I was reading the recent SCDigest article Just How Big is the Out-of-Stock Problem in Retail?, and the definition of what the report called an “out-of-stock” reminded me of what we called in the “old” days of retail the “Walk to Buy” ratio. Simply put, how many customers walked out of the store without a purchase to how many customers bought something.
Typically a “walk” was considered the result of one of three things:
- Out-of-stock of the exact item the customer was looking for and there was no substitute or the substitute was not acceptable.
- The customer could not find the item, and/or could not find help to find the item (but the item was in stock).
- The price of the item was too high.
Good marketing and pricing is supposed to fix the last issue.
The middle issue is addressed through a good retail layout, good signage, and good floor customer service.
So the only issue left to fix is the Out-of-Stock issue. So, how long ago was it that you walked into a store and walked out without the item you were looking for? And why was it?
This issue came up in a discussion yesterday with one of my clients as we talked about the liquidation and demise of Circuit City stores. The conventional wisdom is that Circuit could not compete against the execution and pricing juggernaut of Best Buy.
I don’t buy that they could not compete with Best Buy, or that Best Buy is invincible. Yes, Best Buy is good, but they were not the only reason that Circuit City gave up and liquidated.
Some of what “Shorted” Circuit City was self inflicted. The decision to exit the appliance market did get “City” out of a low-margin business, until you look at the losses in margin that appliances brought in from the service contracts that they could sell with each appliance sale. You don’t sell a contract on a boom box or a CD, but you will sell a good contract on a washer and dryer. A 5-year contract could add back to the margin of a washer dryer combo almost $110, which could goose GM anywhere from 700 to 1250 basis points.
As I understand the economic argument that was made, the chain expected to gain some costs based on the reduction of space needed in the stores without the large storage back room. It would be nice if you could rewrite the lease, but most of the leases could not be altered, so they had to keep paying for that space.
Another “self-inflicted wound” was the change in compensation plan from commission sales to a flat program. While many people have nothing good to say about commission sales, the proof is in the pudding. When there is lots of selection of price points to sell a customer, a good commission salesperson will match the customer up to the right level of solution. They will make sure that the customer is happy, both because they know that a return will pull money out of their pocket, and that a happy customer will come back. And yes, Best Buy did convert out of commission sales, but replaced the commissions with a nice pay differential (and sometimes “bonus”) for the departments that have high tickets and need more customer service in conducting the sale. Those “conditions” weakened but did not kill Circuit City.
What killed Circuit City was out-of-stock issues. I know this from a very unscientific analysis of actually shopping both Circuit City and then Best Buy over the past three years. I bought from both, but more from Best Buy than Circuit City because of one main factor, when I could not find what I wanted at Circuit City, I could find it at Best Buy.
The out-of-stock issues started to come up about three years ago, it seemed to me. In my “route” to buy a major electronic or computer item, I would follow a route that would take me to a Tweeter first, then Circuit City, and finally to Best Buy if I did not buy at Circuit City.
The Tweeter stop was to look at the eye candy and get some “skinny” from the salesman. In almost all cases, the price that they wanted for the items was “above” what I was willing to spend. My Walk to Buy ratio for Tweeter was 1:0 each time. Eventually, I quit stopping there.
Then I would go around the corner to Circuit City. In some cases, I would find what I was looking for and at a price that I liked, so I would buy. But often, while the main item was there, the needed “accessories” (an extra battery for the camera, the spare cables for the router, the printer cable for the printer, etc.) would be out of stock or the substitute was not acceptable. I would “walk” out and drive over to Best Buy to price and see if they had the accessories. I would find the price on the key item to be the same and I would find the accessories (Best Buy may have been a bit higher priced on the accessories) were in stock.
I would make the buy at Best Buy so that I would have everything I needed to have “joy” that day. As time passed, more and more I was walking empty handed out of Circuit City and over to Best Buy. So were a lot of other people. I had friends that said that they stopped going to Circuit City because of the stock outs.
So you would think that Circuit City and the inability to maintain a great in-stock position would be a no brainer to fix. It is not that simple. Because while Circuit City’s inventory management and buyer teams worked hard to keep stocking positions, they were undermined by their own suppliers. I contend that the suppliers “Shorted” Circuit City out of business.
More on that next time.