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Is Your Supply Chain Vulnerable?

The combination of pandemic lockdowns and rising freight prices has forced some companies to focus on supply chain vulnerabilities.

Many commerce businesses — ecommerce, omnichannel, direct-to-consumer, B2B — have experienced some form of supply chain disruption in the past 18 months.

Each business and industry likely has unique experiences relative to products and suppliers. Those experiences inform a new sense of supply chain awareness to guide purchasing, inventory, and promotional decisions.

Pandemic

“You cannot assume that [your supply chain] is going to work the way it did in years past,” said Rick Wilson, CEO of Miva, the SaaS ecommerce platform.

Wilson’s company witnessed the pandemic’s impact across thousands of commerce businesses.

At first, there was a sense of the unknown.

“It is hard to take yourself mentally back to a place in time, but if you reflect back to March 10 through April 30 of 2020 … we were worried that our merchants might go out of business,” said Wilson, adding he was concerned the entire worldwide economy would suffer.

Soon, however, the effect on ecommerce became clear. Sales soared. Wilson’s clients experienced Black-Friday-like revenue in the middle of summer.

Concerns about the economy gave way to supply chain worries.

Lockdowns

In 2020, global shutdowns meant to “flatten the curve” slowed or stopped manufacturing the world over.

Not surprisingly, inventories began to shrink.

In February 2020, for example, U.S. retailers held approximately 43 days of inventory, according to an article from the White House citing data from the U.S. Census Bureau. By June 2021, retail inventories had fallen to about a 33-day supply, the lowest in 30 years.

U.S. retail inventory levels were at a 33-day supply in June 2021, the lowest level in decades. Source: WhiteHouse.gov.

Thus businesses should think about the manufacturing facilities they depend on, including the risks of further lockdowns and other pandemic-related disruptions.

“It’s simple project management,” Wilson said. “You have to reverse engineer [the supply chain]. You take a Gantt chart, and you work back from delivering to the customer. You check every step.”

If manufacturing is vulnerable, a merchant might purchase earlier, hold more inventory, or promote relatively less. For example, a retailer without adequate holiday inventory could avoid offering Black Friday discounts and, instead, sell available stock at full margin.

Freight Challenges

Slowed manufacturing is not the only potential supply chain problem. Worldwide container shipping costs have quadrupled in the past year, according to The Wall Street Journal. Some container prices have risen more than 50% since May 2021.

The factors driving the increase are complex but likely include pent-up demand, the March 2021 Suez Canal blockage, and overworked ports in California and China. Regardless, the effect is painful for commerce companies.

“Just this past week, I got some really bad news. One 40-pound container going through Surabaya, Indonesia, used to cost $5,000. It’s up to $19,500,” said Kyle Tortora, owner of Lotus Sculpture, an Oceanside, Calif.-based retailer of artisan-made Hindu and Buddhist statuaries.

“Indonesia is typically the most expensive place I ship from, but this is way too cost-prohibitive,” said Tortora, “so I changed my plan.”

Screenshot of Lotus Sculpture home pageScreenshot of Lotus Sculpture home page

Lotus Sculpture has had to change its purchasing and inventory practices in response to supply chain challenges.

Tortora generally purchases garden statues from artists in Indonesia, buying a container load every month or so. This year he took a different approach, placing a massive five-container order but not shipping it immediately. Instead, his suppliers are holding the goods in the hope that container prices will fall in the coming months.

Businesses with similar vulnerabilities may want to evaluate supplier and transport options. If no meaningful alternatives exist, raising prices now — well before the holiday shopping season — is likely prudent.

Getting Investors to Buy Your Inventory

When it comes to funding inventory, retail businesses can be creative, using loans, credit cards, supplier terms, and even advances from family. Whatever the method, raising the money can be a challenge.

“Every business needs to fund inventory before it gets the opportunity to earn revenue by selling it, and there is no single [funding] solution for all companies,” said Sean De Clercq, CEO of Kickfurther, a platform that connects investors with emerging brands.

Kickfurther describes these connections as consignment opportunities (co-ops) and separates what it does from other funding or crowdfunding options. Before describing these co-ops, it is worth mentioning some of the ways retailers, direct-to-consumer brands, and even consumer packaged goods companies acquire inventory.

Funding Inventory

Outside of savings, bank loans, credit cards, and individual investors, businesses have alternatives for funding inventory.

For example, very small companies based in the United States can apply to Kiva for interest-free loans of up to $15,000 and take as much as three years to pay.

Indosole, a brand that sells shoes made from recycled tires, is one of many companies that has used Kiva for funding. Kiva partners with institutions to provide interest-free, small business loans. Kiva and its partners also provide non-financial support and resources to help businesses succeed.

Screenshot from Kiva's home page showing IndosoleScreenshot from Kiva's home page showing Indosole

Indosole is a featured business on the Kiva website. Kiva partners with institutions to provide interest-free, small business loans.

