Our recent study conducted with IHL, How Retailers Win Loyalty in an Omnichannel World, looks into the need for all retailers to take a firm hand in optimizing their inventory. But it’s physical retailers that have the most to lose by not doing so. The backdrop to this, as we’ve witnessed, is that there’s an ongoing inventory crisis, with too many retailers still carrying too much of the wrong merchandise. With buying patterns changing quickly, retailers need to get the right goods into the right stores.
In previous articles, I have discussed the business model revolution that’s necessary to compete with Amazon. Here we’ll look into the study findings on a sunnier topic for physical retailers: impulse spending. There’s a high likelihood that, as an American shopper, you’ve been at a store, seen an item completely unrelated to the purpose of your shopping trip, and suddenly — you have to have it.
This phenomenon is known as impulse spending, and it’s so commonplace that it’s not considered an inherent sign of reckless spending habits. Impulse spending, when done in moderation, can lead to new hobbies, new tastes and new experiences. I’d go so far as to say it’s part of the human condition in that it speaks to our inherent curiosity and innate need to look beyond prescribed limits.
Impulse spending accounts for a sizable chunk of retail revenue. In our research, consumers reported that between 13% and 22% of their total bill in stores was made up of impulse items, depending on the type of retailer shopped. Electronics had the lowest percentage, at 13.6%. In contrast, mass merchants rely most heavily on impulse buys — a whopping 22% of all purchases, according to our study.
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However, as America’s retail landscape shifts from in-store toward online spending, retailers worry that this change may signal the end of the impulse purchase. The fashion industry — where 50% of purchases are currently made online — is especially concerned about this loss in revenue.
While most physical retailers fear Amazon’s growing dominance, they should take solace in the fact that Amazon has groomed the modern American consumer to be an impulse buyer mainly during in-person shopping trips. What does this mean for physical retailers? Our research found that Amazon Prime members are not habitual impulse buyers when online shopping — yet they turn to impulse buying when they make trips to physical stores. Prime members impulse purchase 30% more at department stores than non-Prime members, our study showed. This disparity is most stark when comparing impulse purchasing rates in the home décor category — Prime members impulse purchase 71% more than their non-Prime counterparts.
Physical retailers are misguided in blaming their disappointing profits on Amazon’s growth or even the pandemic. Consumer demand is there, but are the products they want on the shelves? Based on our research, we believe that what’s really sapping brick-and-mortar revenue is inventory inefficiency. When Prime members visit physical retailers for a desired item, they experience out-of-stocks 55% more of the time than when online shopping.
Physical retailers must capitalize on their single biggest edge over online retail: convenience. By remedying out-of-stocks, physical retailers can return to profitability — and more successfully coexist with online retail. To do this, they need more precision: more precise data on what inventory they have (and where), more up-to-the-moment data on buying trends and shopper behavior, and faster mechanisms to respond to changing events in the business and in the marketplace. The key idea: improving inventory position can help retailers secure consumer loyalty and capture more sales.
Can Online Retailers Capture More Impulse Spend?
While Amazon can turn a profit without high rates of impulse purchases, smaller online retailers can’t say the same. So what can struggling online retailers do to match the impulse buying rates of physical retailers?
Simply put, online retailers can encourage impulse spending by mimicking the physicality of in-person retail. According to research, much of the behavior behind impulse buying has to do with a customer’s proximity to an item creating feelings of partial ownership — therefore there is a potential sense of loss if the item is not purchased.
If a shopper at a physical retailer tries on a pair of pants, they are more likely to purchase said pair of pants. Let’s say an online sunglass retailer understands this relationship and wants to re-create it digitally. They could incorporate a 360-spin view option or a webcam mirror for the customer to feel they’re actually “trying on” the item — encouraging an impulse purchase by intertwining the item with the customer’s actual facial features.
Online retailers can also leverage the behavior of other customers to boost impulse spending. In an age of social media, where the modern American is constantly on display, a decision to purchase an item comes not only from potential personal gratification but from the purchases and advice of peers and influencers. Savvy online retailers understand this — they offer discounts to customers who write glowing reviews, sponsor content creators and constantly highlight select items’ popularity when browsing their inventory.
Impulse buys are here to stay. If done correctly, impulse purchases provide the consumer with a sense of spontaneous joy while leveling the playing field between Amazon, smaller online competitors and physical retailers — creating more loyalty in a diverse and sustainable retail landscape. Responding successfully to fast-changing buying trends will mean tuning in to their inventory data and empowering themselves to make up-to-the-moment decisions to meet those needs.
To wrap up, we’ve seen through our research that consumer loyalty is changing, and it encompasses many components, not only from pre-pandemic trends but also from emerging behaviors. Retailers at all levels, and across channels, will succeed by paying exquisite attention to managing their inventory issues. Smart inventory management makes it less likely customers will abandon their carts; when they go to shop in stores, the items they want will be there. Impulse buying will go up, and retailers can better hold the line against Amazon.
Kevin Young is CMO of ToolsGroup and an internationally recognized supply chain expert. He can be reached at kyoung@toolsgroup.com.
