When Less is More: Estimating the Effect of Product Variety on Retail Operational Performance

Managing product variety has long been a concern for firms from many different industries, with less product variety typically associated with higher operational performance. However, most contemporary research on product variety has looked at its impacts on the operations and sales performance of manufacturing firms. In this research, we investigate the impact of product variety on the operational performance at a retail setting. The distinction between retailer and manufacturer is important because of the unique product assortment issues retailers face, such as selling competing brands, offering many different types of product categories, or product substitutability. Using data gathered over a 7-month period for two product categories, we develop econometric models and find that product variety has a positive effect on inventory levels, and that this impact is moderated by product category substitutability. We also find that product variety increases product availability in product categories that are more substitutable, with a 1% increase in product variety leading to 0.67% fewer stockouts in some product categories. Our findings suggest both a positive and negative impact of product variety on operational performance.