Although not-for-profit lenders such as Kiva are rare, they do exist. The Accion Opportunity Fund is another example of affordable financing.

As a retailer grows and its inventory levels increase, other forms of financing become available from services such as Kabbage, BlueVine, Clearco, OnDeck, or similar. These companies offer various forms of term loans and lines of credit that established businesses can access. For the most part, lenders in this category will evaluate a business based on credit history and historical and projected revenue and cash flow.

Crowdfunding Inventory

Another alternative for some businesses is crowdfunding. Crowdfunding platforms are, in a way, the Airbnb or Uber of retail or direct-to-consumer inventory.

Airbnb, for example, doesn’t own rental properties; it simply connects folks who do with others who want a short-term rental. And Uber doesn’t own cars necessarily. Rather it connects folks who do with others who want a ride.

Similarly, crowdfunding platforms connect businesses with backers.

For example, electric bike maker Reevo raised millions on Indiegogo, effectively selling pre-orders to customers who, in some cases, will wait a year or more to receive the bike.

Screenshot of Indiegogo home page showing ReevoScreenshot of Indiegogo home page showing Reevo

Reevo raised funds on the crowdfunding platform Indiegogo.

Consigning Inventory

Perhaps the least discussed option for funding inventory is consignment or even crowdfunding consignment.

“We’re specific to physical-product companies, which gives us the ability to look at things like production and distribution risk. Because we are very specific to that niche, we are also able to get our businesses funded for less,” said Kickfurther’s De Clercq during a live interview with the CommerceCo by Practical Ecommerce community on July 15, 2021.

Kickfurther reviews businesses before allowing them to present their co-ops on the platform. Once approved, funding usually comes quickly. Kickfurther investors can support entrepreneurs and earn a return with consignment opportunities. Fractional investment starts at just $20.

At the time of writing, recently funded co-ops included drink maker Greater Than and apparel brand House of Fluff.

Inventory consignment is not new. Consider the Winmark Corporation. The company owns several nationwide second-hand retail brands, including Play It Again Sports, Plato’s Closet, and Once Upon a Child. Each of these obtains inventory from retail consignment: Individuals drop off second-hand goods, and the stores pay those individuals when the product sells.

Kickfurther applies this idea to ecommerce companies.

Benefit to Investors

In a technical sense, “As investors, we take ownership in [inventory] and consign it to the company to sell on our behalf, and when they sell it, then the underlying cash gets distributed,” said Michael Fox-Rabinovitz, managing partner of Chartwell Capital and the author of “Own a Fraction, Earn a Fortune.” Fox-Rabinovitz invests through Kickfurther and also joined the CommerceCo community during the live interview.

“Realistically, we look at the deal. If we like it, we’ll allocate cash to it…it is really fractional ownership in a sense,” Fox-Rabinovitz said.

But at least some investors don’t necessarily think about the Kickfurther co-ops in this way.

The investors inject money into a company that is both interesting to them and a sound investment. They profit from supporting a growing business that develops exciting new products.

Save Money on Inventory with EOQ

A production scheduling model first proposed in 1913 and popularized in the late 1980s may help modern companies understand how much inventory to buy and how often, saving money in the process.

Ford Whitman Harris, an American production engineer, developed the economic order quantity (EOQ) model to help buyers at manufacturing companies understand how much of a given raw material or part they should buy.

In the past few decades, different sorts of companies, including pure ecommerce operations, omnichannel retailers, and direct-to-consumer brands, have used the EOQ to calculate the ideal amount of inventory to purchase from a particular supplier to minimize the cost of buying and holding.

The model starts with an understanding that the total cost of buying inventory is the sum of the purchase cost (the price of the product), the ordering cost, and the carrying cost.

Total Cost = Purchase Cost + Ordering Cost + Carrying Cost

A Balancing Act

Purchasing inventory is something of a balancing act.

Buying too little inventory results in out of stocks, disappointing shoppers and foregoing profits.

But too much inventory is a problem too. Where will the retailer put the inventory? And what happens to that inventory as it ages? Will it spoil or become obsolete?

This balancing act is what the EOQ tries to solve, using an equation that identifies ordering cost, demand, and carrying cost.

Image showing the EOQ formula.Image showing the EOQ formula.Image showing the EOQ formula.

The economic order quantity or optimal order size is the square root of two times the ordering cost times the demand for a given timeframe divided by the carrying cost per unit.

Ordering Cost

Ordering cost, also called the setup cost, is the expense of placing an order (not the price of the goods, which is the purchase cost).

Thus, ordering cost might include freight and the time your company’s purchasing team spends researching and placing the order.

For example, imagine a DTC brand that manufactures its product in Taiwan. With each production run, the brand sends a quality engineer from its office in Los Angeles to the facility in Taiwan. The trip is part of the ordering cost.

