How do you judge a successful retailer?

How do you judge a successful retailer? While the eyes of the retail world have been fixed upon Christmas trading updates in recent weeks, poring over like-for-likes, sales growth and margins, one of the most powerful indicators that often gets overlooked is inventory management.

It’s not the sexiest of indicators, but stock control and the ability to respond quickly to buying habits can make or break a retailer.

In a world where retailers are hunting for every penny, eking out cash to fund investment and even survival (where the customer is ever more impatient and discerning, the inventory cycle and supply chain can often be overlooked.

Take for example Tesco’s recent problems.

A letter to The Sunday Times outlined five reasons why a reader had stopped shopping there, of which three – stockout, blocked aisles and non-barcoded items – were related to inventory management.

Supergroup admitted to problems following a botched implementation of a warehouse management system. The glitch led to incorrect stock profiles and incomplete ranges on key lines, knocking an estimated £8.8m from profits.

Own goals like these should never happen as making the correct stock available at the right place at the right time is simple. Moreover, real-time systems that provide up-to-the-minute information that draws together sales data across mobile, online and stores has also, in theory, made managing this process easier.

Previously only the preserve of those with deep pockets, the cost of this technology has dropped considerably in recent years. At the same time, its sophistication has soared.

Unfortunately, it appears that this complexity has made execution more difficult. Too many retailers have been burned by the promise of untold inventory efficiencies only to find the system they have purchased difficult to implement.

Stock management issues can often get ignored. Working capital is used to fund additional stock to service new orders through more frequent deliveries. Although stock-turn improvements happen, this can mask excessive stock build. Excessive stock at the wrong time inevitably leads to crippling discounting as seen during Christmas 2008.

At the other end of the scale with stockouts, many retailers underestimate the scale of the problem, assuming that customers will select a substitute product rather than go elsewhere. This is a dangerous assumption given the ease with which customers can switch between stores.

According to estimates, roughly 8% to 10% of SKUs are stocked out at any given time. Across clothing stores it is even worse and can average as much as 20%.

Stockouts not only lead to lost sales but also harm customer goodwill. A study conducted by a multinational consumer company found that over 80% of consumers blame retailers for a stockout irrespective of the cause.

So how do you judge a successful retailer?

If sales are vanity, profit sanity and cash reality, a less-than-perfect strategy with perfect execution will beat a perfect strategy with less-than-perfect execution.

  • Don Williams, national head of retail and wholesale, BDO