Caso: Coca-Cola Femsa

Stockout: a research on the consumer response in the food retail market

Luís Henrique Pereira Assistant Professor at the Department of Marketing Fundação Getulio Vargas - EAESP Rua Itapeva, 474, 9o. andar. São Paulo-SP, Brazil, 01332-000 Phone: (5511) 32817848 Fax: (5511) 32841789 e-mail: [email protected]

Mauro Sampaio Assistant Professor at the Department of Production and Operations Management at Fundação Getulio Vargas - EAESP Rua Itapeva, 474, 8o. andar. São Paulo-SP, Brazil, 01332-000 Phone: (5511) 32817782 Fax: (5511) 32841789 e-mail: [email protected]

Susana Carla Farias Pereira Assistant Professor at the Department of Production and Operations Management at Fundação Getulio Vargas-EAESP Rua Itapeva, 474, 8o. andar. São Paulo-SP, Brazil, 01332-000 Phone: (5511) 32817782 Fax: (5511) 32841789 e-mail: [email protected]

Keywords: retail stockout, consumer response, food retail

Abstract Stockouts are an extremely important managerial problem. The stockout can generate a number of problems: a negative image of the brand and the store, errors in demand estimates, deficient stock policies, among others. Consumer response to stockout has implications for retail assortment, shelf space allotment, pricing, and logistics. The great majority of stockout studies that have been published are empirical in nature but provide valuable, but fragmented insight into factors linked with the heterogeneity in consumer response to stockout. The purpose of this paper is to research the consumer short-term response to stockout in the food retail in Brazil. The chosen method is a survey based on personal interview. The instrument for data collection is a written questionnaire adapted from a previous research study carried out in USA. Some additional variables were added to the original questionnaire to adapt to the singularities of Brazilian consumer market.

Introduction Previous consumer surveys have shown that product availability is a very important factor for consumers all over the world. To be able to respond properly to this consumer demand is still a huge challenge for most retail companies. If we consider the growing trend of companies to compete based on product variety and launching new products, avoid stockout occurrences are likely to be an even great and complex problem for companies. Stockout management is a theme of great relevance among academics and executives. The stockout situation can generate a number of problems: a negative image of the brand and the store, errors in demand estimates, deficient stock policies, among others. In the last decade most retail companies have made a great effort to answer to this consumer demand for product availability by adopting and investing in a number of practices and technologies to assure product availability. Management systems such as Quick Response (QR), Efficient Consumer response (ECR) and Forecasting and Replenishment (CPFR), has been adopted by several companies all over the world with the promises of reducing the stockouts levels by 55 percent. However, a substantial decrease of stockout levels has not yet been observed in practice (Vergin & Barr, 1999). Some researches have measured the percentages of stockout occurrences in different countries. The results have shown that stockout ranges from five percent (The Netherlands), seven percent (France), and eight percent (United States and Brazil) of the total stock-keeping unit level of supermarkets (Andersen Consulting 1996; Kooistra 1999; Zinn & Liu 2001; ECR Europe 2003 and Azevedo & Araujo 2004). Despite the efforts, stockout remains as a recurrent problem for shoppers and its levels may vary from 5-10 percent in retail. The resulting gross margin losses for retailers due to stockout are estimated to lie between $7 and $12 billion per year in the United States (Coca-cola Research Council/Andresen Consulting, 1996). The consumer response to stockout situations has implications for retail assortment, shelf space allotment, pricing, and logistics. Considering the relevance of the subject and the difficulties to overcome the main obstacles inherent to stockout, it is important to develop additional insights to help reducing the effect of stockout in stores. A few academic efforts have been made to apply the theory of customers' recovery in a useful way to managerial decision making. The great majority of stockout studies that have been published are empirical in nature but provide valuable, but fragmented insight into factors linked with the heterogeneity in consumer response to stockout. The purpose of this paper is to research the consumer short-term response to stockout in the food retail in Brazil.

