Retail Inventory, Consumer Stockpiling, and Environmental Stress: Empirical Evidence From a Natural Experiment
45 Pages Posted: 12 Jan 2019
Date Written: December 22, 2018
During economic downturns, consumers change their buying patterns, resulting in suboptimal retail fulfillment performance in the absence of adjustments to these changes by retailers. This paper shows how household stockpiling patterns evolved during the “Great Recession” of 2008-2009, and demonstrates the impact of this change on inventory management at a retail chain that pursues a high-low pricing strategy. In the face of increasing environmental stress due to financial and economic events, consumers are likely to spend more time at home and shop more frugally. At the same time, in a high-low (promotional) environment, consumers may be incentivized to increase the amount they stockpile to take advantage of promotional prices. Accordingly, we use the two-segment household inventory theory to categorize consumers in a retail channel into non-stockpiling and stockpiling segments. Drawing on a combination of household-level and retailer-level analysis and using the 2008–2009 financial crisis as a natural experiment, we find that as environmental stress increases, consumers, in general, decrease their consumption rates. However, they also increase the time between shopping trips, thus hold inventories for a longer period of time. Finally, the relative size of the stockpiling segment to the non-stockpilers is reduced, perhaps due to budget constraints on a larger percent of the population. These changes in consumer stockpiling behavior add complexity to retail inventory planning. In particular, lower consumer demand does not imply lower inventory risk during times of economic downturns. In order to efficiently meet consumer needs, retailers need to carefully adjust inventory and safety stock levels (both of which, as we find, may actually need to increase or decrease during promotional periods), due to the compound variability in consumption rate, inventory holding duration, and size of the stockpiling segment.
Keywords: retail inventory, consumer stockpiling, environmental stress, natural experiment
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