Shortage Signs vs. Facing: Cheap Talk in Supply Chains

You have probably heard quite a bit over the last few months on product shortages and stockouts. While we might be approaching the end of these, it seems we still have a long way to go, especially with lockdowns re-emerging in more countries. 

But the interesting question that is now rising is what retail stores should communicate to their customers regarding these stockouts. 

In particular, retailers are asking themselves whether they want their customers to know that there are shortages, or whether they would rather pretend there are none. 

In other words, as a retailer, do you prefer to be truthful about a stockout (and maybe even amplify its presence by putting up a sign), as in the photo above?

Or do you prefer to do what is known as a “Face up” (spread out the existing products over more shelf space), as in the photo below?

This practice was described in a recent WSJ article: 

“Grocery store managers said they are deploying one of the oldest techniques usually used by stores running low on produce to other sections of the store: “Facing up,” or bringing the few items on a shelf to the front so customers can’t see the empty space behind. They are also increasing the number of “facings,” or rows, a certain item is given on a shelf to cover gaps.”

Let's try to understand the main benefits of each approach.

Stockout Signs

The main idea of these signs is a truthful revelation. The notion of truthfully revealing the situation has several advantages:

First, customers understand that all stores are having similar issues. Since most people are probably already aware from various news outlets, as a retailer, you are making it explicit that the reason behind these shortages has less to do with you, and more to do with something much bigger that also affects others. 

The main point here is that you are helping your customers understand that searching for this product elsewhere (other stores or chains), will not be very fruitful. 

Second, you build additional trust with your existing customers. To some extent, if customers are indeed rational, they know that you are experiencing a shortage. By admitting it, you instill confidence and the trust that you are not trying to sugarcoat the situation or misrepresent it. 

The final advantage of shortage signs is that you are indirectly informing your customers about the products you usually carry. This hinges on the fact that most customers probably don’t exactly know the full list of brands and products that each store carries. By informing them about what products you are currently stocked out on, you signal that these products are part of your usual inventory. If the customer does not buy this specific brand/product, they can continue shopping at your store without changing their long-term behavior. This is probably true for products with high brand loyalty. Enough loyalty that customers may switch their behavior long-term, if the store doesn’t carry the brand/product, but not enough that they are going to drop their entire basket if they cannot find it one time. 

However, this method of truthful revelation also has disadvantages and risks. 

First, you are indicating that you are not very efficient. While very honest, there is something very unpleasant about shopping in a place with several empty shelves. It has a doomsday feeling or a feeling of inefficiency; neither are very comforting in a place where you want people to spend money. 

The second risk is that in many settings, inventory stimulates demand. The more inventory you have, the more people will buy. The less inventory you have, the less likely people are going to buy. For example, in DIY stores, such as Home Depot and Lowe’s, people come with a project (rather than a specific product in mind). If you don’t carry enough products for people to find solutions, they are less likely to shop. 

“Facing”

Facing or Facing Up is the practice of pretending to have full shelves. This method appeals more to the “low information” consumer. In particular, since customers do not always know what they are looking for, you are essentially telling them: this is what we have and if you want something, buy it now. 

This practice is reminiscent of the apparel retailer Zara. For many years, when a Zara store stocked out on one of the most common sizes (i.e., small, medium, or large) of a specific product, store associates would completely remove the item from the shelves until all sizes were available again. The main idea behind this strategy was that customers remained unaware of the stock out, hence they would not be “disappointed.” 

This also works for customers looking for a product but do not care about a specific brand. Stretching the facing of the brands the store has, increases the likelihood of a sale, and if their private labels are prominent, this increases the likelihood of a higher-margin sale.

What are the disadvantages?

First, once customers realize your strategy, you lose their trust. After a customer has spent some time looking for a product, they will realize that they are seeing the same products on more shelf-space than necessary. If other stores are using the “shortage signs” strategy, this customer will lose trust. 

Second, you may lose customers who are looking for a specific product and are now assuming that it is not part of your regular inventory. In this case, you may risk losing them altogether. 

And finally, in some situations, you may deter customers from buying a product if, in order to “face” products, you place it in a section they are not used to, such as the refrigerated section: 

“Dill Pickle has been filling fridges with surprising products in its cool section. That includes tofu, usually housed on shelves in the store’s Asian section, and shelf-stable products such as oat and soy milk. ‘But there’s definitely a risk you take. Like, am I going to have to convince someone that they have to keep this refrigerated now?’ Ms. McCarthy said.”

“The Good and the Bad”

So what is the “right” approach?

Ryan W. Buell wrote a case study, “The Good and the Bad,” showing that, providing customers with transparency on the pros and cons of the product, results in customers sorting (customers will eventually align themselves with the products they want). In the case study, a bank reveals both the positive and negative sides of each credit card and based on this information, customers, having made a more informed decision, keep the cards they chose for longer. 