On a smaller scale, a purchasing agent might submit an order, arrange the freight, and allocate that inventory to a few warehouses. The agent’s time should be used to estimate a fixed cost per order.

Imagine that the ordering cost of a product is $100. We can place this number in a Google Sheet.

Screenshot of a Google Sheet showing the $100 ordering cost.Screenshot of a Google Sheet showing the $100 ordering cost.

Ordering cost is the cost of placing or processing an order.

Demand

For the EOQ equation, demand is the number of units your business will purchase in a given timeframe, typically one year, reflecting the number of units you expect to sell.

A weakness of the EOQ model is that it does not account for seasonal spikes in demand. For this reason, it may be necessary to adjust the timeframe.

In our example, let’s imagine that demand is 10,000 units per year.

Screenshot of a Google Sheet showing the $100 ordering cost and 10,000 demand units.Screenshot of a Google Sheet showing the $100 ordering cost and 10,000 demand units.

The EOQ demand is the number of units your business will purchase for some timeframe, such as one year.

Carrying Cost

Carrying cost, which is sometimes called holding cost, is the expense of storing or holding unsold inventory for a particular timeframe (the same timeframe as for demand).

Carrying cost is often shown as a percentage of total inventory value. But for our EOQ equation, we want a monetary amount per unit. So we will start by calculating the carrying cost percentage and then multiply it by the unit cost.

Inventory carrying costs typically include the costs of capital, storage, servicing, and risk.

  • Capital costs are the opportunity or interest costs associated with buying inventory. Imagine you bought $100,000 in inventory. If your business could have earned 5 percent by investing that money, the capital is costing 5 percent. Similarly, if you have to borrow to buy inventory, the interest is a capital cost.
  • Storage costs are a product’s share of warehousing costs, including the rent or mortgage, overhead, and similar.
  • Servicing costs are expenses related to holding a product, such as insurance, software, and labor.
  • Risk includes shrinking, spoilage, and obsolescence.

Added together, these costs result in “inventory carrying (or holding) sum.” That figure is divided by the total value of the inventory and multiplied by 100 to get a percentage.

Carrying Cost (%) = Inventory Carrying Sum / Total Inventory Value * 100

We then multiply the carrying cost percentage by the cost per unit.

For our example, we can say that it costs 20 percent to carry inventory and our unit cost is $10. Thus our carrying cost per unit is $2.

Screenshot of a Google Sheet showing the $100 ordering cost, 10,000 demand units, and carrying cost per unit..Screenshot of a Google Sheet showing the $100 ordering cost, 10,000 demand units, and carrying cost per unit..

Calculating carrying cost takes a little work. It requires understanding the capital costs, storage costs, service costs, and risks associated with holding inventory.

Calculate the EOQ

Having identified the ordering cost, the demand, and the carrying cost per unit, we are ready to calculate the EOQ or optimal order size, which is Q* in our equation.

Image showing the EOQ formula.Image showing the EOQ formula.Image showing the EOQ formula.

The economic order quantity or optimal order size is the square root of two times the ordering cost times the demand for a given timeframe divided by the carrying cost per unit.

This is a straightforward calculation in Google Sheets and Microsoft Excel. The formula is the same in both. Here is what it looked like in a Google Sheet.

=SQRT((2*B3*B4)/B8) 
Screenshot of a Google Sheet showing the formula for calculating the EOQ.Screenshot of a Google Sheet showing the formula for calculating the EOQ.

Calculate the square root in a spreadsheet.

In this case, it would make the most sense to order 1,000 units ten times throughout the year.

Remember, the EOQ aims to reduce your company’s total cost of purchasing inventory by calculating the optimal order size. EOQ then is a way to improve your business’s bottom line.

EOQ may be best for products with relatively stable demand. If your goods have strong seasonal demand, consider experimenting with the timeframe.

Consumers Want Visibility into What They Buy

Is that new summer dress 100-percent organic cotton? How can you prove it? What happened after the cotton was picked until the dress was delivered to the customer?

Merchants don’t typically know with certainty if the product they are selling was ethically sourced and produced. The info from suppliers is frequently limited and often misleading.

Consumers have questions, and they are not getting answers.

What Consumers Want

Consumers want to know that the goods they buy are safe, sourced legally and ethically, and manufactured without damaging the planet. Worldwide, cotton farming uses more toxic pesticides per acre than any other crop. These chemicals strip the land of nutrients, contaminate the water, and endanger the people who grow and harvest it.

Many merchants are responding. For example, apparel retailer Everlane has committed to all of the cotton in its clothing being 100-percent organic by 2023.

Sceenshot from Everlane's website, stating "More Sustainable Every Day"Sceenshot from Everlane's website, stating "More Sustainable Every Day"

Everlane has stated that all of its cotton will be 100-percent organic by 2023.

It is not only about clothing. It is about the food we eat, the shoes we wear, and the furnishings in our house. Retailers have realized that they need to provide greater transparency into their end-to-end supply chain.