Literature Review The great majority of stockout studies that have been published are fragmented and empirical in nature. The objective of early studies about consumer responses to Stockout was mainly to define and measure Stockout reactions and their financial impact. Peckham 1963 was the first author to discuss the potential loss of business to manufactures and retail stores brought about by out-of-stock at the store level. The main contribution of 1968 study developed by the National Association of Food Chains, A. C. Nielsen Company, & Progressive Grocer, was to identify the behavior of the consumer in response to a stockout, which may be:  S - Switch to another product  D- Delay the purchase until the next trip to the same store  L- Leave the store, buying the missing item in a competing store. Ever since, the acronym "SDL"- Substitute, Delay or Leave - is used to collectively describe consumer reaction to stockout. Another important contribution was the Walter & Grabner (1975) study that established the scheme for systematically classifying all possible consumer responses to stockouts, which influenced most SDL studies that followed. Academic research has identified and categorized up to 15 possible consumer responses to stockout, though typically, managerial researchers measure five primary responses (Gruen, Corsten and Bharadwaj, 2003): 1 Buy item at another store (Leave) 2 Buy later at the same store (Delay) 3 Substitute – same brand for a different size or type (size switch) 4 Substitute – different brand (brand switch) 5 Do not purchase the item (lost sale)

Empirical studies reveal that "brand switching" is the predominant reaction, followed by size switching (Charlton & Ehrenberg 1976; Emmelhainz et al.1991). The magnitude of product substitutability has been estimated from 22 % to 83 %, depending on the specific retail environment (see tab.1). Store switching (31 %) and canceling/deferring (15%) the purchase are less often observed, like you can see in table 1, yet remain important as they may entail serious negative consequences for manufacturer and/or retailer. A unique approach was developed by Charlton & Ehrenberg (1976). Instead of using surveys, they conducted an experiment. For 25 weeks, 158 consumers were visited at home and given the opportunity to purchase from a selection of three brands of detergent and of tea. The brands were especially created for the study. Stockouts were introduced during the study, and the reactions of consumers were measured. Consumers usually substituted the stockout brand but returned to it with the restoration of supply. This study did not consider the possibility of switching stores in response to the stockout. Finally, Charlton & Ehrenberg (1976) reported no long-term effects on sales. Straughn (1991) was the first to use scanner data in a stockout study. She attempted to estimate the effects of stockouts on brand share for candy bars. The short-term effect was negligible. The long-term effect, defined as more than five weeks following the stockout condition, was substantial. Decline in brand share averaged 10 percent. The revenue loss not only stems from lost product sales during the stockout period, but also to later periods or other product categories These empirical studies reveal that, the consumer reaction to stockout varies strongly from case to case. Table 1 reports the percentage of times consumers reacted to stockouts by each of the SDL behaviors. It is easy to notice that the results published of SDL behavior did not converge. More recently, researchers began to build a theoretically based conceptual framework to explain consumer reactions to stockout. An improved understanding of consumer response to stockouts thus provides important managerial insight, and may help to determine the items for which stockouts should be avoided or ways in which stockout losses can be mitigated. Schary & Christopher's (1979) study was the first to attempt to explain Stockout reactions. In the early 1990s, Emmelhainz et al. (1991) continued to focus on explaining Stockout reactions. Their study reported that customers who were loyal to a store were more likely to delay purchase than non-loyal customers. The perceived risk of the product - "the risk of purchasing a brand other than the preferred brand" - has been shown to reduce brand switching, while the urgency to buy the brand had the opposite effect, that is, it increased the likelihood of consumers switching brands. Verbeke et al.(1998) found that retailers should keep in mind that abruptly taking a brand out of store is simply disastrous for their own retail chain because a large percentage of consumers are walking out of the store. This shows the power of the manufacturer in the supply chain for at least in the short term. Bell & Fitzsimons (1999) reported that not only do consumers react negatively to the omission of preferred brands, but also that they experience dissatisfaction when previously available (but unchosen) brands are removed from the choice set. This result suggests that retailers should seek stability in in-store assortments. Fitzsimons (2000) has also demonstrated that consumer response to stockout is strongly influenced by his commitment to the alternative stockout and any change in decision difficulty caused by the stockout. Campo et al. (2000) were the first to build a theoretically based conceptual framework to explain