This Holiday Inventory Strategy Is Risky for Retailers

Brick-and-mortar retailers have it tough. Stores are closing, many holiday shoppers are going online to buy gifts, and online competitor Amazon is recording record sales. Some retailers are taking a different approach this holiday season, reducing in-store inventory to avoid having unsold merchandise after the holidays. Merchants are hoping this strategy, along with omnichannel improvements, will make the season bright, but shoppers may not play along.

The strategy

Reuters reported that Macy's, J.C. Penney, Kohl's, and other retailers are cutting back on in-store inventories to reduce chances of after-Christmas markdowns.

A strategy of buying in smaller batches with more frequent replenishment makes sense, but also has risks as the store has more deliveries to manage and the store might end up not having the items people want when they want them.

If "stockouts" happen, retailers risk losing sales. An alternative could be to offer customers an easy way to buy the desired product online, but it's not that easy to execute.

"Mind-boggling" complexity for retailers

Many retailers are pursuing an omnichannel strategy, which is a hybrid approach of online and brick-and-mortar, taking advantage of the best parts of each channel to improve the customer experience. Common omnichannel customer options are covered in the table below.

These features make great use of a retailers' online presence and brick-and-mortar assets, but are complex to execute. Brian Gibson, an Auburn University professor of supply chain management, described the level of integration for an effective omnichannel experience as "mind-boggling." With this complexity, retailers have to execute at a high level to avoid disappointing customers.

And the stakes are high. With many retailers closing stores and customers getting more comfortable buying online, brick-and-mortar shops are between a rock and a hard place.

More customers shopping online

While the Census Bureau reports that less than 10% of all gross merchandise volume in the U.S. is purchased through e-commerce, more customers are using online resources for their holiday shopping than ever before. A study of holiday shopping trends by Deloitte had some results that should give brick-and-mortar retailers pause.

• 83% of Americans said they planned to utilize online resources in their holiday shopping.
• 75% of Americans planned to purchase gifts online.
• Shoppers estimated that 51% of their holiday budget would be spent online.

Fellow fool.com writer Dan Kline pointed out that another of Deloitte's studies was done online, potentially skewing data toward online preferences, but a Pew research study from 2016 confirms that more Americans are getting more comfortable with e-commerce. The survey found 79% of Americans had made an online purchase, up from 22% in 2000.

If a customer can't find what they want at the brick-and-mortar store, online shops are always beckoning, with Amazon.com leading the pack. The e-commerce giant is estimated to take 43.5% of all online sales in 2017 and could woo a disappointed customer with more selection, better prices, or superior shipping options.

It's understandable that retailers are trying to avoid profit-sucking after-holiday markdowns by lowering in-store inventory, but time will tell if they've managed to strike the right balance this holiday season or if they fall short of what customers want.

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