Everything You Need to Know About Dead Stock
Retailers run into many challenges managing their business but there is one that might be the most frustrating of all: the dead stock dilemma.
Just like a zombie on The Walking Dead, having dead stock in your warehouse can quickly eat away at your profits, driving up costs for your business the longer you let it sit within your warehouse.
Pinpointing the inefficiencies within your inventory management that led to the dead stock can be difficult, but it's important for brands to understand what in the sales process or the product purchasing process is causing the excess stock.
More so, retail companies must be fully prepared to get rid of dead stock without taking an additional financial hit and salvaging profit.
It can also be tricky to deal with dead stock if customers just don't want, which could be due to a variety of reasons.
This article will explore in-depth what possible reasons that dead stock can accumulate, how it can be bad for business, how to effectively manage it if it does happen, and how to prevent having dead stock in the first place.
What is Dead Stock?
Dead stock refers to merchandise that has not or currently cannot be sold and has a high chance of no longer producing sales.
This means the products won't move from your shelves, taking up space that could otherwise be used for highly profitable or fast-moving products. Within a brick-and-mortar store, this might mean unsold products sit in the store’s stockroom; however, this problem isn't specific to brick-and-mortar retail businesses.
It can impact e-commerce stores as well, where the excess inventory will live in a warehouse. If your warehouse is a third-party logistics (3PL) provider or a Fulfilled by Amazon (FBA) distribution center, this can lead to hefty fees for housing the units.
It’s also worth noting that dead stock specifically refers to products that have never been sold to a customer, so returned merchandise is not considered dead stock.
Typical classifications of dead stock include remaining inventory from seasonal items, a product that is defective by design, a product that has been rendered obsolete, or a product that was expected to be popular but never amounted to forecasted sales.
What Causes Dead Stock?
More often than not, dead stock is a result of a lack of inventory management.
Having a good inventory management system in place is crucial for any retail business, as it helps with inventory tracking and oversight, brings an improved level of accuracy in the inventory replenishment process, and tracks inventory aging.
When you’re in control of your inventory and know exactly how your stock is organized, you can prevent errors and over-ordering so that you aren’t left with an excess amount of a product that nobody wants to buy.
There are many other reasons why your business could end up with excess stock and require dead stock disposal.
- Inaccurate forecasts: Your business could have predicted a trend incorrectly and ordered too much inventory for a product that ends up not being trendy at all. The customers you thought would purchase the product actually ended up staying far away from it and refused to buy it, leaving you with an excess of product that just won’t sell. This could be caused by a few factors, such as a rapid shift in trends, making the product you bought suddenly unpopular, another product was released and made the older one obsolete, or there was a miscommunication between staff and customers on certain orders.
- Lack of an inventory management system: Manually tracking inventory through spreadsheets can lead to errors in your replenishment process. You may lose track of how many units you actually have, accidentally place purchase orders for products you don't need, or lose track of incoming inventory shipments. Using an inventory management software with purchase order functionalities and forecasting automations can mitigate this risk. They can also optimize your replenishment process, helping you to determine how many units to order based on previous sales data.
- Sales cannibalization: Another reason for dead stock accumulation could be that your business has different products that are too similar, and customers prefer one brand over the other. The more popular product ends up taking away from some of the sales that were expected for both products, leaving you with inventory that doesn't move. This can be particularly damaging financially, as you'll likely need to replenish inventory for the popular product to continue making sales while still housing the dead stock.
- High seasonality: Seasonal items are also usually considered dead stock, depending on the items and the time of year. There are some obvious cases, like any New Years' celebratory products, which immediately are unsellable after January 2nd, but other seasonal decorations may also be difficult to sell after the holiday has passed. Apparel that’s for a particular time of year could be hard to sell by the time the next season rolls around again because trends and opinions tend to change year to year.
Why Dead Stock is Bad for Business
There is a significant inventory cost involved with dead stock that doesn’t include the direct financial loss from purchasing a product that won’t yield the proper return on the investment made.
These mounting costs arise from letting the dead stock linger in stockrooms and warehouses instead of addressing them as quickly as possible.
There’s an opportunity cost involved from keeping dead stock, as it takes up space that could be used to store other products that would be more profitable.
Each unit of dead stock you have on your shelves is a lost opportunity to make a sale of a top-selling product. This problem is compounded further if your highest-selling products are often out of stock because you don't have the space to store more.
There are also holding costs and expenses associated with keeping a product that doesn’t sell. Holding costs are normally covered by the revenue generated from selling products, but if you aren’t selling a product, they aren’t contributing to the revenue.
These expenses can include the rental cost for the warehouse, money spent on utilities, and the costs of insurance, equipment, and security, all of which can add up to a significant amount. If you are using Amazon FBA for distribution, you can also face long-term storage fees which can cut into any profit you are making on the platform.
For larger businesses with more stock or those managing their logistics in-house, keeping excess stock on the shelves could also mean having to hire more staff for maintenance and management.
Of course, having more staff or asking them to work overtime means spending more money on wages that ultimately only hurt your bottom line.
The Best Way to Clear Dead Stock
If you find that your business ends up with merchandise that cannot be sold and it is beginning to cost your business money, there are a few ways you can clear it out. There may even be some ways to salvage your profits without taking a complete loss.
