Are retail substitutions damaging customer loyalty?

For years, retailers have treated substitutions as the least-worst solution to the frustrating operational problem of on-shelf availability.

An item goes out of stock after the customer has placed an online order. The picker swaps it for something “close enough”, the order is fulfilled, and the customer gets something rather than nothing.

Problem solved…or is it?

New research discussed at a recent ECR Retail Loss working group suggests the relationship between retail substitutions and customer loyalty may be far more complicated than many retailers assume.

The research, based on 12 months of data from a leading European omnichannel retailer, found that just one fulfilment failure reduces average spending on the next order by €1.14, or 0.84%.

So, for businesses investing heavily in online grocery, rapid delivery, and ship-from-store fulfilment, the implications of substitutions could be significant.

Why retail substitutions are becoming a bigger issue

The growth of online grocery and ship-from-store fulfilment has fundamentally changed how retailers manage availability.

Unlike traditional e-commerce warehouses, stores are messy environments:

• Customers are shopping at the same time as pickers
• Inventory accuracy is imperfect
• Products move quickly
• Availability changes minute by minute

The result?

A growing number of what researchers describe as “post-purchase out-of-stocks”: situations where the product appeared available when the customer ordered it, but was unavailable by the time the order was picked.

Retail substitutions have become the industry’s default mitigation strategy.

But the new research raises an uncomfortable possibility: What if substitutions are quietly damaging customer loyalty?

The surprising finding: substitutions may backfire

The study analysed around 65,000 online grocery orders across 5,000 customers over 10 months. On average, each affected order experienced around 2.5 fulfilment failures.

The researchers found that when customers experienced fulfilment failures:

• They delayed their next order by roughly 30 hours
• They spent less on future purchases
• Loyalty behaviour weakened over time

That, perhaps, is not surprising. However, when retailers substituted more aggressively, customers often delayed their next purchase even further.

In other words, attempting to “fix” the problem through substitutions sometimes appeared to make things worse.

This goes against much of the industry’s current thinking.

Many retailers have spent years optimising substitution rates, encouraging pickers to avoid refunds wherever possible. In operational terms, substitutions are often viewed as a customer service win.

But behavioural data may be telling a different story.

Why customers may dislike retail substitutions more than retailers realise

Part of the issue may be psychological. Customers often say they want substitutions. But actual behaviour may suggest something more nuanced.

A close substitute, such as a different brand of chicken breast, a larger box of cereal or another version of the same product, can feel helpful.

But bad substitutions create a very different experience.

When fresh herbs are replaced with dried, specialist products are swapped for generic alternatives, or promotional items disappear entirely, substitutions become more than an inconvenience.

It creates work for the customer:

• Checking replacements
• Rejecting items
• Changing meal plans
• Visiting another store anyway

As several retailers in our on-shelf availability working group noted, substitutions also create hidden operational costs:

• Additional picking time
• Returns handling
• Rejected products
• Wasted labour
• Extra customer service interactions

What looks efficient on paper can feel chaotic in practice.

Many of these “failure costs” mirror issues identified in ECR Retail Loss’s research into returns fraud and abuse, where inconsistent fulfilment experiences and customer dissatisfaction were found to contribute to repeat compensation claims and broader operational complexity.

Not all retail substitutions are equally damaging

One of the most interesting parts of the research was how customer reactions varied depending on product type.

Customers appeared more tolerant of substitutions involving highly perishable products or categories where availability is naturally volatile.

But they reacted more negatively when:

• Dry goods were unavailable
• Promotional products were substituted
• Products felt highly specific or personal

That makes intuitive sense.

Customers may forgive stock issues on strawberries or avocados. They may be less forgiving when toothpaste, baby products, healthcare items, or promotional offers disappear. And some substitutions can be very strange indeed.

For some retailers, particularly in health, beauty, and pharmacy categories, substitutions become especially risky because product choice is deeply personal.

Replacing one loaf of bread with another may be acceptable. But replacing skincare, medication, vitamins, or ingredient-specific products is a completely different challenge.

Prevention vs mitigation: where should retailers focus?

The research points to a bigger strategic question: Should retailers invest more in preventing out-of-stocks instead of trying to mitigate them afterwards?

The findings suggest prevention delivers significantly greater long-term value. Researchers estimated that eliminating fulfilment failures entirely could improve top-line revenue by around eight percentage points, with roughly half the benefit coming from stronger customer loyalty over time.

That has major implications for:

• Inventory accuracy
• Forecasting
• On-shelf availability
• Promotion planning
• Fulfilment technology
• Pick-from-store operations

It also reinforces why many retailers are now paying far closer attention to On-Shelf Availability (OSA) as a strategic capability rather than simply an operational KPI.

Similar themes emerged in ECR Retail Loss’s research on retail food waste reduction, where execution failures and poor availability processes were shown to create hidden downstream costs.

Could AI improve retail substitutions?

One theme about retail substitutions that recurred throughout the working group discussion was personalisation.

Most substitution systems still rely heavily on category rules: similar product, similar size, and similar brand tier

But customers do not think in averages. One customer may happily accept alternatives, while another prefers refunds.

That creates an opportunity for more intelligent substitution models:

• Customer-specific preferences
• Dietary awareness
• Purchase history
• Behavioural patterns
• Real-time approval workflows

Several participants suggested that AI-powered customer interaction could become increasingly important. For example, automated systems that contact customers before dispatch to confirm preferred alternatives.

The technology may finally be reaching the point where substitutions become genuinely personalised, rather than broadly guessed.

The big takeaway for retailers

Perhaps the biggest theme for retailers to explore is this: Retail substitutions are not just an operational process. They are a loyalty moment.

Every substitution communicates something to the customer about reliability, trust, and convenience.

And, as online grocery competition intensifies, those moments matter more than ever.

The challenge for retailers is balancing three competing pressures:

1. Productivity
2. Availability
3. Customer satisfaction

There is no perfect answer. But this new research suggests that simply substituting the problem away may no longer be enough.