By Bill Scott, President, StoreReport LLC

Thirty years ago, I lived in a small community between Dallas and Ft. Worth, Texas known as Bedford. I was at the height of my career. I had 360 customers who had purchased and were using my software to run their oil distribution companies and convenience stores. I had recently licensed my software to a national company that ended up trying to steal my customers, and sell off my source code, which eventually led to their bankruptcy. Even though I won a legal suit against them, I was never able to bathe in my previous glory.

I have long since forgiven them, because to be honest, we were both victims of an up-and-coming technology and had convinced ourselves what we had was better, faster, easier to use and much more powerful than any competitive product on the market.

Enter Disruptive Technology
A disruptive technology is defined as any new technology that forces you to change the way you operate your business. At first they cause tiny tears in the underbelly of a company, and often go unnoticed for years until someone sees them and attempts to exploit them for their own benefit. Sometimes these are noticed by the company that created them, but not always.

The disruptive technology I am talking about was Microsoft Windows. We paid no attention to what was happening in the market, and we counted on the fact that business people would shun Windows for the safe and stable environment of the mid-range IBM operating system. We had foolishly ignored the first rule of marketing technology: COST ALWAYS WINS THE TECHNOLOGY RACE!

We made the same common mistake that companies like Blockbuster made when they made the decision not to rent movies through the mail, and an upstart company called Netflix drove them out of business almost overnight. It was the same mistake that Kmart and Target made by hanging onto their aversion to change and allowed Wal-Mart to become the world’s largest retailer.

In Chapter 2 of my book, “Retail is Detail,” I talk at length about disruptive technologies and how they have laid waste to entities as large as IBM, the U.S. Postal Service, Kmart and Xerox.

Disruptive technologies are coming at us constantly, and companies who have had a long history of investing in products and/or cultures that have served them well over the years, have developed a blind spot that prevents them from seeing the dangers that will ultimately lead to their undoing.

After surviving the incident I spoke about, I became determined to not make the same mistake again. But, leaving the herd and wandering off on your own comes with its own dangers. The danger of getting permanently lost and never seen again is only one of them. Leaving the herd takes courage, but not always. Depending on the threat you are facing, it can become a move of desperation. You have to live with the knowledge that if you are wrong, it could be over for you. Either way, it’s not a place you want to find yourself in.

16 years ago, I stopped selling computers and software to retailers and began to rent my ERP program over the Internet. At the time, IBM announced that we were the first company to do so.

I held fast to my belief that cost does indeed win the technology race, and by providing my services through the Internet I could erase the distance between convenience store headquarters and their retail stores, link them up with their suppliers, and streamline the process of receiving inventory, allowing stores to get rid of 50% of their stock and gain an unfair competitive advantage over big box retailers. The word went out that I had seriously lost my mind.

From 2000-2006 I tried in vain to raise operating capital. I created a business plan and modified it five times. My idea was so radical that no sane investor would consider it.

Back then, IBM called us an ‘Application Service Provider’, changed later to SaaS (software as a service), and finally in 2010, as the public began to catch on, the term Cloud Computing began making its rounds. Larry Ellison of Oracle, in an attempt to put a cloud over “The Cloud,” made the statement that Cloud Computing was simply “putting everything on the Internet,” which couldn’t have been further from the truth.

Cloud computing was the answer everyone had been looking for. Among its advantages was the ability to manage multiple locations from a central location, streamline the process of inventory replenishment, solving the problems of overstock and out-of-stock and allowing trading partners to totally automate the process of receiving and selling products.

My theory was based on my belief than retailers were nothing more than conduits to move inventory between suppliers and their retailers’ customers. If I could convince suppliers that helping their retailers control their inventory more efficiently would benefit them as well, I would be able to construct a ‘vendor managed inventory’ environment that would link up the supply chain and make everyone more profitable. Again I underestimated the aversion to change and the tendency to maintain the status quo.

Some retailers continue to live under the fantasy that consumers like to shop in brick and mortar stores. Amazon taught them otherwise. Amazon is the latest disruptive technology that is putting many retailers in America out of business. And it’s not just in America. Recently I read that in Asia half of Chinese consumers order their groceries on-line. In America, Big Box retailers like Walmart and Best Buy are feeling the pinch, but remain terrified to rock the boat.

Among the last of the retailers to not yet be affected by online ordering is the convenience store industry. Amazon can’t fill your car with gasoline, and it can’t sell you hot coffee while you’re driving down the road, or give you a snack on demand. If that’s the case, you would think that convenience stores would be doing a booming business. Well they are.

In December of 2015, the National Association of Convenience Stores (NACS) reported the existence of a record 154,195 stores in America, an increase of over 1,400 stores over the previous year.

So What’s the Problem?
The demand for higher wages and the cost of handling inventory is a major killer of convenience stores in America, with the average store making a tiny 2.1% profit from sales of $195 billion in 2015 alone; but, 15% of the inventory in stores is dead, 55% is either non-profitable or marginal at best and 30% of the inventory is cross-subsidizing the losses and accounting for all of the convenience store retailers’ profits. When you consider the presence of the dead inventory, and the inventory that is marginal, taking up space where profitable items could be displayed and sold, even the inventory that is not selling is costing the retailers money by just being there.

Every single item in a convenience store is a tiny little machine that either generates cash or it’s costing the retailer profit by its mere existence in the store

Many stores are filled with out-of-date stock, dust so thick you can barely read the bar codes, mouse chewed wrappers and chocolate bars that have turned white with age. And it’s growing.

There is a disease running through the convenience store industry, and it feeds on apathy, coupled with the constant infusion of good news that’s really not all that good. The number of stores continue to grow as new Americans are building stores and working longer hours in them. And it’s true… overall sales are up, but the amount of stock being warehoused in stores is also rising, and labor costs coupled with the cost of carrying that stock is going through the roof.

The dollar value of inventory continues to rise, inventory sales ratios are on the decline, annual carrying cost is increasing to the tune of 30-35% of the value of the stock. A store carrying $70,000 in inventory (at cost) and turning eight times per year, loses around $21,000 in carrying cost alone.

Carrying costs is a major cause of lost profits, and if you add the cost of stock-outs and order/setup cost, it gets even worse. But that’s not all of it. Storage space, inventory service, cost including auditing, insurance and taxes, obsolescence, damaged goods, shrinkage, pilferage and theft play a major role.

The average cost of stock on hand is virtually unknown as the cost of inventory is rising and convenience retailers have no accurate knowledge of the actual cost of any particular sale.

Managing inventory by category alone will not solve the problems. Reorder points are not established and stores should stock only the inventory necessary during the delivery cycle with a minimum amount of safety stock.

Someday, history will prove that retailers changed only when there was nothing left but change, and their too-little-too-late approach will see the demise of more than a few of them.