR Retail Loss Group study undertaken in 2012 published some data on this issue as part of a broader research project looking at the effect of staff satisfaction on retail losses. In this study, three large European grocery businesses shared not only their staff surveys on levels of employee satisfaction, but also the value of losses due to shrinkage (unknown cause stock loss), wastage (fresh produce not sold), out of stocks (as defined by the participating retailers) and cash losses (both malicious and non-malicious). The out of stock number was then used to calculate a lost profit from out of stocks estimate (details of the methodology can be found in the original report). A summary of this data is shown in the Table below.

Table: The Costs of Four Types of Loss in the European Grocery Sector

While a more detailed analysis of this data is available in the original report, what is fascinating about this data is two things: First, based upon just four types of loss, European Grocers are losing over 3% of retail sales, where most shrinkage surveys average around about 1.4%-1.6%. Secondly, the traditional measure of loss – shrinkage – is only third in the list in terms of value. While it may not be surprising to see wastage as the costliest factor, it is extremely interesting to see estimates of lost profit from out of stocks being considered the second most costly type of loss, above shrinkage.

Other work by the ECR Retail Loss Group has highlighted the importance of inventory accuracy and how its improvement can lead to a growth in retail sales by as much as 8%. What is also evident is that poor inventory control can lead to OOS and this in turn can lead to lost profits as evidenced in the data presented above. In many respects it is different sides of the same coin – increased sales/reduced lost profits from OOS – it can be recorded as one or the other. But what the Total Retail Loss Concept and the various ECR Retail Loss reports show is that retail businesses need to avoid a myopic approach to understanding how they are affected by loss and that successful retailers will always benefit from having high levels of inventory accuracy.

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