What drives strategic investment in retail product availability? Maintaining optimal product availability is a long-standing issue in the supermarket and other retail industries. Studies consistently find that retailers bear the responsibility for the vast majority of out-of-stocks, which affect 8.2% of a typical food retailer's items and cost $6-12 billion in sales (3-4%) annually in the supermarket industry. Their prevalence has motivated a growing empirical academic literature that analyzes consumer behavior in the presence of out-of-stocks. Whereas these studies focus on the effects of out-of-stocks (and find them to be significant), this project analyzes their underlying economic causes.
Data on out-of-stocks are fundamentally rare, and neither large-scale nor longitudinal data have been studied. This project fills this gap using data from the survey conducted to compute the consumer price index (CPI). The data include monthly prices and product availability on about 30,000 supermarket goods over a 17-year period. This unique source of large-scale, longitudinal, store-identified, product-level data on out-of-stocks enables an assessment of the underlying item, market, firm, and store characteristics that drive differences in product availability investment and operating performance across retailers in the supermarket industry. The project focuses particular attention on how retailer competitive strategy and liquidity constraints contribute to out-of-stocks, answering important questions such as: Does market power lead retailers to increase or decrease investment in product availability (an important dimension of retailer service levels)? Do the cash flow demands of debt service discourage product availability investment or stimulate productivity improvements?
This study uses CPI microdata to overcome previous data availability challenges and provide a better understanding of the relationships between marketing, operations management and financial structure in the retail sector. It analyzes whether retail product availability has an important strategic component and whether capital structure has a significant effect on strategic investment in the retail sector.
Broader Impacts: Retail product availability is an important issue for both retailer and product manufacturers, as it is an essential component of managing customer retail experiences and building product brand loyalty. Existing studies estimate that out-of-stocks cost retailers $6-12 billion in sales annually. The cost for manufactures may be even larger, since consumers are more likely to substitute brands than delay purchase. In considering the underlying economic determinants of product availability, this project goes beyond existing studies that generally ascribe out-of-stocks exclusively to operational inefficiencies. Lessons learned may help retailers interested in effective inventory management develop targeted incentive programs and the results may influence how regulators approach product availability. In particular, understanding how retail competition affects service levels, such as product availability, is an important consideration in developing merger policy for the retail sector.
