Smart Retail: The Advent of Smart Shelves

A customer enters the local grocery store of his choice looking for his favorite product but finds that it is not available on the shelf. Frustrated, the customer considers his options: choose another brand, go to another store, postpone the purchase, or not buy the product at all. None of these scenarios are favorable for the grocery store, as the customer’s experience is jeopardized.

Supermarkets and other retailers are facing this “out-of-stock” scenario more often than is generally assumed. Due to the lack of oversight and control over all products in stock and on the shelf, this is still a major problem. It is, therefore, indispensable to look at the economic impact of the off-shelf products and to analyze the appropriate response options for retailers. It is important for retailers to realize the impact of the out-of-stock scenario,  including on the final outcome. 

These days, supermarkets, hypermarkets and convenience stores play a fundamental role as our main suppliers of numerous products. To have a clear insight into the large number of products they offer, we only need to look at the size of these facilities, which on average range from 600 to 24,000m2 for the largest ones, offering between 8,000 and 47,000 different products.

In Mexico, there are 3,284 such markets, which together represent a sales floor of 8,397,855m². In other words, almost the size of the states of Morelos and Tlaxcala combined.

Thanks to their massive distribution capacity, 80 percent of the consumers in Mexico shop at these establishments at least twice a month. Consequently sales are reaching an average of US$1.45 billion annually. 

As we can imagine, it is difficult to keep an eye on the stocks on the shelves and at the same time to ensure that the staff are available to replenish the out-of-stock products for such a large quantity of products.

Therefore, in supermarkets and hypermarkets “out-of-stock” can easily amount to between 8 percent and 11 percent of total sales. However, this percentage increases up to 15 percent with newly launched products during major marketing campaigns or promotional prices.

When products are out-of-stock, up to 21 percent of customers will continue to buy other products while up to 43 percent of customers will go to another store to buy the product. That means a massive loss of customer satisfaction for this product with the risk of losing the customer in general.

These figures show that more than half of a supermarket’s consumers would lose their loyalty to that store. If we translate this into revenue, for example, a retailer with annual sales of US$1 billion will have US$40 million in losses per year.

In response to this problem and the alarming figures recorded, leading software companies have created solutions driven by artificial intelligence (AI) and machine learning (ML), creating a segment in the industry known as smart retail, which allows the digitalization of stores and hence the automation of operations in retail distribution, such as automatic re-stocking with smart shelves.  

A smart shelf operates through algorithms generated by AI-powered platforms that not only accumulate information but also correlate, connect and orchestrate all the data to generate actions and predictions according to the different scenarios occurring in the store.

When a customer enters a supermarket and takes a product from a smart shelf, it detects it and notifies the store staff so that they can immediately place another product or, if there is none in stock, notify suppliers and place the new orders before they run out of products in the store.

With optimal shelf-stocking, retailers can efficiently reduce the loss of sales, generating higher profit margins and lower costs while, at the same time, enriching the customer’s satisfaction and journey. 

In Mexico, we forecast that the application of smart solutions by retailers could increase the sector's profits by US$600 million with the implementation of smart shelves and the reduction of stock-outs alone, based on the supermarket sales in the first quarter of 2022, which totaled US$15.6 billion.

Moving toward smart retail is, therefore, key as new technologies increasingly  address the problems associated with  out-of-stock products. Future-oriented retailers need to focus on these new technologies to facilitate operations, increase their revenues and remain competitive in the market.