Food. Consumers have growing concerns about the health, safety, and freshness of the foods they eat, including the use of harmful ingredients and pesticides. Consumers want to understand and substantiate terms such as organic, free trade, cruelty-free, and free-range. They want more openness.

A 2018 study by France’s consumer affairs ministry found that 49-percent of olive oils sold in that country are wrongly labeled as to quality and product origins. Some bottles were even found to contain rapeseed and sunflower oil instead. It is likely the same elsewhere, beyond France.

An American importer, Caroli USA, Inc., is using blockchain technology to monitor olive oil from the bottling source in Italy, through customs clearance, and into and out of U.S. warehouses. This ensures that the customer, buying a premium product, is getting the real thing and that the olive oil was transported at the correct temperature and the right humidity throughout its entire journey.

Furnishings. Wooden furniture and home accessories are not exempt from consumer scrutiny. Buyers want to know where an item was made, what type of wood was used, and whether it contributed to deforestation.

Fortunately, timber sourcing is authenticated through third-party certification bodies such as the Forest Stewardship Council, which promotes the responsible management of the world’s forests. Companies that achieve certification commit to transparency about their sourcing and manufacturing processes.

Tracking

Manually tracking items through the supply chain is not the answer. Blockchain technology is now used extensively, especially with food, to identify and track individual items. A head of lettuce or a joint of beef can be followed from farm to fork using smart labels and QR codes, tracking each activity, including third-party certifications and compliance with regulations.

Consumers are starting to demand proof regarding ethical sourcing and sustainability claims. This is especially important for premium branded products where counterfeiting is rife.

For merchants, verifiable tracing:

  • Builds trust in a brand,
  • Reduces fraud, counterfeiting, and fakery,
  • Addresses quality problems,
  • Facilitates prompt recalls.

What’s the Future of Traditional Retail?

Did the events of 2020 and the associated changes in shopping behavior break the classic brick-and-mortar retail model?

The combination of Covid-19 lockdowns, supply chain problems, and economic woes accelerated digital retailing in several areas of the economy. While some experts believe this will result in more individual retail businesses, it may indicate that the traditional retail model will not work or at least not work as well in the near future.

“Let’s start with the model that just doesn’t work,” said Bloomreach CEO Raj De Datta, who is also the author of the book “The Digital Seeker: A Guide for Digital Teams to Build Winning Experiences.”

“What doesn’t work anymore is ‘I’m a retailer. I’ve got a certain level of selection. I source all my products. I work with all my brands. I deal with the supply chain. I open a bunch of brick-and-mortar stores — that’s my distribution. I market online and offline. I’m dependent on the number of people that walk into my store and buy the product that I bought from someone else and mark it up a bit to cover my margin and call it a day.’

“That model of retail, which has existed for a hundred years, is gone,” De Datta said during an exclusive CommerceCo by Practical Ecommerce event.

Bloomreach CEO Raj De Datta, right, was interviewed by the author during a live CommerceCo by Practical Ecommerce event on January 14, 2021.

The Path Forward

De Datta was responding to a question when he said the traditional retail model was in danger. Specifically, he was asked how traditional retailers could compete when so many brands, such as Nike and Carhartt, are opening their own physical stores and promoting their own ecommerce sites.

Ultimately he saw three possible paths toward future success if these traditional retail businesses adapt.

Specialty retail. Specialty retail has been around for a long time, too. You might think of pet stores, boutiques, and even greeting card sellers as specialty retailing. Still, to be successful long term, it is important to select a specialty that cannot be overrun the next time an online marketplace like Amazon adds a new category.

As De Datta put it, this is a “high bar” for retailers, but it can work.

“There are certain categories, particularly more complex categories where [incredibly specialized retail] is feasible….it turns out eyeglasses are a good example of that. It is pretty hard to be a great eyeglass retailer. There is a lot of depth from prescriptions to filling the prescriptions and making sure that fits works and all of these other things. So specialty can work to an extent,” De Datta said.

Other areas of specialty success might reside in Blue Ocean businesses that have unique selling propositions.

Direct-to-consumer retail. Imagine you run a traditional retailer in the Pacific Northwest. You sell online and through your network of retail stores. One of the brands you sell is Carhartt, and it opens a new Carhartt store just a mile from one of your locations. How do you win against the very brands you sell?

“We’ve got to stop talking about retailers and brands. Every retailer needs to be a brand,” De Datta said.

Effectively, traditional retailers will need to white label products and establish their own brands. For example, Mid-States Distributing, which is a sort of joint-venture operation with dozens of farm and ranch chains as its members, launched its own brand of pet food, Wildology.

The Wildology brand sells in each of the members’ stores — more than 1,000 physical locations and dozens of websites — and is controlled by the members collectively. Wildology is, effectively, a direct-to-consumer brand that sets on the shelf (virtual and physical) next to traditional pet food brands.

