Retail’s Ghost Economy: A $1.75 Trillion Problem for Retailers Worldwide

The numbers are mind-boggling: a new research report from retail analyst firm IHL Group, sponsored by OrderDynamics, points out that retailers worldwide lose $1.75 trillion (that’s trillion, not billion) annually in revenue opportunities due to the combined costs of overstocks, out-of-stocks and sales returns.

It’s a phenomenon that IHL and OrderDynamics call the “Ghost Economy,” the “hidden” activities that occur within a retail enterprise that wreak havoc with sales and profitability.

The research report, Retailers and the Ghost Economy: $1.75 Trillion Reasons to be Afraid, breaks down the annual losses from returns, out-of-stocks and overstocks as follows:

• Returns: $642.6 billion each year;
• Out-of-Stocks: $634.1 billion each year; and
• Overstocks: $471.9 billion each year.

What does this mean? For the typical retailer, the losses are the equivalent of increasing revenue by 11.7 percent. In other words, retailers lose 11.7 percent of revenue due to the combined impact of overstocks, out-of-stocks and needless returns (i.e., returns that could have been prevented). To put it simply, if retailers can fix these problems, it’s the equivalent of adding $117 million for every $1B in retail sales.

As the report notes, internal process failures are the No. 1 cause of out-of-stocks and overstocks, followed by personnel issues, and disconnected data and systems. Retailers have the ability to resolve all of these issues, and they stand to reap enormous benefits by doing so.

Online Retail’s Role in the Ghost Economy
The research focused on omnichannel retailing, so the daunting $1.75 trillion in lost revenue represents sales across all channels. And while e-commerce still represents a small portion of overall retail sales, it continues to grow at double-digit rates that far outpace retail’s overall growth. Disconnects in data or processes multiply much faster online, and do so with devastating effects. Consider the following common scenarios of online disconnects:

• Remarketing out-of-stock merchandise: Abandoned shopping carts are the bane of online retailing, and a frequent cause is back-ordered or out-of-stock merchandise. And yet retailers continue to haunt shoppers with remarketing ads for merchandise they can't buy, which only reminds them that the retailer couldn’t fulfill what they wanted, when they wanted it. Retailers are paying to remind consumers of the items they wanted but couldn’t buy.
• Disconnected channels: For omnichannel retailers, merchandise that’s out-of-stock online may be available in certain store locations. However, unless a retailer has connected its inventory and order management systems throughout all channels, online shoppers will likely leave e-commerce sites frustrated while unsold merchandise in stores may be sold at zero profit or for a loss.
• Excessive returns due to inaccurate sizing, quality issues or improper tagging: Shoppers in-store can easily try on apparel to experience the overall fit and quality, but don't have this luxury online. Retailers must pay close attention to their size scale and manufacturing quality, and move quickly to address problems at the first sign of avoidable returns. Furthermore, if retailers don’t assign the right descriptors, they’re playing “hide and seek” with their merchandise, keeping it away from the very shoppers that visited their site to buy it.

These are just a few examples of the frictions that omnichannel retailers and their customers encounter every day. And while connecting disparate systems and processes may seem a daunting task, the good news is that omnichannel retailers can make progress in solving the pain points of overstocks, out-of-stocks and returns. It all begins with connecting systems and data, and identifying opportunities to achieve this type of omnichannel excellence.

Where should retailers focus their attention? Here's just one example:

By connecting data within its organization, online fashion retailer REVOLVE identified more than $2 million of inventory that had minimal exposure online — a sure predictor of future markdowns. Half of this inventory hadn’t sold in four weeks or longer, while the other half was overstocked. The retailer moved quickly to increase product views for these low-exposure products by an average of 15 percent per week over a four-week period, generating a 20 percent increase in sellthrough of the inventory that had no recent sales. The strategy improved REVOLVE's return on capital of overstocked items by an average of nearly 60 percent.

REVOLVE also noticed excessive returns on a new brand that was being carried, leading the retailer to determine that the sizing chart wasn’t correct. REVOLVE moved quickly to correct the sizing and solved the returns issue.

In the face of seemingly overwhelming industry issues, these examples may seem small, but multiply them by tens of thousands of retailers and the numbers add up quickly. Many of the contributing issues leading to the Ghost Economy can be addressed by connecting systems and processes. And in the face of a $1.75 trillion problem, that’s welcome news.

Kevin Sterneckert is the chief marketing officer at OrderDynamics, a cloud-based software company built to transform enterprise-level retail.