It’s back to school time of course, and if your experience mirrors ours, many of the key items are not on the shelf when you visit your local retailer.

All of which got me thinking about RFID, and its promise to significantly eliminate retail stock outs. As with all these retail-consumer goods supply chain initiatives over the past decade or more, RFID has two main thrusts: cost reduction (lower inventories) and revenue enhancement (reduced stock outs).

As one of the papers (written by Accenture) from the Auto ID Center at MIT stated: “Research for the Coca-Cola Retailing Research Council indicates a potential for lost sales of 3% annually to CPG manufacturers due to out-of-stocks, equating to a $12 billion revenue opportunity.”

They are only leaving one thing out: on the revenue side, it’s a zero-sum game.
There’s no question that in parallel with RFID, we are seeing an increased focus on the retail shelf and the consumer “moment of truth” by both retailers and manufacturers. This includes much commentary by industry analysts, and specific initiatives by companies such as Procter & Gamble (see SCDigest Archive from May 2004).

According to P&G, when customers can't find the P&G product they're looking for, the retailer loses the sale 41% of the time, and the customer buys a non-P&G product 29% of the time. What I’m afraid is getting lost, is that no matter what P&G, Target or anyone else does, we consumers are still going to spend exactly the same amount of money, or nearly so. Using P&G’s statistics, 61% of the time (100 minus 29%) when facing a stock out, the consumer either buys another P&G brand or package type, or goes to another store to buy the specific product they want. You can also deduce that of that 61% when they still buy P&G, 41% of the time the consumer goes to another store, and 20% they buy another P&G product in the same store. 29% of the time they pick up something from Kimberly-Clark, Unilever or Colgate.

The point is that the consumer spending only grows by such factors as the economy, discretionary income and population growth, and that any top line benefits a retailer of consumer goods company received from RFID or any other initiative can only come out of some competitor’s pocket. The $12 billion cited by Accenture is not extra revenue really available to manufacturers and retailers, but rather the amount of consumer spending that might shift to one retailer or manufacturer from another based on relative in-stock performance.

Why is this important? Because it says that the top line benefits from initiatives such as RFID (assuming for a moment they are real) are market share gains, not market expansion, as commentators often seem to imply. Meaning:

By contrast, the inventory savings from RFID and other initiatives are not zero-sum games. Everyone has the chance to reduce total inventories needed to support a given amount of retail sales, and total supply chain costs really are reduced.

All of which seems to me that in calculating increased sales from reduced stock-outs (as I have seen in several theoretic ROI business cases), companies need to be very careful to consider how much of their sales are really lost to out-of-stocks.

I realize the issue is more complicated than this, and involves a retailer’s “scorecards” for vendors in a category, of which in-stock performance is a key indicator. But over time, my wife is still going to buy the same amount of Tide, Crest and adhesive tape no matter what they do with RFID.
Is top line growth from in-stock improvement really a zero-sum game, or is actual consumer spending likely to be increased? Is the economic/ROI analysis around improved in-stock from RFID and other initiatives being done right?

Let us know your thoughts