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Retailers Face Growing Out-of-Stock, Overstock, Return Costs

Out-of-stocks, overstocks and returns are costing retailers $1.75 trillion a year as they attempt to overcome complex merchandise-tracking issues.
Images: A man drives a forklift full of supplies
A man drives a forklift full of supplies at a store on Aug. 17, 2010, in Los Angeles.Kevork Djansezian / Getty Images

Shipping costs aren't the only thing weighing on retailers' digital profits this holiday season.

As operations become more complex for companies doing business both online and in store, out-of-stocks, overstocks and returns are costing retailers $1.75 trillion a year — a number that's only moving higher.

What's more, as retailers struggle to get a read on how much merchandise they have and where it's located, many are falling short on their promise to make it easy for shoppers to pick up their online orders in store. As a result, these businesses are likely to miss out on future sales from consumers whom they've disappointed in the past.

Images: A man drives a forklift full of supplies
A man drives a forklift full of supplies at a store on Aug. 17, 2010, in Los Angeles.Kevork Djansezian / Getty Images

"This is the time of year when it really becomes acute," said John Squire, CEO of retail analytics firm DynamicAction.

According to a study commissioned by his company and conducted by IHL Group, "out-of-stocks" accounted for $634.1 billion in lost retail sales for the year ended in the spring — 39 percent higher than in 2012. Likewise, overstocks contributed $471.9 billion in lost revenue, up 30 percent from three years prior. When a retailer has too much merchandise, it cuts into its margins.

This Is the Biggest Threat to Retail Sales Growth

The slide in performance comes as retailers are struggling to utilize the mounds of customer data they've acquired over the past few years and accurately forecast demand. Further complicating things is that as consumers buy more online, it's getting even harder for retailers to keep tabs on inventories.

Overstocks, in particular, are expected to be a big issue this holiday season, as a delay in cold temperatures has left retailers with too many jackets and boots. The industry has already warned that this will lead to severe markdowns toward the end of the season, eating away at their profits.

"You can only imagine what retailers have ahead of them as they try to manage this overstock problem that they have," Squire said.

While margins are expected to contract even further as the season progresses, they're already taking a hit. According to separate analysis by DynamicAction, retailers ahead of Black Friday were already selling about 21 percent fewer items at full price than they did at the same point in 2014.

On the flip side, a separate study by the GT Nexus, a supply chain platform, found that 75 percent of U.S. adults have come across an unavailable product in stores over the past year, with 63 percent encountering that issue online. As a result, the majority of these frustrated shoppers decided to shop at another retailer or buy nothing at all.

Where Wal-Mart, Target Are Falling Short

This shortage intensifies over the holiday season. Data from Adobe's Digital Index found that 35 percent of online sales volume went toward retailers' Thanksgiving Day door-buster deals, leading to "a lot more out of stocks" on Black Friday than the firm expected.

Items that were either out of stock or running low included Hasbro's Pie Face game and the 7-inch 8-gigabyte Amazon Fire, Adobe said.

Scot Wingo, executive chairman and founder of ChannelAdvisor, said retailers are particularly concerned about having deep enough inventories on peak shopping days, so that they don't disappoint consumers who woke up early for deals.

"That's what retailers are spending a lot more time on," he said.

They're also spending time working out the kinks in their "buy online, pickup in store" capabilities. According to a recent study by JDA Software Group, nearly 40 percent of consumers who have elected to use this service have encountered issues with the store's employees along the way. The most commonly stated problem was that workers took a long time, or were unable, to find an order in the store or computer system.

Meet the Holidays’ Big Retail Spenders

Along with these issues, returns are also placing a bigger strain on retailers. Because many online purchases are made without a shopper seeing the product in person — meaning they aren't totally certain of its color or fit — returns are already 9.3 percent higher this holiday season compared with last year, according to DynamicAction.

Exacerbating the issue is the fact that many online shoppers, who are unsure of their size, will place multiple orders and return what doesn't fit. And retailers, who are trying to capture a larger share of online sales, are making it easier — and cheaper — for shoppers to return these items. Returns accounted for $642.6 billion in lost sales for the year ended in the spring.

"We're seeing higher returns and more profitable product coming back in those returns," Squire said.