Mid-States Distributing is developing similar DTC products for everything from hardware items to power-equipment.

Screenshot of Wildology home page

Nearly 40 farm and ranch chains worked together to establish their own brand of pet food. Because the chains collectively have stores throughout the United States and Canada, they can build a brand with clout.

Many other retail stores are doing the same.

“Owning your brands is really important because you need the margin, and you’ve got to know that your brands are competing with you, and if they’re competing with you, you’ve got to complete with them,” De Datta said.

Marketplace retailing. The final path forward may be available only to the largest traditional retailers: become a marketplace.

“If you’re Target or a Walmart or if you have incredible scale, your company could succeed if you say, ‘I’m going to play the selection game. I’m okay without having proprietary products. I’m okay without having a high degree of specialization,’” according to De Datta.

Combining the Three

If the traditional retail model, as De Datta describes it, won’t work, a retailer should adopt one of these approaches or some combination of them. For example, a retailer could be both specialized and the owner of DTC brands.

Retail Returns Can Be Hazardous and Subject to Fines

Booming retail sales in November and December can lead to tons of returns and exchanges in January. Some of those returned items can be hazardous and require special handling and disposal.

The return of hazardous materials poses several problems for retailers, including identification, reverse logistics, and disposal. Moreover, hazardous materials threaten people and the environment and are subject to significant fines from regulatory agencies, depending on how the materials are managed.

Ross Stores, Inc.

For example, in December 2020, Ross Stores, Inc. agreed to pay several California counties a total of $3.3 million for improperly handling and disposing hazardous materials at many of its Ross Dress for Less and DD’s Discount stores over a seven-year period.

“It is vital that any company doing business in California abide by our environmental protection laws. My office remains dedicated to prosecuting violations of these laws in our ongoing effort to safeguard our natural resources from irreparable harm due to improper disposal of hazardous waste,” said Alameda County, Calif. District Attorney Nancy O’Malley in an official statement.

Ross is not alone. Earlier in 2020, retailer Bed Bath & Beyond paid $1.4 million in a similar settlement after hazardous materials (batteries and electronics) the chain sent to a California landfill caught fire back in 2015.

In all, retailers reportedly paid more than $8 million in hazardous material fines in California alone in the last several months of 2020.

A significant part of the problem for Ross, Bed, Bath & Beyond, and other retailers is product returns.

Image of open boxes to illustrate product returns

Managing hazardous material returns can be a serious challenge for retailers.

HazMat Identification

The first challenge with retail returns is identifying hazardous materials.

“I’ll give you a great example,” said Ken Bays, vice president and general manager of the logistics business unit for Inmar Intelligence, a returns service provider. “In my office, I have a tub of baby lotion. It is like a salve that you put on a baby’s diaper rash. In California, it is considered hazardous. It’s ok to rub it on your baby’s bottom, but don’t put it in a landfill.”

While a product like diaper-rash ointment might be safe for external use on a person, it could be deadly when it contaminates water.

Similarly, some of the products Ross disposed of and was fined for included cosmetics and perfumes.

So, how can a customer service agent who is processing a return request know that a particular ointment or perfume is dangerous?

Reverse Logistics

Reverse shipping logistics is the process of a package traveling from its original destination back to a warehouse.

The U.S. Department of Transportation has issued rules and regulations (PDF) for hazardous-materials reverse logistics. These requirements include understanding:

  • If a product is hazardous,
  • If it has packaging requirements,
  • If it can be used for its original purpose,
  • How much hazardous material is involved,
  • Where the product is located.

Merchants should understand similar requirements on a local, regional, and state level.

Some businesses address the problem by telling consumers to keep a product that could create a hazardous material concern.

According to Bays, this is a viable option to address the costs and risks associated with returns classified as hazardous. But it does not always address the underlying human or environmental risks.

Asking a customer to keep a small of cosmetics may be acceptable. But as Bays points out, hazardous material regulations exist to protect people and the environment. The aim is to be a good corporate citizen.

Disposal

Disposal is perhaps the most challenging problem with hazardous material returns. Simply tossing something in the trash could result in a violation similar to Ross and Bed, Bath & Beyond.

Thus, all retailers should formalize and adhere to standard operating procedures for potentially hazardous materials. As Bays put it, we all want to protect our companies, customers, and communities.

Covid and the Long Tail

An interesting development is happening on the way to retail recovery during the Covid pandemic: Brands and retailers are cutting back on the breadth of products they make and sell.

In August 2020, for example, Todd Kahn, president and interim CEO of Coach, announced during an earnings conference call that the brand would slash the number of products it offered this holiday season.

“Over the last five months, we have taken a dramatically more critical lens to the SKU proliferation and inventory churn. For this upcoming holiday season, we’ve shrunk our SKU count by approximately 50 percent. We believe that this reduction is key to greater productivity and clearer brand messaging to the consumer,” Kahn said.

