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. 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 style or to products with different styles. Little research has been done to study consumer responses to stockouts of fashion products because researchers had limited access to the proprietary data of fashion retailers and because 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. To fill this void in the literature, we empirically estimate the SKU-level demand spillover effect of inventory stockouts in a fashion footwear retail setting. Methodology/Results: We obtain a large-scale data set from a large sportswear retail chain, 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 cross-size demand spillover effect of inventory stockouts. We demonstrate the validity of this framework by conducting a pre-trend test and a placebo test. We find that roughly over 50% of the unmet demand caused by the stockout of a men’s footwear SKU spills over to adjacent sizes of the same style and significantly increases their daily sales: on average a 23.0% increase for the adjacent-larger-size and a 19.8% increase for the adjacent-smaller-size. The cross-size demand spillover effect is larger in regular stores than in flagship stores, larger for casual sports shoes than for specialized sports shoes, and larger for low-price products than for high-price products. Using an attribute-based model to estimate the cross-style demand spillover effect, we find that it is much smaller than the cross-size spillover effect. Managerial implications: First, we empirically demonstrate that consumers have a strong tendency to substitute between adjacent sizes when purchasing footwear products in a brick-and-mortar fashion retail setting. Second, our counterfactual analysis shows 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.