Published by ETRetail.com, March 28, 2017
How come a retail store (displaying and selling regularly required essential items such as a food and household products) opened by a retail company with due knowledge of the potential sales in an area close down after some time?
(The burden of the inventory of a few closed stores can bring the retail company to its knees)
The root cause:
Many store incharges often blame it on the competition giving out higher discounts / schemes/ lower prices, or increased costs or lower ‘demand’.
With the extent of knowledge of potential market available , the probability of the estimation of the potential footfalls / sales (market share) for a store in an area being way off the mark is low. Nor do the initial estimation of the costs (rent, manpower, electricity, etc) increase dramatically, to wipe out the initial estimation of the profits. It is also fair to assume that the shopping experience was not compromised. Nearly all the leading chains make it equally attractive for customers through value offers, discounts etc. So the only reason to be analysed remains – lower ‘demand’.
What is demand for a store? One of the most weighted factor determining demand is the potential flow of people into the store.
When the store is operational for considerable time, the flow of customers into the store is quite deterministic. Discounting a few external factors such as a new difficulty in approach to the store, social risks etc, can the demand in the store decrease?
So the key question to answer is: All other external factors remaining unchanged, why does the flow of people into the store decrease? One of the primary reasons is the inconsistent availability of all the items that she wants (her whole shopping list). In such hyper stores the customer would like to complete her shopping in a single visit. Unavailability of even a few items of her shopping list is viewed as huge inconvenience as the customer has to make additional trips to another store. If the unavailability, even if it is of different items at different times, is experienced regularly, and if there is a nearby option, the chances that she will try another store is very high. Most importantly visit to such stores being a frequent topic of discussion amongst women, not so favourable word of mouth can urge a few more customers to reinforce their experience and reduce their visits to this store. As the number of such customers increase, the loss of customers for the store increases exponentially (and not linearly).
As the customer flow decreases, the inventory turns decrease as the inventory held is the same as before and the sales has decreased. Lower inventory turns locks up the cash of the store. As inventory is not flowing as was expected, the limited capital/ budget (for a category) gets tied up in items not selling immediately. As forecasts are not accurate (suppliers compete with each other for higher visibility and customer preferences change), some items get stocked out and some items become surplus. To provide better prices to customers category managers buy in high volumes to avail discounts. And if these now turn into slow movers, a huge chunk of capital is now locked.
(Study a few stores and warehouses and you will realise how prevalent this situation is. A store will have 15 days of inventory, though the supplying warehouse is 1 day away, and even in these 15 days there will be some stocked out and some well above the 30 day level).