Coach, the maker of this bag, is reducing the number of styles it produces.

Writing in The Wall Street Journal, reporter Suzanne Kapner described the company’s move succinctly. “Coach went from making 1,000 handbag styles last year to 500 this year.”

Coach is not alone. Kapner notes that retailer Bed Bath & Beyond reduced the number of can openers it carried from 15 to five, and big-box chain Kohl’s reduced the varieties of towels it carried from 320 to 265.

Inventory

Reducing the variety of handbags, can openers, and towels simplifies supply chains and focuses on items with mass appeal.

Imagine an omnichannel retailer selling everything from dog food and hay to clothing and footwear. The company has a good, better, best approach toward most product categories. In the footwear department, this can be seen in the number of work boots available. Here is an example.

 Retail PriceCostGross Profit
Good Work Boot$99.99$45.00$54.99
Better Work Boot$129.99$58.50$71.49
Best Work Boot$189.99$85.50$104.49

This retailer keeps a “size run” of each work boot at all 15 stores and at its two ecommerce fulfillment centers. Thus it needs at least one pair of work boots from size five to 14 in each style at each location.

It also doubles up on popular sizes from nine to 11. So it must carry a total of 13 pairs per run, times three styles multiplied by 17 (15 stores and two fulfillment locations). Bottom line, each initial stocking order consists of at least 221 pairs of work boots per style.

 CostInitial Stocking
Order Units
Initial Stocking
Order Dollars
Good Work Boot$45.00221$9,945.00
Better Work Boot$58.50221$12,928.50
Best Work Boot$85.50221$18,895.50
TOTALS663$41,769.00

As such, the example retailer is investing $41,769. Fill in orders would follow, replenishing each location’s size run as needed. If every boot in the initial order sold, the business would earn $51,044 in gross profit.

The coronavirus, however, exposed at least one potential problem with this approach: What if the supply chain is disrupted?

Two pairs of size 10 at each store might not be enough. The retailer could sell out of these popular sizes and miss sales opportunities while holding 51 pairs of size 14 work boots chain-wide, which is likely too many.

If this hypothetical retail chain focused on just the “better” option, it could purchase something like 714 pairs for the same $41,769 investment. It would have less product breadth but a lot more depth. There could be something like 10 pairs of the relatively more popular size 10 work boots at each store. If every boot in the initial order sold, the chain would generate the same $51,044 in gross profit while avoiding the purchase of additional sizes and the associated shipping, logistics, and warehousing costs.

This retailer could sell more of less and make more money.

The Long Tail

But selling more of less is the opposite of what some retail businesses might expect.

In October 2004, author and entrepreneur Chris Anderson introduced us to “The Long Tail.” Two years later, he produced his now-notable book, “Long Tail: Why the Future of Business is Selling Less of More,” which is the opposite of selling more of less.

“An average record store needs to sell at least two copies of a CD per year to make it worth carrying; that’s the rent for a half-inch of shelf space. And so on for DVD rental shops, videogame stores, booksellers, and newsstands,” wrote Anderson in his famous Wired magazine article 16 years ago.

“Meet Robbie Vann-Adibé, the CEO of Ecast, a digital jukebox company whose barroom players offer more than 150,000 tracks — and some surprising usage statistics,” Anderson continued.

“Vann-Adibé hints at them with a question that visitors invariably get wrong: ‘What percentage of the top 10,000 titles in any online media store (Netflix, iTunes, Amazon, or any other) will rent or sell at least once a month?’”

Most folks guess 20 percent, but the answer is 99 percent. Songs have a long tail, meaning that many, many songs will sell.

Anderson and many others in the industry have argued that Amazon’s success, in part, is due to the long tail — you can find several thousand different handbags, more than 1,000 different can openers, more than 10,000 different styles and colors of bath towels, and something like 30,000 styles of work boots.

Nonetheless, not every business is Amazon. Moreover, Amazon doesn’t fund the items in its marketplace — the participating sellers do. If it were forced to purchase all of the inventory offered on its site or if it experienced circa 2020 supply disruptions, Amazon might reduce SKUs, too.

Using Site Search Reports in Google Analytics to Improve Product Selection

Internal site search is the equivalent of someone walking into a physical store and asking for a product. The storekeeper would develop an understanding of what shoppers want based on these requests. In the digital world, Google Analytics can store all of these questions.

In this post, I’ll address how to configure site search in Google Analytics to improve your ecommerce product selection.

The first step is to capture site-search data in Google Analytics. We’ve addressed how to do this. Google’s Analytics help explains the process, too. Once configured, your internal site search data will show up in Google Analytics at Behavior > Site Search. Allow up to 24 hours for this to occur.

