Reducing inventory has been sold as all good: cutting overhead costs for retailers, eliminating "clutter" of seldom-purchased items and making shopping simpler for customers. A new study by university researchers, however, suggests that assortment reductions even among less frequently purchased items can cause significant overall loss in sales.

---------------------------

One way retail grocers can cut costs is by reducing the number of slow-selling items in their inventory. Prior marketing research has shown that little or no loss in sales occurs with such reductions; however, many retailers remain skeptical, fearing a reduction in choice may steer their customers to the competition. A new study by a Rice marketing expert indicates they may be right.

“Customers do in fact change their shopping behavior after being offered fewer alternative products from which to choose,” says Sharad Borle, an assistant professor of management at Rice's Jesse H. Jones Graduate School of Management.

“Furthermore, having more items to choose from seems to matter most in those product categories that shoppers visit most infrequently.”

In a forthcoming article in Marketing Science, titled “Effect of Product Assortment Changes on Customer Retention,” Borle and other university researchers examine the impact on customer retention of a large-scale, one-time reduction in product assortment across each and every category within an online grocery service.

In contrast to the claims of many earlier studies, Borle and his colleagues found that when a retail grocer reduced the store's selection of products, overall store sales did decline, as did the number of times customers' visited the store and the amount they purchased during each visit. The researchers also found that the overall decline in shopping frequency resulted in a greater loss than did the reduction in purchase quantities. The same trend was observed among different categories of products.

“When the assortment cut occurred we saw fewer purchases in about 74 percent of the product categories,” Borle explains, “while the amounts spent during each store visit only decreased in 36 percent of the categories.”

According to Borle, these findings suggest that customers buying into a product category probably still spent the same amount; however, they reduced the frequency with which they bought in that category, shifting their purchases elsewhere, most likely to other stores.

The researchers also found that when the store reduced customers' choices, product categories less frequently purchased were more adversely affected than the more frequently purchased product categories.

“Having more items to choose from seems to matter most in categories shoppers visit infrequently,” Borle says. “Perhaps they have a very specific brand in mind and aren't willing to purchase a substitute, or not knowing much about the product, they are looking for more brand choices.”

According to Borle, earlier research focused primarily on select categories, often among moderately selling items, while this new study examined the impact of assortment reductions on the frequency and dollar amounts of purchases of each category, as well as the overall amount of purchases and visits to the store. Utilizing data on over 1200 households from an online grocery and delivery service, Borle and his co-authors, Peter Boutwright and Joseph Kadane from Carnegie Mellon University, Joseph Nunes from the University of Southern California and Galit Shmueli from the University of Maryland, analyzed the shopping behavior of two groups of customers during a six-month period –

one which was offered a reduced selection of products, and the other a full assortment.

“While reduced assortment can help simplify shopping by eliminating clutter or redundant items, it may not outweigh the loss in sales we observed in our findings,” Borle says. “The challenge for managers is to figure out what is considered clutter by their average customer, and how a change in assortment may affect some segments of their customers.”

Borle believes further experimentation could help managers more precisely select which product categories or the number of categories and to what extent they could be reduced without a significant effect on the store's overall image or customers' visits.

“Shoppers may forgive the loss of scented toilet tissue,” Borle concludes, “ but a loss of variety across all categories might recast the store in an unfavorable light.”

In addition to his studies on consumer responses to product assortments, Borle conducts research on quantitative models of consumer behavior and Bayesian econometrics. Prior to joining the Jones School in 2003, he managed and implemented the AIDS prevention and tuberculosis eradication programs in India for England's Department of International Development.

A graduate of Banaras Hindu University in Varanasi, India, Borle received his master's in business administration from XLRI Institute of Management in Jamshedpur, India, and his Ph.D. in marketing from Carnegie Mellon University.

To learn more about this research, contact Debra Thomas in the Jones School at dthomas@rice.edu.