New York Times had a recent piece about how retailers like Dollar General, JC Penney, Old Navy and Wal-Mart are increasing clutter to improve sales. So to get their customers to buy more, these retailers are adding more inventory and more variety to their stores, according to the article. I think this is a really bad way to increase sales.
Yes, these companies will see a short-term increase in their same store sales. You give customers more choices, stuff the store with inventory, and they will buy more. And yes, Wall Street will probably love this. The increase in same store sales growth will make the analysts think that these retailers are actually doing something right. But of course, the analysts will miss that since this sales increase comes solely from more inventory or variety increase, it cannot be sustained. This is just a one-time increase in sales. You cannot keep on adding more and more inventory to the store.
More importantly, this is a bad long-term decision. It does not benefit employees because their operating environment has now been made more complicated. It will not benefit store operations because employees will be less productive and make more errors when their stores are cluttered. It surely does not benefit the environment because this will increase waste from obsolete inventory. And it probably doesn’t even benefit the customer. Store clutter leads to customer confusion. Some customers even responded on the New York Times article’s comment section saying they regretted buying stuff they didn’t need.
Here is an idea. How about offering fewer but better products and investing in employees so they are knowledgeable about these products and they can educate their customers about the value they are receiving? This is exactly what retailers like Trader Joe’s, Mercadona of Spain, and Costco are doing. And you want to know how they compare to their competitors in terms of sales? Not too bad! Trader Joe’s sales per square foot is more than double the supermarket average. Mercadona’s is more than 50% higher than that of their largest competitor, Carrefour. Costco’s is more than 30% higher than that of Sam’s Club.
Today, I also learned about another retailer that has the same strategy: Patagonia. I met the Director of Advanced Research and Development at Patagonia at a panel I was moderating at HBS Retail and Luxury Goods Conference. When someone asked a question about how Patagonia responded to the economic crisis, he mentioned that they did so by cutting their product variety in half. In half! It took them 18 months to do so, but their customers loved it, their employees loved it, and their performance showed it. Of course, one reason Patagonia was able to do this was because they had invested in their store employees so that their employees could intelligently talk to the customers about the products they carry.
The panelist also mentioned that Patagonia’s salespeople are taught to encourage customers to only buy things that they need—not waste resources on stuff they don’t need. Why would they do this? Because this is aligned with their mission: Build the best product, cause no unnecessary harm and use business to inspire and implement solutions to the environmental crisis. Kudos to Patagonia!
Zeynep’cim,
Great post! I agree with your argument for brick and mortar businesses like the ones you mentioned above.
But what do you think if the context is online retailers? Would the same arguments hold true? Some managers in online retail also argue that the more SKUs, the more the revenues (mostly from the long tail of related products).
So I wonder if same arguments apply especially since there is little incremental operations cost to adding SKUs to a web site – especially if the business is a drop-shipping/non-inventory carrying online retailer?
I guess I am trying to quantify how much of the incremental costs are related to errors, sales training, etc. And how much due to inventory financing costs? I guess it is different for all businesses but you made me think about things like how much product depth and width is the right mix for my business.
Thanks for this article!
Kerim Baran
Co-founder
CivicSolar.com
Kerim’cim,
Thanks. I’m glad you found it helpful.
My argument applies largely to brick and mortar businesses. I guess your company doesn’t hold inventory, but even for online companies that do so, adding inventory and product variety is less expensive because they have it centralized. I imagine that customer confusion is also less of a problem online. More variety would still increase the complexity of the back end supply chain. You’ll have to manage more vendors, more parts, etc… But I don’t know how big of a deal this cost is for your business.
I have never looked at how variety would affect personalized selling. But the Patagonia panelist told us that their salespeople became a lot more effective when they reduced variety.
By the way, if you decide to use drop-shipping, you should make sure that your partners are capable. Retailers like Amazon had a lot of customer complaints from dropped-shipped items.
Take care,
Zeynep
I’m proud of reading about Mercadona, a company that was born in Valencia, where I also was born and I has been living for all my short life.
Thanks Zeynep!!
Hello Zeynep,
I believe that part of the job of top management is to keep business as simple as possible. It is very easy to add one SKU or a new service contract type. No one ever got fired for doing so. However, complexity tends to creep up making it all worse for everyone. In my opinion, that is one great concept that Apple has applied correctly.
It would be great if you could also shed some light on this principle applied to services when sales go down and in an attempt to increase the top line new services are added to the catalog.
Regards,
Miguel