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You can't sell what you don't have.
While having a good price is important, we've heard over the year about the cost related to out of stocks, both in terms of lost sales and customer defections. Unfortunately, as inventory costs increase, more and more retailers are potentially exposing their stores to higher out-of-stock rates. In fact, the survey highlighted that nearly one-third of the retailers perceive that they have higher/worse out of stocks in cigarettes today than a year ago.
Why is that happening? According to the survey, retailers are now averaging around 14 days-of-supply for cigarettes with many indicating they're even lower. This finding is dramatic if you realize that the average is 25 percent lower than just two years ago when it was approximately 19 days.
The point is that lower inventory levels are good if the benefits (e.g., less product shrink, lower working capital requirements) are greater than the costs (e.g., lost sales, unhappy customers).
There's more than one way to skin a cat.
This proverb teaches us that a problem typically has more than one potential solution. In tobacco's case, the problem is the increasing costs associated with carrying tobacco inventory and the simple solution is inventory reduction, which we learned under lesson No. 1, can create other problems if done incorrectly.
What are some other, more effective solutions? Digging into the survey results revealed that retailers who focused mainly on reducing SKU counts were the least likely to report that out of stocks are worse than last year. On the other hand, those who focused primarily on lowering product supply across the board were 29 percent more likely to indicate that out-of-stocks are higher today vs. last year.
The point is that an effective approach to lowering inventory should always ensure that a stable supply is available in the store. Therefore, be careful about how the strategy is executed with top-selling SKUs, while also using the opportunity to identify low-value SKUs.
Inventory reduction opens up other possibilities.
Retailers understand they need to find space in order to add a new SKU. Conversely, when a retailer removes an existing SKU he/she needs to determine what to do with the free space. For instance, more than 70 percent of retailers are rationalizing cigarette SKUs to some degree, but it doesn't mean that their carrying few SKUs.
What should you do? In some cases retailers are shifting some free space to improve the in-stock position of top-selling cigarette SKUs. In other cases, many retailers are expanding the assortment in segments like subgeneric/private label and fourth tier to ensure stores are competitively positioned for the extremely price-sensitive shopper.
The point is that inventory reduction can help you broaden assortment where it makes sense while culling it back where it doesn't. And, at the same time, it can help you strengthen the everyday availability of the core SKUs that make up the base business.
Ultimately the process of reducing inventory on-hand creates both opportunities and challenges that retailers need to be aware of in order to build their tobacco business for tomorrow and beyond regardless of the economic or political environment.
David Bishop specializes in convenience retail and is the managing partner at Balvor LLC, a sales and marketing firm located in Barrington, Ill., and can be reached at david [email protected].