Optimizing Store and Online Operations

The biggest issue impacting Retail Operations is supply chain challenges. To the public, they manifest themselves in empty shelves in store and products being out of stock online. In some cases, they show up as products being limited to a maximum number of units per shopper.

The critical impact of out of stocks is twofold:

• Greater lost sales, resulting in higher lost profits. This is painful, because the bulk of the gross margin on lost sales would have fallen to the bottom line, because most of the fixed expenses like rents, property taxes, headquarters personnel costs, etc, have already been covered by the actual sales.  
  
  
• In the slightly longer term, a loss of customers. Surveys over a number of years have shown if a customer experiences out of stocks on lines they normally buy on 2.7 occasions (on average), they switch to another store. At that point, the retailer loses the rest of the lifetime value of that customer.

These losses need to be addressed and their impact minimized.  

Employee churn in stores has always been a significant challenge for retailers averaging 40% a year in the UK (and 50% to 60% a year in the USA). Churn is expensive but in the past retailers could cope because, albeit costly, retailers could recruit and train replacements. In the current environment, recruitment is much harder. The Covid pandemic changed many people’s attitudes to working in retail and many companies now experience fewer applicants and sometimes no applicants for advertised vacancies. 

One impact of the labour shortages is the need to offer higher wages to get people to work in retail. Payroll is the single biggest non-merchandise expense in running a retail business and 85% of payroll costs are incurred in stores. Hence, keeping staff costs down is a focus for Store Operations management.

Rates (property taxes) are a significant burden to store-based retailers and create an unfair playing field verses online retailers. Ever rising parking charges in towns and cities, while not a retailer cost, is a retailer issue, because it is deterring people from shopping in stores and is a factor in encouraging the switch to online retailers.

Many retail products sold in stores are purchased overseas and much of the buying is in US dollars. Adverse foreign exchange movements caused by a weakening pound have caused the cost of imported goods to rise. Coupled with other cost rises, the shortage of key products and raw materials due to the war in Ukraine, it is contributing to UK inflation.

Energy costs have risen rapidly, largely through the war in Ukraine. Stores consume the biggest share of energy. In non-food retail, electricity costs are often in the range of 4% to 6% of store operating costs, rising by another 50% when stores have fridges and freezers, though many retailers have been replacing lighting with lower cost LED options in recent years. But the scale of increases being experienced will be a big challenge to manage.

Given the supply chain problems retailers are experiencing, many are increasing their safety stock levels when they can get supply, to provide more resilience to out of stock situations. This is reducing inventory turns and increasing inventory carrying costs.

Online consumer returns have risen significantly and are now causing some retailers to stop offering free returns.

The disruption to retail over the two years of Covid lockdowns has caused historic data to be a less useful baseline for planning and forecasting future years, making the business of placing inventory in the right place at the right time much harder.

Collectively, these issues require retailers to have a strong focus on improving their inventory management to cope with these issues.