Site Search.” width=”300″ height=”408″ srcset=”https://www.practicalecommerce.com/wp-content/uploads/2020/08/Site-search-1.jpg 400w, https://www.practicalecommerce.com/wp-content/uploads/2020/08/Site-search-1-221×300.jpg 221w, https://www.practicalecommerce.com/wp-content/uploads/2020/08/Site-search-1-150×204.jpg 150w, https://www.practicalecommerce.com/wp-content/uploads/2020/08/Site-search-1-368×500.jpg 368w” sizes=”(max-width: 300px) 100vw, 300px”>

Once configured, your internal site search data will show up in Google Analytics at Behavior > Site Search.

Site Search Data

When the data appears, you can establish if visitors use your site search and if it generates revenue. Go to the usage report in Google Analytics, at Behavior > Site Search > Usage for:

  • The percentage of your visitors use site search.
  • The percentage of your revenue that comes from visitors who use site search.
  • The average order value of visitors who search vs. visitors who do not.
  • The conversion rate of visitors who search vs. visitors who do not.

This info is a good starting point to know the importance of site search for your business.

Search terms. Next, determine what visitors search for and how often. Analyze, too, their phrases and terms. Do they query, for example, “kitchen supplies” or “cooking utensils”? Get all this data in Google Analytics at the Search Terms report, at Behavior > Site Search > Search Terms.

The Search Terms report shows what visitors search for and how often. Click image to enlarge.

The Search Terms report shows what visitors search for and how often. Click image to enlarge.

You might find a few hundred terms or a few thousand. Scan the list to get a sense of the phrases your visitors are using.

Remember that Google Analytics, by default, shows only 10 terms on the first view. Scroll to the bottom of the table for a drop-down menu to expand the list to as many as 5,000 items. Alternatively, expand the list by choosing a broader time range. You can export this data to a spreadsheet for further analysis.

If you have at least a few thousand search phrases, you could also see this data by segments, such as search terms from visitors by state or a certain campaign.

Problem terms. Once you have a sense of the search terms, look for the ones that are not working. The Search Terms report contains a column called “% Search Exits” — the percentage of people who leave the site after searching for that term.

Say, for example, that “kitchen utensil set” has a search exit of 70 percent. That means that 70 percent of visitors leave after they see the search results.  There are several reasons for this, typically.

  • Zero search result. If they can’t find what they are looking for, visitors will leave.
  • Fewer search results than what visitors were expecting.
  • Wrong search results. The results are not what the visitor was looking for.

Look at all search phrases with more than 50-percent exits. And pay special attention to all phrases with 100-percent search exits.

"% Search Exits" column in the Search Terms report contains the percentage of people who leave the site after searching for that term. Click image to enlarge.

“% Search Exits” column in the Search Terms report contains the percentage of people who leave the site after searching for that term. Click image to enlarge.

Revenue from site search. Next, determine whether your site search is generating revenue. This requires implementing Google Analytics ecommerce tags in Google Tag Manager to track your sales.

The default Search Term report does not show revenue. Create a custom report with the following columns:

  • Search term.
  • Total unique searches.
  • % Search Exits.
  • Revenue.

The custom report will reveal many interesting patterns, such as:

  • The search phrases that generated the highest revenue.
  • The phrases that produced zero revenue. (Address the search results for these phrases.)

Trends. The Search Terms report can indicate how products and categories are trending.  Click on any term for a graph of the number of unique searches for a given date range, which you can adjust.

Repeat the process for all terms to see which products are gaining popularity and which are on their way out.

Click on any term in the Search Term report for a graph of the number of unique searches for a given date range. This can indicate a trend for that item or category.

Click on any term in the Search Term report for a graph of the number of unique searches for a given date range. This can indicate a trend for that item or category. Click image to enlarge.

Store Closures, Slow Shipping Could Drive Retail Prices Lower

The coronavirus pandemic could lead to much lower retail prices for some categories, as store closures and product returns caused by slow shipping lead to an inventory glut.

The problem might be divided into two broad categories: excessive discounted inventory and slow-shipping-induced returns.

Discounted Inventory

Some retail sectors could face a significant increase in discounted inventory thanks to retail bankruptcies, store closures, and stalled supply chains.

Each of these problems may lead to an oversupply of marked-down goods in the next several months.

Retail bankruptcies. The coronavirus sped the demise of several, already struggling, brick-and-mortar retail chains. Many of these companies had planned to shutter stores or even cease operations.

For example, Modell’s Sporting Goods Inc. said in March 2020 that it would shutter all of its remaining 141 stores after bankruptcy proceedings, only to have its going-out-of-business sale interrupted by nationwide shelter-in-place and stay-at-home orders. As businesses reopen, Modell’s is expected to continue liquidating its inventory.

The Covid-19 pandemic also contributed to Pier 1 Imports Inc. filing for bankruptcy and announce that it would shutter all stores and cease operations.

“We are grateful to our dedicated and hardworking associates, millions of customers, and committed vendors who have collectively supported Pier 1 for decades,” said Pier 1 CEO Robert Riesbeck in an official statement.

