Online VS offline: 5 differences between online and offline retail in inventory management processes

Inventory management plays an important role in retail development as it affects customer satisfaction, competitiveness and overall business performance. Azamat Nirov, Inventory Management product director at Napoleon IT, talks about the main differences in online and offline retail, as well as the factors that determine the specifics of these approaches.

The basis of business

If we talk about the processes in online and offline retail, the key difference is what they understand by their basis for business. Offline retail has a logistics model, meaning that offline retail "sells" logistics.

By opening an offline shop in a locality, the retailer ensures that customers in that region can buy the products they need. Every day simple physics starts working here, where the shop has limitations, the goods have limitations, there are limitations of the retailer's warehouses and its transport supply system. So the success of the business will depend on how well the network has been planned, the facilities have been designed, the vehicles have been routed. That is, the retailer needs the right logistics company, we can say that the success of the logistics depends on the success of the entire business.

Online retail, on the other hand, thinks much less about logistics. It can afford to use 3pl logistics operators, i.e. it engages third-party companies, use marketplace logistics or additional last-mile delivery services, as not everyone has their own couriers and transport. Therefore, online business is more focused on competitive advantage relative to the rest – it sells time.

If we compare two delivery services for the same set of groceries to each other, they usually differ a lot just on the side of speed. Whether it takes 2 hours from click to delivery or 30 minutes is a very significant advantage for many services. Online retail is always balancing between the width of the offer and the speed of delivery, and offline retail is always balancing between the cost of logistics and the width of the range presented online. These are two fundamental differences.

Influencing demand

An online retailer can manage demand much better than an offline retailer. This means that he can incentivise individual offers, make individual showcases for each customer and build them in such a way as to stimulate the kind of demand needed to achieve the goals.

An offline retailer's ability to manage demand is much worse. He has only a few levers, for example: to remove or add an item to the assortment, or to play with the offer price and a couple of other possibilities. Therefore, when an offline retailer does the planning, he plans exactly the load on his logistics network and the associated risks and costs. For him, inventory management, sales planning and merchandising planning are key processes that are directly tied to the company's strategy and goals, in other words, an offline retailer can't afford to experiment much. He can't just pop five new items into the range and see what it does. To do that, he has to buy them, carry them, incur certain costs, certain risks with the products. Since this increases his costs, he carefully calculates each case for introducing and removing items from the assortment.

Online retailers can afford a great deal of flexibility in this matter. They can literally introduce new items with a couple of clicks, even without bringing them to their warehouses, just increasing the delivery time, they can manage the life cycle of a single product and change prices several times during the day depending on traffic. Online, retailers are very good at playing the margins of their business.

So while an offline retailer first makes a plan and then strives to execute it as accurately as possible, an online retailer can afford to move to maximise the metric at every point in time. That is, it does not seek to achieve the sales plan first to recoup its cost side, but works in the moment with the attractiveness of the offer, the traffic, the conversion. The more people came to the site, the more people bought the product, the more conversion they chase, the higher the result for them. This is not to say that there are no planning processes online, the goal setting processes themselves have been inherited by online from the offline past, but the basic idea is that constantly adjusting the plan gives online more opportunities to reduce costs and increase profits. Unlike online, offline retailer influences traffic very inertially, day by day building a strategy to attract new customers, changing the traffic of a long-established shop by 10% is a strong challenge for the company's specialists.

To summarise, we can say that, having the same mistake in its plan, online retailer can influence the purchase, it has many tools and mechanisms to correct its mistake, but if offline retailer made a mistake, it will suffer losses with a much higher probability.

Width and depth of assortment

We have been doing research on the statistics of large retailers on how customer demand is influenced by various shop metrics, and we noticed a very interesting correlation. If the assortment is broken down into two parts – width (number of items in the assortment) and depth (stock for each item), then the formula works for offline: the wider your assortment, the higher your traffic, and the deeper the stock, the higher the average purchase.

