Estimating the Demand Spillover Effect of Inventory Stockouts in a Fashion Footwear Retail Setting

Abstract

Problem Definition: In brick-and-mortar fashion retail stores, inventory stockouts are frequent and widespread. When a specific size of a fashion product is out-of-stock, the unmet demand might not be completely lost due to spillovers to adjacent sizes of the same product. We empirically estimate this cross-size demand spillover effect of inventory stockouts in a fashion retail setting.

Academic/Practical Relevance: Little research has been done to study consumer responses to stockouts of fashion products, partly due to researchers’ inaccessibility to proprietary data of fashion retailers. Moreover, it is challenging to estimate stockout-based substitution patterns using existing approaches due to the enormous number of stock keeping units (SKUs) and frequent stockouts in fashion retail stores.

Methodology: We obtain a large-scale data set from one of the largest sportswear retail chains in China, whose retail stores are dedicated to distributing products of a single world-renowned brand. Employing around 1.5 million granular and real-time sales and inventory records of 217 stores, 503 men’s footwear products, and 4,024 SKUs over a two-year period, we develop a difference-in-differences framework to estimate the demand spillover effect of inventory stockouts. We demonstrate the validity of this framework by conducting a pre-trend test and a placebo test.

Results: We find that on average the stockout of a men’s footwear SKU led to a 23.0% increase in the daily sales of the adjacent-larger-size SKU of the same product and a 19.8% increase in the daily sales of the adjacent-smaller-size SKU of the same product. The magnitude of the cross-size demand spillover effect is larger in regular stores than in flagship stores or stores in prominent locations, larger for casual sports shoes than for specialized sports shoes, and larger for low-price products than for high-price products. We do not find evidence that the stockout of a footwear SKU would lead to a significant change in the daily sales of the same-size SKUs of other products.

Managerial Implications: At the store level, we recommend the sales staff to encourage consumers to try adjacent larger/smaller-size SKUs when their most preferred size is out-of-stock. At the corporate level, our counterfactual analysis demonstrates that incorporating the cross-size demand spillover effect into the sportswear retail chain’s proactive transshipment decision can reduce its transshipment cost substantially and improve its profitability.