consumer reactions to stockout and revealed that consumers react differently depending on their shopping habits and on the specificities of the shopping occasion. In the same way, Zinn & Liu (2001) suggest that demographic variables don't have significant correlations with SDL behavior and that the majority of variables that have significant correlations are situational. A consumer buying something in a situation of urgency, such as something for Mothers Day, has a greater probability of substituting the item than a consumer who is making a planned purchase. Of the six variables included in the Zinn & Liu study (2001), four are situational: Urgency, Upset, Surprise, and Pre-Visit Agenda. The majority of consumer decision making occurs in the store (Hoch & Deighton 1989). Long standing surveys of supermarketing shopping behavior have found that only about 1/3 of purchases are specifically planned in advance of visiting the store (Dagnoli 1989). The apparent importance of situational variables has the potential to explain the SDL behavior divergence in previous studies. Stockout has been, is and will continue to be a problem. Retailers live with gaps in their inventory because they believe that to fix it is more expensive than to live with the problem. This is not the most profitable idea. Stock occupancy cost range from about $20/square foot for dry grocery shelf space to over $50/sp ft for dairy and $70/sq ft for frozen foods (Drèze, Hock, & Purk 1994). Reducing stockout requires initiatives that cut across functional boundaries which can require a fundamental rethinking of the retailer process. The most comprehensive study on the extent of retail stockouts is the one by Gruen, Corsten & Bharadwaj (2003). They looked at several worldwide studies of more than 71,000 consumers that were conducted across a variety of categories. These authors show that stockout rates vary across retailers but the majority tends to fall in the range of 5% to 10%. For retailers, brand and size switching do not represent a central problem. First, they need to focus on stockout situations in which consumers do not buy a substitute. Clearly, the retailers cannot sell something that is not in the store. Many consumers were not willing to switch brands when their preferred brand was out of stock: They either switched stores (31%), postponed the purchase (15%) or do not purchase the item (9%) (Gruen, Corsten & Bharadwaj, 2003). In general, retailers can lose nearly half of intended purchases when customers encounter stockouts. When shoppers permanently switch stores, and either the new preferred store has overall lower stockout levels, or it has lower stockout levels on items of greatest value to the consumer, the result will be even worse. The store with a lower overall stockout level and effective strategies to manage dissatisfaction due to stockout will lose fewer customer and gain more customers from other stores. Those abandoned purchases result in sales losses of about 4% for a typical retailer. For a billion-dollar retailer, that could mean $40 million a year in lost sales (Corsten & Gruen, 2004). Understanding the customer reactions to stockouts will enable retailers to develop policies to reduce both the number of stockouts and the severity of the impact of the stockout. This means that the retailers should maintain an active policy to reduce stockout occurrences and at least to investigate ways in which stockout losses can be mitigated. A high level of stockout will certainly result in losses of market share. Proposed methodology The chosen method to explore the consumer short-term response to stockout in the food retail in Brazil is a survey based on personal interview. Previous research (Zinn & Liu, 2001) show that the best way to identify consumer reaction to stockout is an interview at the store front immediately after the stockout experience. The instrument for data collection is a written questionnaire adapted from a previous research study carried out in USA (Zin & Liu, 2001). Some additional variables were added to the original questionnaire to adapt to the singularities of Brazilian consumer market The research undertake in USA had a total sample size of 283 consumers. The data was collected over a period of two weeks in a regional chain of discount stores. The data was collected by a group of students. In Brazil, our research will have a sample size of 300 consumers. As we depend on the occurrence of stockout experience, the research will be carried out until the established sample size is reached. The data will be collected by a group of undergraduate students specially trained for this research. This research will be carried out in the largest retailers in Brazil to measure the consumer response to stockout of groceries. A research to measure stockout in Brazil was carried out by ACNielsen in 2004. They measured stockout in the main retailers of the two Brazilian largest cities. The data collection was based on interviews. They have measured stockout of 528 SKU´s in 482 stores in São Paulo and 185 in Rio de Janeiro. The main results showed that the average stockout is of 8% on every day of the week. The stockout level in groceries was above average and those products respond for 48% of the total retail sales. Moreover, most studies and investments concerning Efficient Consumer Response (ECR) in Brazil are undertaken in the retail market.

