Out-of-Stock Channel Prioritization

A playbook for omni-channel brands when facing inventory shortages

This is a guest post from Sam McBride, the Chief Operating Officer / Chief Sales Officer at RXBAR (acquired by Kellogg for $600M). Sam is also an investor/advisor in a number of emerging CPG brands including MUSH, Cometeer, Olipop, Swiftly, Four Sigmatic, and Muddy Bites (disclosure: Muddy Bites is a Reformation portfolio company).

Although some supply chain pressures have eased up in recent months, many brands will continue to experience inventory shortages due to global economic and geopolitical uncertainty. As omni-channel brands head into Q4 — which includes major sales-driving events including Black Friday, Cyber Monday, and the holiday season — founders must have a playbook for how they’ll prioritize various sales channels in the case of inventory stock-outs (which often occurs in Q4 as a result of the demand spikes for the period).

Though it’s never an easy decision to cut off any channel in its entirety, it’s imperative that brands approach inventory stock-outs in this absolutist manner vs. taking the approach of cutting a little bit of inventory from a variety of channels. Spreading inventory cuts evenly across all channels will just make everyone a little bit mad.

With that said, here’s a framework I’ve shared with brands facing an out-of-stock prioritization decision. The optimal order for cutting inventory shipments is as follows (with (1) being the first channel I recommend cutting off from inventory, and (6) being the last channel to cut off from inventory):

  1. Non-Retail Distributors
  2. Amazon
  3. DTC — One Time Customers
  4. DTC — Subscription Customers
  5. Retail Distributors
  6. Direct Retailers

(1) Non-Retail Distributors

Non-retail distributors (“up and down the street guys”) should be the first place you cut back on supplying inventory. These distributors have the ability to get you back into stores when you’re back in stock, so you won’t lose much permanent shelf space despite cutting them off. Additionally, a lot of these accounts are reselling on Amazon anyway and have more inventory than they’d like to admit. Therefore, this is an easy channel to de-prioritize.

(2) Amazon

Amazon should be the second channel to cut for several reasons. First, they should have inventory to last a few weeks before being fully depleted. Second, you can restart selling on Amazon (via FBM) as soon as you have inventory back in. Lastly, the Amazon resellers (to the extent they exist for your product) can fill the void for your Amazon customers for a while — and it’s good to clear these resellers of inventory anyway (especially for perishable goods, since these resellers don’t manage date codes well).

(3) DTC — One Time Customers

The next channel to cut supply from is DTC one-off customers (i.e. customers making a one-time purchase from your own website). Though it’s counterintuitive to cut inventory from a higher-margin channel that you own, these DTC customers are your most loyal and most forgiving, so if you communicate well with them they’ll likely be the channel who understands the most. Additionally, because you directly own the customer relationship, you can make up for these DTC stock-outs later by providing customers with discount codes, early access to new products, or other forms of “rewards” for their patience.

(4) DTC — Subscription Customers

This has the same explanation as in (3) above; however, because this is a higher-LTV customer base than one-off purchasers, and since it’s difficult and expensive to reacquire a churned subscriber, subscription customers should be be cut off from inventory supply only after one-off DTC customers are cut. Also worth noting for all DTC customers when facing stock-outs: stop all of your performance marketing as you don’t have anything to sell. (Why spend marketing dollars when you have no inventory to sell them?)

(5) Retail Distributors

Retail distributors (e.g. UNFI, KeHE) are difficult to set up and even more difficult to get in a rhythm, so you don’t want to disrupt them. If you cut off retail distributors and go out of stock in their retailers, you will lose shelf space, lose buyer trust, and impact your sell-through numbers, making it difficult to earn back the shelf space, especially for your non-core SKUs.

(6) Direct Retailers

Direct retailers have the leanest inventory situation since their distribution centers manage many brands’ inventory for just a single retailer. Additionally, these retailers are likely your biggest and most important channels, so a loss of shelf-space, trust, and sell-through is even more detrimental than in (5) above as you will risk losing the entire account. And to exacerbate things, you have no ability to communicate directly to the end consumers who will be searching for but won’t see your products on these retailers’ shelves.

Overall, regardless of which channels you decide to cut and which to prioritize, it is very important that your executives — whether it be the CEO, COO, Head of Sales, etc. (the more senior the better) — communicate with customers in a transparent manner. Block a day off on the calendar, pick up the phone, and call your customers to educate them on what’s happening with their inventory supply (important to be firm here as to not leave room for debate), when the stock-out will be over, and deliver on your promises. Additionally, it’s important you continue to send updates to these customers so that they do not feel they are in the dark.

As the brand’s leader, you must also communicate internally and clearly explain the decisions to your employees. With less inventory resulting in lower sales, employee’s bonuses (and overall company performance) might be impacted and they need to understand why.

— Sam McBride

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Andrew Oved

Andrew Oved

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Founder & Managing Partner @ReformationVC. Previously @FirstMarkCap. @StanfordGSB. 🏀