“We deeply value our associates, customers, business partners, and the communities in which we operate, and this is not the outcome we expected or hoped to achieve. …Unfortunately, the challenging retail environment has been significantly compounded by the profound impact of Covid-19…requiring us to wind down.”

To these bankruptcies, add J.C. Penny Co., Neiman Marcus Group Inc., J.Crew Group Inc., Tuesday Morning Corp., Art Van Furniture Inc., Stage Stores Inc., and many more. And it doesn’t include the hundreds or even thousands of single-store retailers the pandemic has pushed out of business.

What all of these bankrupt businesses have in common is inventory that must be liquidated.

<img aria-describedby="caption-attachment-350333" class="wp-image-350333 size-large" src="https://www.practicalecommerce.com/wp-content/uploads/2020/06/060420-retail-discounts-570×375.jpg" alt="Bankrupt retail stores will need to liquidate inventory at discounted prices. Photo: Artem Beliaikin.” width=”570″ height=”375″ srcset=”https://www.practicalecommerce.com/wp-content/uploads/2020/06/060420-retail-discounts-570×375.jpg 570w, https://www.practicalecommerce.com/wp-content/uploads/2020/06/060420-retail-discounts-300×198.jpg 300w, https://www.practicalecommerce.com/wp-content/uploads/2020/06/060420-retail-discounts-150×99.jpg 150w, https://www.practicalecommerce.com/wp-content/uploads/2020/06/060420-retail-discounts-500×329.jpg 500w, https://www.practicalecommerce.com/wp-content/uploads/2020/06/060420-retail-discounts.jpg 703w” sizes=”(max-width: 570px) 100vw, 570px”>

Bankrupt retail stores will need to liquidate inventory at discounted prices. Photo: Artem Beliaikin.

In some cases, these retailers will sell inventory at discounted prices from their stores. Others might sell large amounts of inventory to overstock or discount chains. Still others might auction pallets of goods that will make their way to eBay, Amazon, and other online marketplaces.

In all cases, shoppers should expect to find heavily-discounted items for the next several months.

If your ecommerce or omnichannel retail business is healthy and operating in the same industry segment as one of these struggling or defunct merchants, there could be downward price pressure on some of the products your business sells.

Store closures. Bankruptcies are not the only potential retail inventory problem.

When the shops and boutiques in The Village at Meridian shopping center in Meridian, Idaho closed in late March, for example, those stores tended to have two sorts of seasonal merchandise on display.

First, there were the remaining Valentine’s items, which were already on sale at closeout prices. Second, there were the many and various Easter-themed products ready for the April 12 holiday. By the time those stores reopened in May, both seasons had long passed.

Now, many of those items are heavily discounted.

The example can extend to nearly every seasonal retail item in the country. As stores reopen, they will need to sell through now-out-of-date products.

Thus, this second source of discounted inventory has the potential to lessen demand for similar, full-price items, at least in the near term.

Supply chain in waiting. The pandemic’s shutdowns not only impacted retail stores but also caused closures and employee furloughs at retail warehouses. In some cases, those warehouses had already assembled pallets of goods for a chain’s locations. Those pallets, wrapped in plastic, are still sitting on docks waiting to be loaded on a truck and delivered to a brick-and-mortar store.

Some of these pallets contain the same kinds of Easter or spring items that newly reopened stores are trying to sell at deeply discounted prices.

Thus, supply chain disruptions are still another source of discounted inventory that could push retail prices lower in some industry sectors.

Slow Shipping

The surge in retail ecommerce sales — most notably Amazon and Walmart — along with closures in March, April, and May, has strained ecommerce shipping.

In some cases, the carrier, such as the U.S. Postal Service, has been unable to keep up. In other instances, businesses that furloughed most of their warehouse staff have been slow to ship.

Regardless, slower delivery times have encouraged a new sort of consumer behavior that may impact omnichannel retailers.

Here is an example. Imagine it is early May. Nearly all physical stores are closed because of the pandemic. A kitchen-supply retailer, perhaps in need of cash flow, has put an espresso machine that normally sells for $700 on sale for $500. A shopper buys it.

Fast forward to the end of May. This same kitchen-supply retailer has just reopened its physical stores, but it has not yet been able to fulfill the many orders it received during the espresso machine sale.

A shopper, flush with cash from a stimulus check, goes to the physical store and buys the same espresso machine a second time rather than continuing to wait for the online order. When the online order does arrive a few days later, the customer takes it to the physical store and returns it unopened.

This may sound crazy, but it is happening. What’s more, the returned item is now sitting in the store’s backroom for up to 15 days, depending on the chain’s procedures.

Downward Price Pressure

Collectively, store closures and returns caused by slow shipping could produce an inventory glut in some retail segments, pushing down prices.

Retailers might want to look at their inventory positions and decided if it makes sense to reduce reorders or, perhaps, even try to buy inventory from a new bankrupt competitor.