Out-of-stocks and margins: why does an out-of-stock on a high-margin product cost twice?

Two out-of-stocks at the same rate, two different costs

The on-shelf out-of-stock rate counts absent SKUs, each as one (on-shelf out-of-stock rate: how to calculate it). For the profit and loss account, an out-of-stock on a low-margin bottle of water and one on a high-margin face cream have nothing in common, yet they count the same.

The study by Gruen, Corsten and Bharadwaj estimates that a retailer loses about 4% of sales to out-of-stocks. But that figure is an average: the margin loss depends on the products hit, and high-margin categories often show the highest out-of-stock rates, such as hair colour (15.6%), make-up (14.2%) or facial care (12%) in the ECR France 2013-2014 survey.

The double cost of the high-margin out-of-stock

When a shopper finds the product absent, the reactions measured by Gruen, Corsten and Bharadwaj split as follows: 26% switch brand, 19% switch size within the brand, 15% delay, 31% buy elsewhere, 9% give up. For a high-margin product:

1. The sale is lost in 40% of cases (bought elsewhere or given up): loss of the whole margin.
2. The sale is substituted in 45% of cases: if the substitute is a less profitable product (national brand instead of own label, small size instead of large), the store books a sale but loses the margin gap.
3. The delay (15%) costs nothing if the product comes back fast, everything if the out-of-stock lasts.

The real cost of an out-of-stock is therefore: unit margin × hourly sales × duration × share lost, plus margin gap × share substituted. For a product whose most likely substitute carries a margin five points lower, the second term is not negligible.

Weighting out-of-stocks by margin

The method is one more column in the dashboard:

SKU	Out-of-stocks seen (week)	Sales / hour	Unit margin	Estimated margin cost
Spring water 1.5 L × 6	5	30	£0.40	low
Hair colour, common shade	2	2	£4.50	medium
Coffee pods brand A	3	12	£1.80	high
Premium facial care	1	1	£9	medium

The ranking by margin cost looks like neither the ranking by number of out-of-stocks (water would be first) nor the ranking by sales. It is the third line, high velocity and decent margin, that costs the most, and it draws nobody’s attention.

The products to protect first

Three families deserve a stricter out-of-stock target than the store average:

• high-margin, high-velocity products (coffee, branded toiletries, everyday fine food): every hour of out-of-stock is expensive;
• own-label products: their margin is higher than national brands’, and their out-of-stock sends the shopper to the national brand, less profitable for the store;
• products without a substitute in high-margin categories (pharmacy, hair colour, skincare): the sale is lost, not substituted (which products are most often out of stock).

For these families, facing, reorder point and cycle counting are set on a target below 2%, even if the rest of the aisle is at 5.

Talking about it to management

A store manager who presents an out-of-stock rate of 6% gets a nod. A store manager who presents £4,000 of margin lost per week, 60% of it on twenty SKUs, gets the means to treat them. Converting the rate into money is described in how much does an out-of-stock cost a store; margin adds the priority.

What shopper reporting changes

Shopper reports with ShelfAlert give the SKU, the time and the duration of every out-of-stock. Crossed with unit margin, they produce every week the list of the twenty out-of-stocks that cost the most margin, which no walk-round count can do. 14-day trial, no payment card: see the plan for store managers.

Sources

• Gruen, Corsten, Bharadwaj, “Retail Out-of-Stocks: A Worldwide Examination”, GMA, 2002: full study (PDF).
• ECR France, 2013-2014 out-of-stock survey by category, reported by Journal du Net: the products most often out of stock.
• IHL Group, “Inventory Distortion Study”, 2026: study overview.