However, the main difference is that when choosing a credit card, for example, there are tradeoffs; some people want lower fees, while others are willing to pay higher fees for more rewards.

This is not the case when shopping at a store. All customers want higher availability of the product they are looking for. 

So, is there a tradeoff?

Most people probably have a basket they usually buy at a supermarket. Most probably prefer buying the same basket at the same supermarket, week after week. There is a small cost for changing products in the basket and a higher cost for changing stores (different locations, different product and store layout); the switching cost is not negligible.

When a customer knows that all stores suffer from the same shortages, they won't change stores, even if there is a slight chance of finding the product elsewhere. However, knowing that a product is no longer carried in that store, will result in switching to another store altogether. So if other firms/stores carry the product and have not stocked-out on it (because they are Amazon or Walmart), there is a risk of losing a customer forever. Here, there is no tradeoff, only signals that customers respond to.

In other words, the main question is: What do customers infer from the “signs” the retailer is providing?

Semiotics and Equilibrium Language

My colleagues and I have tried to solve a key question in a series of research papers on whether an “equilibrium language” exists.

The notion of “equilibrium language,” which we introduced, is a combination of game theory tools and the idea of Semiotics, which was introduced by Ferdinand de Saussure, a Swiss linguist.

The core idea is quite simple: Saussure defined a sign as being composed of: a 'signifier'- the form which the sign takes; and the 'signified' - the concept the sign represents. “The sign is the whole that results from the association of the signifier with the signified. The relationship between the signifier and the signified is referred to as ‘signification.’” Saussure's relational conception of meaning was differential: he emphasized the differences between signs. Language, for him, was a system of functional differences and oppositions.

So, for example, the word bottle signifies, well, a bottle. And the word floor signifies something else that is not a bottle. The role of signifiers (which can be words or signs) is to signify and provide meaning to different items or actions (I know, I am oversimplifying).

Without getting too deep into linguistics, what does this theory mean for operations or business? Different physical or verbal signs tell us something different about the state of the operating system (be it a call center or a retail store), and thus require (or should induce) a different action. 

For example, Achal Bassamboo and I studied information provision in a service system. In such a system, when contacting a call center, the announcements are usually along the lines of: “we are experiencing high call volumes,” or “the expected waiting time is longer than 20 minutes,” and sometimes there is no announcement at all (maybe some pleasant music which will probably end up becoming rather irritating after having heard it 20 times in a row). 

These announcements are the “signifiers.” In our paper, we refer to them as “cheap talk” because they are non-commital, costless communication that, in and of themselves, have no meaning.

So why are they provided, and how helpful are they? As mentioned above, each verbal sign (in this case, each announcement), induces a different action. 

When the queue is short (and no announcement is provided), the call center wants the customer to stay on the line until the next available agent. When the queue is long (and the announcement mentions that the waiting time is longer than expected), the call center wants the customer to remain on the line only if their issue is of extreme importance. 

How is it possible that this “cheap talk” can be informative and influential (in the sense of resulting in different actions)? Because the customer and the call center are aligned: Both the customer and the call center want the customer to remain on the line when the line is short, and both want the customer to hang up when the line is long. Given this alignment, the “equilibrium language” is possible. The call center has very little incentive to misrepresent the situation. 

Is Equilibrium Language Possible in Retail?

Back to our retail setting. 

Is the same idea of an “equilibrium language” possible here, where the “stockout” sign is one signifier, and the “faced-up” shelves are a different signifier? And where each results in a different action? 

The answer is no. Unlike the example of the call center, here, the customer and the store are not aligned. 

The customer wants to learn whether this stockout is store-specific or industry-wide; each case resulting in a different action.

The store wants the customer to take the same action regardless of whether the stockout is store-specific or industry-wide; the store wants the customer to find a substitute and continue buying from them in the future. 

And when a store wants a customer to take the same action, regardless of the underlying situation, “equilibrium language” is just not possible. 

And this brings us to my final point. Maybe this is not about a store-specific strategy, but rather more about a product-specific strategy: For high-loyalty brands, it may make more sense to alert customers that, while you do carry the product, it is currently out of stock due to shortages on an industry level. For brands with low loyalty, however, facing is probably the right approach regardless of whether the product is missing only at the store-level or the entire industry. The stores that don’t have it, want you to think that it’s missing at the industry level, because it’s less about what the “signs” convey, and more about the actual missing product. 

What does all this mean for us, as customers? Everyone is experiencing shortages right now, so if you want to know where to buy things, it’s best to do the leg-work. Do not take information at face value. It’s not meant to inform you. It’s intended to influence you.