Final considerations This is a work in process. So far we have concluded the literature review, established the research variables and designed the questionnaire.

References AGUIRREGABIRIA, V. Retail Stockouts and Manufacturer Brand Competition. Department of Economics, Boston University. working paper, 2005. ANUPINDI, R., M. DADA AND S. GUPTA (1998): “Estimation of Consumer Demand with Stockout Based Substitution: An Application to Vending Machine Products,” Marketing Science, 17, 406-23. AZEVEDO,C, ARAUJO,O. Ruptura: Causas e impactos na cadeia de abastecimento e no comportamento do consumidor. Presentation held at ECR Brazil Conference, Sao Paulo, 2004. BELL, D. R. & J. FITZSIMONS G.J An Experimental and Empirical analysis of Consumer Response to Stockouts. Preliminary Draft, The Wharton School, 1999. CAMPO, K., GIJSBRECHTS, E., & NISOL, P.. Towards understanding consumer response to stockouts. Journal of Retailing, 76(2), 219–242. 2000 CAMPO, K., GIJSBRECHTS, E., & NISOL, P. The impact of retailer stockouts on whether, how much, and what to buy. International Journal of Research in Marketing, 20(3), 273–286. 2003 CAMPO, K. & GIJSBRECHTS, E. Retail assortment, shelf and stockout management: issues, interplay and future challenges. Apply Stochastic models Business and Industry. 21: 383-392; 2005. COCA-COLA RETAILING RESEARCH COUNCIL/ANDERSEN CONSULTING. “Where to look for Incremental Sales: The Retail Problem of Stockout Merchandise”, The Coca-Cola Retailing Research Council, Atlanta, GA (1996). CORSTEN, D.S., GRUEN, T.W. Desperately seeking shelf availability of the extent, the causes, and the efforts to address retail out-of-stocks. International Journal of Retail & Distribution Management. Vol. 31, number 12, pp. 605-615. 2003 CORSTEN, D.S., GRUEN, T.W. Stock-Outs Cause Walkouts. Harvard Business Review, May, 2004 CHARLTON, P E EHRENBERG, A.S.C. “An Experiment in Brand Choice”, Journal of Marketing Research 13 (May 1976): 152-160. CHOPRA, S. e MEINDEL, P. Gerenciamento da Cadeia de Suprimentos; tradução Cláudia Freire. São Paulo: Prentice Hall, 2003. DHAR, RAVI. “Consumer Preference for a No-Choice Option,” Journal of Consumer Research, 24 (September), 215-231.1997. DREZE, X; HOCK, S & PURK, M . Shelf Management and Space Elasticity. Journal of Retailing. Vol. 70 (4) 1994. ECR EUROPE .Optimal Shelf Availability - Increasing shopper satisfaction at the moment of truth. ECR Europe and Roland Berger, Kontich, Belgium 2003 EMMELHAINZ, L.W; EMMELHAINZ, M.A. E STOCK, J.R. “Logistics Implications of Retail Stockouts”, Journal of Business Logistics 12 (2) (1991): 129-141. FARRIS, P; OLIVER, J E KLUYVER, C. “The Relationship between Distribution and Market Share”, Marketing Science Institute Report (88-103) (May 1988). FARQUHAR, PETER H. & ANTHONY R. PRATKANIS. “Phantom Choices: The Effects of Unavailable Alternatives on Decision Making”. Technical Report 87-2, Carnegie Mellon University, Pittsburgh. 1997. FITZSIMONS, G J Consumer response to stockout. Journal of consumer research, Vol. 27, pp 249-266, Sept. 2000. FITZSIMONS, G J.,GREENLEAF, E.A. & LEHMANN, D.R.. “Decision and Consumption Satisfaction: Implications for Channel Relations,” Marketing Studies Center, Working Paper Series, n. 313, University of California, Los Angeles, 90095. 