Variety and Inventory Trade-off in Retailing: An Empirical Study

Abstract

We investigate the trade-off between variety and inventory in retailing using a proprietary data set from a bookstore chain. In general, more variety is expected to generate higher traffic to store and higher conversion for incoming customers. Another argument is that too much variety reduces sales due to the confusion it creates in the customers’ minds (choice paradox). Higher variety also implies lower inventory per product due to limited shelf space in the stores. Hence, a critical question for a retailer is to determine where their stores are currently positioned on the variety-sales curve, and whether or not they should increase/decrease variety by extending/cutting the long tail of slow-moving products. We consider number of subcategories, number of products in a subcategory, average inventory per product, and inventory dispersion as measures of, respectively, macro variety, micro variety, inventory depth, and inventory policy effectiveness. We exploit the differences between stores and variations over time to investigate the net impact of variety and inventory on sales of total category and of top-selling products. We control for store traffic and seasonality, and introduce instrumental variables to control for endogeneity of variety and inventory. We find that both micro and macro variety increase total category sales. Further, variety increases sales of the top-selling products as well—a somewhat surprising positive effect of presenting the long-tail of products to customers. We also demonstrate how a retailer can significantly increase its revenue by optimally swapping shelf spaces across product categories based on the estimated category-specific variety effects.