The Effect of Product Variety and Inventory Levels on Retail Store Sales: A Longitudinal Study

Abstract

We examine the effects of product variety and inventory levels on store sales. Using 4 years of data from stores of a large retailer, we show that increases in product variety and inventory levels are both associated with higher sales. We also show that increasing product variety and inventory levels has an indirect negative effect on store sales through their impact on phantom products—products that are physically present at the store, but only in storage areas where customers cannot find or purchase them. Our study highlights a consequence of increased product variety and inventory levels that has previously been overlooked in studies of retail product variety and inventory management. It also quantifies the impact of phantom products on store sales. In addition, our study provides empirical evidence to support earlier claims that higher product variety and inventory levels lead to an increase in defect rate. We discuss the implications of our findings for retail inventory and assortment planning and for the design of retail stores.