Consumers react negatively towards luxury and non-luxury (fast-fashion) brands that destroy excess inventory, according to new research by UNSW Business School, in collaboration with Monash Business School.
The study, called Disposal-based scarcity: How overstock reduction methods influence consumer brand perceptions and evaluations, reveals the impact of companies' methods to reduce overstock on how consumers perceive them.
The paper extends on the PhD thesis conducted by former UNSW Business School student Oanh Nguyen in collaboration with co-authors UNSW Business School Professor Tania Bucic and Associate Professor Liem Viet Ngo from the School of Marketing, and Professor of Marketing at Monash Business School, Harmen Oppewal.
According to the researchers, how a brand reduces its overstock acts as a ‘marketing signal’ that influences brand reputation. Their paper examines how different ways of removing excess products - such as burning unsold goods - can affect people's opinions and desire to shop for that brand.
“Many companies have to deal with overstock regularly – products that didn’t sell or that, for whatever reason, they can no longer hold in their inventory,” the researchers said. “When this happens, those companies must find ways to dispose of the overstock.
“Some brands choose to incinerate it, while others send it to landfill. Other ways of handling overstock include recycling, donation and discounting.
“We wondered how such disposal choices affect consumer perceptions of the associated brands.”
The researchers conducted three experiments based on interviews with 3,609 US-based participants.
In the first study, they used hypothetical brands in different product categories such as clothing, accessories, and electronics and examined the effects of destructive and non-destructive overstock reduction methods - such as. They interviewed around 400 participants about brand perception and the role of perceived wastefulness.
Their second study focused on a genuine luxury brand (Burberry) and added two more overstock reduction methods (recycling and lower prices at factory outlets). They also added a condition where there was no overstock at all. Some 1300 participants were asked to select a real product before being exposed to information about the disposal methods.
The third study examined a non-luxury brand (H&M) and included additional measures such as perceived popularity and a sold-out condition, involving a further 1,300 participants.
According to the paper, destructive disposal methods - such as incineration - harm brand image and are considered wasteful; recycling, donation, and discounting methods are viewed more positively by consumers; while maintaining a balance in supply so that products neither run out too quickly nor become overstocked was seen as ideal as it signals both exclusivity and popularity.
However, some exceptions emerged.
When it comes to consumers who have a close connection to luxury brands, the research found that destroying overstock did result in greater perceived exclusivity and enhanced consumer brand perceptions. Discounting had a negative effect on perceived exclusivity and brand evaluations.
But for non-luxury brands, not having overstock or being sold out boosted its perceived exclusivity and also its perceived popularity, resulting in enhanced brand evaluations.
The research also found that when incineration or discounting was used, people perceived the non-luxury brand as less popular and consequently valued it less.
Across the study findings, the effects of perceived wastefulness were stronger than any effects of exclusivity or popularity.
With the global backlash against unethical and unsustainable business practices, the research suggested brands have several incentives to improve their forecasting and deal with excess inventory.
One solution is to manage inventory levels early on before they become an issue in-store or inside a warehouse.
“In our investigation, we found that companies don’t usually disclose their method of overstock disposal,” the researchers said. “We found, though, that perceptions of disposal-based scarcity have far-reaching implications through the flow-on effects of disposal choice.”
In an example, researchers said when brands like H&M and Burberry receive news or social media coverage about how they handle redundant stock - and especially when it becomes known that such stock is being destroyed - consumers respond very negatively due to their sense of this being a very wasteful act.
Meanwhile, recycling was a clear winner out of all options open to brands such as Burberry & H&M.
“It was known from the literature that people have strong negative reactions to wastefulness, but we had not expected this effect to dominate the other possible effects of overstock disposal methods, including for luxury products," the researchers said.
"In contrast, we were surprised that the effects of messages about overstock reduction had very little impact on perceptions of exclusivity and also had relatively little impact on popularity – except that when consumers hear that if stock is being disposed, they conclude the product is or has become less popular, which in turn lowers their brand evaluations."
Overall, when choosing an overstock reduction strategy on the basis of consumer perceptions of exclusivity, popularity, and wastefulness, the researchers said that marketers need to note the trade-offs involved.
If they place more emphasis on being perceived as less wasteful or, more generally, as sustainable, the researchers suggested marketers might communicate their uses of recycle, donate, and discount disposal methods.
The researchers also suggested governments could also incentivise eco-friendly approaches to effect more widespread change in how overstock is managed.