Stockout costs are a bigger problem than most grocery store owners realize: stockouts cost North American food retailers an estimated 5.9% of their total retail sales, and out-of-stock rates in the grocery sector average 7–10% worldwide. Understanding and reducing your stockout cost is one of the highest-impact moves you can make for your store's profitability.
Imagine this scenario: A customer comes to your store looking for a specific item. When they arrive at the shelf where that item should be… they find the shelves cleared out. You’re out of stock. The customer drove all the way to your store specifically for this item.
Now that you don’t have it, they’re forced to leave your store empty-handed and frustrated. Not only did you lose the sale that day, but what are the chances that the customer returns to your store?
This post will walk you through the basics of stockout cost. We’ll explore what it is, the elements contributing to the cost of running out of stock, and give you some tips on reducing your risk of stockouts.
A stockout occurs when customer demand exceeds the inventory you have on hand, leaving a product unavailable for purchase. Stockout cost is the total financial impact of that shortage — including lost sales, operational expenses like expedited reorders, and the longer-term cost of lost customer loyalty. For grocery stores, these costs can add up faster than most owners expect.
Stockout costs fall into three main categories:
- Lost sales: Revenue missed while the product is unavailable
- Customer loyalty damage: Shoppers who go elsewhere and may not return — 21–43% of customers will go to another store to buy the item
- Operational costs: Expedited reorders, rushed delivery fees, and overtime labor to urgently restock
All of this adds up to costs you can do without. Adopting measures to reduce stockouts is key to happy customers, a thriving grocery store, and profitability. Let’s explore strategies!
To estimate your stockout cost, add together three figures: the revenue lost during the out-of-stock period (your product's average daily sales multiplied by the number of days out of stock), any additional operational costs like rush shipping or overtime labor, and an estimate of customer lifetime value lost from shoppers who don't return.
While the customer loyalty element is difficult to quantify precisely, even a conservative estimate often reveals that stockout costs are significantly higher than most store owners assume.
Here’s a quick guide:
While this won’t be completely accurate, you’ll have a better understanding of stockout costs and how they impact your grocery store.
Basic Stockout Cost Formula: Stockout Cost = Cost of Lost Sales + Expediting/Operational Costs + Estimated Customer Lifetime Value Lost
It’s not quite a crystal ball, but demand forecasting helps align inventory with upcoming needs. You can analyze sales patterns and historical data to inform your purchasing strategies and keep up with customer demand.
For each product, consider seasonality, bestselling weeks, and demand fluctuations. This gives you a baseline to work from. Also factor in external data like upcoming holidays, competitor promotions, weather forecasts, and local events that may impact sales.
Your point of sale (POS) system is a goldmine of data and helps tie together operations:
To stay on top of stockouts you need real-time access to your inventory across brick-and-mortar and online channels. In addition to demand forecasting, optimizing inventory management helps minimize stockout risks.
POS systems with real-time visibility enable you to streamline operations.
Related Read: Automated Inventory Management: Why It’s Critical
For example, automated tracking updates stock levels across channels. Your POS can also trigger alerts when products hit a threshold — some POS systems automatically reorder for you — to ensure continuous availability. Last, you could implement just-in-time inventory practices, and receive new key inventory just as existing stock nears depletion.
Developing strong relationships with reliable suppliers is key to avoiding stockouts. It’s essential to have vendors you can rely on to deliver on time, consistently.
Be sure to ask questions that will help you decide which suppliers you want to work with. For example, what are their lead times? Long lead times result in out-of-stock gaps. What are their minimum order quantities? You don’t want to over-order and tie up excess capital; flexible minimums are ideal.
Candid conversations will ensure your replenishment requirements align. Vendor relationship management is a two-way street, however. Let’s say you’re planning an ice cream promotion over the summer; give your suppliers a heads-up so they know to expect a bigger order.
It’s best practice to have a couple of backup suppliers in case your main supplier has any hiccups. You can manage multiple suppliers through a POS system, as well as:
Supplier and inventory management capabilities in POS systems help retailers collaborate with vendors, streamline purchases, and prevent disruptions.
We touched on this above, but real-time inventory management systems are the future! When you only have periodic snapshots of stock levels in legacy inventory systems, you are vulnerable to stockouts, so a modern inventory management system is a must.
Continuous inventory tracking across all locations and channels allows you to see what is available at any moment. Counts are adjusted as soon as items are sold. Employees can quickly update inventory when items are received or transferred using handheld scanners with barcode readers, and this real-time data feeds into the POS.
Related Read: How Do Grocery Stores Keep Track of Inventory? 5 Essential Tools
A modern POS system reduces stockout costs by giving you real-time visibility into stock levels across all channels, automatically alerting you when a product hits a low-stock threshold, and enabling demand forecasting based on historical sales data.
Some systems can even trigger automatic reorders. Combined with supplier management tools, a good POS system means you're never caught off guard by an empty shelf.
The four tips above can help you manage your inventory appropriately and effectively, minimizing your risk of running out of stock of popular items and incurring those dreaded stockout costs!
The easiest way to minimize the risk of stockouts is by investing in an advanced point of sale system capable of helping you with the four tips listed in this post.
IT Retail’s point of sale solution offers advanced inventory management features like purchase order generation and low stock reports. These features and more can help you keep tabs on your inventory and quickly restock in the event that you’re running low.
Schedule a free software demo today to see if IT Retail is the right solution for your grocery store!