1997. GATTORNA, J. "Effective Logistics Management," International Journal of Physical Distribution and Materials Management 18 (1988): 4-92. GREENLEAF, Eric A. & Donald R. Lehmann. “Reasons for Substantial Delay in Consumer Decision Making, “Journal of Consumer Research, 22 (September), 186-199. 1995. GRUEN, T.W., CORSTEN, D.S., BHARADWAJ, S. Retail Stockouts: A Worldwide examination of Extent, Causes and Consumer Responses. The Food Institute Forum (CIES, FMI, GMA). (2002). HOCK, S & DEIGTON, J. Managing What consumer learn from experience. Journal of Marketing, 53(2): 1-20 (1989) KOOISTRA, A. (1999). The huge waste. Food magazine, 55(5), 20–25. MANSON, JOSEPH BARRY & J.B. WILKINSON. “Mispricing and Unavailability of Advertised Food Products in Retail Food Outlets,” Journal of Business, 49 (2), 219-225. 1976 MOTES, W. & CASTLEBERRY, S. (1985), "A Longitudinal Field Test of Stockout Effects on Multi-Brand Inventories," Journal of the Academy of Marketing Science, 13(4), 54-68. NIELSEN MARKETING RESEARCH Category Management: Positioning Your Organization to Win, NTC Business Books, Chicago ILL(1992). PECKHAM, J. "The Consumer Speaks," Journal of Marketing, 27, 21-26. (1963) PROGRESSIVE GROCER “The Stockout Study: A Crusade against Stockouts”, a study by the National Association of Food Chains & A.C. Nielsen. Parts 1 and 2 (1968):S1-S31. SCHARY, P.B. e BECKER, B.W. “The Impact of Stock-Out on Market Share: Temporal Effects”, Journal of Business Logistics 1 (1) (1978): 31-44. SCHARY, P. B. e CHRISTOPHER, M. “The Anatomy of a Stock-Out”, Journal of Retailing 55 (2) (Summer 1979): 59-67. SLOOT, L.M; VERHOEF, PC FRANSES, P.H. The impact of brand equity and the hedonic level of products on consumer stock-out reactions Journal of Retailing 81,15–34 (1, 2005) STRAUGHN, K. “The Relationship between Stock-Out and Brand Share”, Ph.D. diss., Florida State University (1991). VERBEKE, W., FARRIS, P, THURIK, P. Consumer response to the preferred brand stockout situation. European Journal of Marketing, Vol. 32 No. 11/12, 1998, pp. 1008-1028. WALTER, C.K. e GRABNER, J.R. “Stockout Models: Empirical Tests in a Retail Situation”, Journal of Marketing 39 (July 1975): 56-68. WALTER, C. & LA LONDE, B. (1975), "Development and Test of Two Stockout Models," International Journal of Physical Distribution, 5(3), 121-132. WESTBROOK, Robert A., Joseph W. Newman, and James R. Taylor. “Satisfaction/Dissatisfaction in the Purchase Decision Process,” Journal of Marketing, 42 (4), 54-60. 1978 VERGIN, R. C., & BARR, K. Building competitiveness in grocery supply through continuous replenishment planning: Insights from the field. Industrial Marketing Management, 28(2), 145–153. (1999). ZINN, W e LIU, P. “Consumer Response to retail stockouts”. Journal of business logistics, vol. 22 n.1, 2001. ZINSZER, P. H e LESSER, J. A. “An Empirical Evaluation of the Role of Stock-Out on Shopper Patronage Processes”, in Marketing in the 80´s: AMA Educators Conference Proceedings (1981): 221-224.