Offline retail is always looking to play with depth of purchase at the expense of in-store representation. If you look at the public reports of the big companies, they always talk about the average check. This is the main way to compare yourself with your competitors. As a rule, in Pyaterochka or Magnit, the assortment is not revolutionarily different, they operate in roughly the same conditions. A significant factor that can be used to attract a buyer is to play with depth. For example, whether the shop has fresh milk in the evening or not, and if there is too much milk left at the end of the day, tomorrow morning it will not be fresh anymore, while the competitor may have the opposite. Finding this balance is a direct task of the planning processes that take place within the company.

An online retailer can afford to put out two thousand items without having anything on stock because they have time management for delivery. If a customer wants to buy milk from a certain company, but the retailer does not have it in stock, he can bring it to him, but not today, but, for example, tomorrow, and also ask the customer to signal that he did not have enough of this product. with the button "bring more". Here the competition is for the one who will make the offer wider in a certain period of time. Here the correlation of the width of the offer per unit of time applies. That is why an online retailer first of all plans the width of the assortment. More specifically, it plans for traffic, and the driver of traffic is width. In turn, for an offline retailer, time is not a problem at all: at the moment a customer visits the sales area, the goods are either in the shop or they are not, the event has already happened, and it makes no sense to bring something to the shop urgently.

Transaction costs and digitalisation

Offline retailers have significant operational processes and the costs they generate. They need to pay salaries to salespeople in each shop, clean the sales floor, make repairs, put in coffee machines, change price tags, and so on.

Online retail does not bear these costs, it can change prices several times during the day to sell out the overstock at the expense of a certain audience of the most loyal customers. For example, to make a good discount on goods with a small expiry date. It does not need a good location for a darkstore – it can be placed in a semi-basement room. And the cleanliness of the space can be ensured by simple hygiene of the staff, there are no customers here, and they do not bring dirt from the street. Well, and many other costs – for example, the operability of self-service cash registers does not worry online at all. This all significantly reduces the required staff, and therefore the operating costs. In fact, online only has a load in the form of couriers, but these are not the highest paid staff. All these savings an online retailer can invest in an interesting price and a good offer.

Another key difference is that the high degree of digitalisation of online businesses allows them to tackle inventory management more easily. Conventionally speaking, any model that makes demand predictions is more accurate the more input data there is. With information about what a customer has cast their eyes on, how many seconds they stayed on a product page, retailers are greatly enriching their forecasting systems with the right set of factors and data. Their capabilities are more advanced and more accurate than those of an offline retailer.

Rotation of assortment stock

There is another important nuance in the overall costs – it is the rotation of assortment stock on the shelf. This is one of the significant challenges of offline businesses. For example, shelf rotation is when customers take the fresher product that is in the front rows on the shelf and no one takes the farther product. Eventually, this lack of rotation ends up with the "back" box being written off. For an offline business, one written off item in terms of costs is zeroing out the profit from five to ten sold.

This problem can be tried to be solved, of course. For example, sometimes this problem is solved in the following way: a salesperson in the sales area, making his rounds and checking the shelves, discovers a product with an expiry date, takes a promotional price tag with a 50% discount (what is called markdown) and pastes it on the product in the risk zone. Then the customer either buys that product or passes it by.

In an online business, this rotation problem doesn't exist. Firstly, rotation is ensured by the darkstore employee, when giving out an order he takes the product that has the shortest remaining shelf life. But if this situation still occurred due to significant forecast errors, the retailer has an interactive showcase where you can put a price tag marked "ready today" and a good discount, and they will sell less fresh goods much faster. To summarise, the online rotary machine is built so that situations where a product is stale and has a couple of days left before the expiry date are extremely rare.

Regardless of the format of operation, inventory management systems play a key role in ensuring efficient business in both online and offline retail. What differentiates their approaches is the focus of their inventory management tool – high quality plan, transparency and quality analysis offline or high-fidelity forecasting, the ability to quickly receive and process signals from multiple systems and maximum flexibility in the moment for online. Regardless of the approach, quality inventory management systems help them optimise stock on hand, manage deliveries, forecast demand, improve customer service and increase operational efficiency. In doing so, they enable them to take their retail business to the next level.