How Retailers Should Prepare for Runs on Essentials
As COVID-19 grew into a pandemic, consumers did what they usually do when disaster looms: flocked to retailers, clearing store shelves of essentials – toilet paper, hand sanitizer, soap. This consumer stockpiling urge also kicks in before hurricanes and is the subject of new research from the University of Maryland’s Robert H. Smith School of Business.
The research, forthcoming in the journal Production and Operations Management, offers keys for how retailers and suppliers can prepare and plan for runs on essential stock to reduce shortages during a crisis.
Maryland Smith’s Martin Dresner, a professor and chair of the department of logistics, business and public policy, worked with three co-authors, including Smith PhD Xiaodan Pan, now at Montreal’s Concordia University. They wanted to see how a disaster impacts supply, demand and consumer stockpiling, and how that stockpiling behavior affects product availability after the crisis event.
The researchers looked at four big recent U.S. hurricanes – Ike in 2008, Irene in 2011, Sandy in 2012 and Arthur in 2104 – and data from retail stores near the hurricanes’ paths. They examined how consumer stockpiling ramped up before a hurricane and the in-store product availability after it. To do so, they compared normal shopping periods a month before a hurricane to the week leading up to a hurricane, and to the period following a hurricane. They focused on bottled water as a representative essential good.
“What we found makes intuitive sense,” says Dresner. “Before a hurricane or other emergency situation, people are going to stock up on essentials, so a good place to go is a store that sells a lot of essentials. That’s why drugstores experience more stockpiling than other types of retailers.”
Consumers also turn to national retail chains with extensive retail networks. These chains carry greater inventory across their networks and can respond to regional demand shocks quicker by shipping in inventory from outside the affected regions, he says. These are often the stores, with their better supply chains, that recover fastest after an emergency event.
In times of shortages, suppliers will allocate products to their best and most reliable retail customers first, says Dresner. That leaves low-margin discount stores and dollar stores, where purchasers are always looking for deals, last on resupply lists. “They tend to take longer to recover from shortages during these emergencies.”
The way it works doesn’t exactly follow economic market principles, says Dresner.
“Prices on essentials should go up when there is a surge in demand, but because companies don’t want to appear to be price-gouging, they are reluctant to raise prices. So you get shortages instead. Retailers try to handle the shortages through policies such as quotas on purchases,” he says.
That’s the reason most retailers don’t jack up the price of essentials, such as toilet paper, but may limit the number of packages to one purchase per customer.
There are a lot of parallels between the emergency situations of hurricanes and pandemics, says Dresner. In fact, he is currently expanding on this hurricane research to look at pandemics. “Different products, perhaps,” he says. But the takeaways are similar for retailers and government.
“Increasingly, large retail companies are becoming essential to emergency planning situations,” says Dresner. “FEMA [Federal Emergency Management Agency] plays an important role during emergencies, but they can’t do everything. Retailers can help with prepositioning supplies, for example, so that essential supplies are available during emergencies.”
Dresner says because of that, planning for emergency situations should be a combination of private-public initiatives where both sides are talking and planning together. “That would help us during emergency situations to make sure we have essential products available in the stores for people who need to buy them,” he says.
Dresner says governments should work with retailers and tap supply chains to make sure consumers have access to essential goods in times of crisis, whether during hurricanes or pandemics. But unlike a hurricane, that usually affects only one region, the coronavirus pandemic has had widespread impact and larger scale inventory impact.
Overall, better collaboration and communication among government officials, emergency managers, retailers and consumers will make for better availability of essential goods during any crisis.
While ultimately it’s human nature to gather essentials when a crisis is looming, preventing stock-outs of critical goods comes down to better retail planning, says Dresner. “The better you can plan for these situations, the better off you’re going to be. If you anticipate consumer behavior, you’ll end up with fewer stockouts, offer better customer service and be better able to meet customer needs.”
It also comes down to better messaging through government channels.
“Somehow you have to tell people to think about society as a whole,” says Dresner. “Stay calm, be careful about what you buy and don’t hoard stuff that you don’t need.”
Read more: “Pre-Hurricane Consumer Stockpiling and Post-Hurricane Product Availability: Empirical Evidence from Natural Experiments,” (Pan, Xiaodan; Dresner, Martin; Mantin, Benny; Zhang, Jun), is forthcoming in the journal Production and Operations Management.