Bundle the product with another product
Product bundles are a great way to increase the value of an order, but it can also be used to associate a slow-selling product with a popular counterpart.
By pricing the bundle so it is cheaper than the cost of buying both products separately, the perceived value of the dead stock increases, making it more likely that customers will buy it.
If you’re trying to use product bundling to get rid of dead stock, the key is to pair your overstock with products that sell incredibly well. However, be careful that you don't mismatch products.
If customers have a really bad perception of the slow-moving product, it could have an adverse effect and impact the sales of popular products.
Pros: Product bundling is attractive to customers as they find what they need with one single solution at a perceived increased value but lower cost; it helps increase efficiencies when it comes to logistics, reduces distribution and marketing costs.
Cons: Customers may feel like they’re being forced to purchase a product as part of a bundle that they don’t want.
Offer it as a free gift with another purchase
Another way to increase the value of an order and get rid of dead inventory is by offering it as a free gift with another purchase.
This could be done by including it with one specific top-selling product that’s related, or by offering it as part of a promotion, such as, “Get a free gift when you spend over $50.”
If you decide to add a minimum purchase limit to qualify for the free gift, make sure the value isn’t too high, so your customers feel like they’re still getting a good value.
Pros: Customers don’t feel like they’re being forced to buy something they don’t want, making it difficult to object to at the point of purchase; adds more incentive to buy; “gives back” to customers and potentially nurtures them for transactions in the future.
Cons: You won’t be able to recoup any losses on your dead stock in terms of financial costs.
Have a clearance sale
If your dead stock is a result of an unpopular product, seasonal product, or product that may be obsolete, having a clearance sale can help free up space for new, more profitable products. Slash the prices and advertise the huge savings to your customers.
Pros: You can clear out dead inventory to make way for new stock that can sell better; your customers may be encouraged to buy because of the large savings; you may be able to recoup some financial loss.
Cons: You won’t be able to make the profit margin you had initially thought for that particular product.
Sell it to another company at a discount
Selling your dead stock to other companies like closeout liquidators and consignment shops can help you recoup some of your costs.
Consignment shops work best for apparel companies, while other goods-based retail businesses can sell to closeout liquidators.
Pros: You can recoup some costs, even if they’re minimal.
Cons: You will still take a financial hit; you won’t get any brand recognition, and if the store doesn't align with your brand, it might actually negatively impact your reputation.
There are a few ways that you could donate your dead stock where you can make up for lost profits in other ways. One way is to donate merchandise to charity where the items would be useful to them.
You may be eligible for a tax write-off in this situation, as long as you get a written agreement from the charity that states the items were donated at no cost, and also get signed receipts so you can deduct the market value of the stock from your taxes.
Moreover, you would be helping out a charity in need, and it would help your customers think about your brand’s corporate social responsibility – an increasingly important factor when choosing where to shop.
Another more innovative idea would be to find a charitable partner where you could offer your dead stock as part of a promotion or collaboration to help the charity.
You could incentivize customers to purchase your product at a massive discount where funds go to help the charity, or even offer the products for a donation to the charity directly in order to help a cause and reach a goal.
You may not make your money back on the dead inventory, but the brand recognition and reputation gained, as well as potential new customers in the future, can make up for it in the long term.
Nomad +Skubana: Free Cable for the Planet
NOMAD was looking for an innovative way to move aging inventory for their Rugged Cables while acquiring new customers. Tapping into their Modern Nomad philosophy, they launched "Free Cable for the Planet."
In partnership with Carbonfund, NOMAD offered 2 SKUs with high levels of aged inventory for $0 as long as customers provided a donation to fund reforestation in the Amazon. The campaign targeted new customers and included advertising on partner brand and influencer Instagram pages, deal sites, and online publications.
NOMAD used Skubana's Listing SKU functionality to push inventory quantities for the Rugged Cable product to three listing variations ($5, $10, and $20 donation listings) at the same time. Each time a purchase was made on one variation, all three were updated to reflect the latest quantity, providing peace of mind that they wouldn't oversell throughout the campaign.
The only "loss" NOMAD recorded was on the COGS of the cable, but this value was made up for in brand reputation through an environmentally friendly initiative and email capture of all new customers.
Here are some quick results from the successful campaign:
- 1,732 units moved over 35 days (average of 346.4 units/week)
- 1,261 new customers
- $10.5k+ donations raised for the reforestation (24,803 tree seedlings grown for 10 years), which correlates to addressing the environmental damage caused by
- 3,667,482 miles driven by passenger vehicles
- 1,639,839 pounds of coal burned
- 180 homes' energy use for one year
How to avoid dead stock
Preventing dead stock means being proactive about your inventory management. Having a good inventory management system is necessary, and investing in the right tools to properly track your product and help you make smart decisions can reduce the amount of dead inventory you will end up with.
Quality inventory management systems can help you control your stock and automate workflows to avoid human error or oversight. You can set up alerts that will tell you when inventory is aging or hasn't sold for an extended amount of time, allowing you to get ahead of slow-moving products and act before they generate significant costs to your business.
Inventory management software can also help you forecast trends so you can make accurate inventory estimates and order the right amount of products.
Inventory management software like Skubana can automatically create POs based on sales velocity and lead time, which includes recommended reorder quantities optimized to your sales velocity. This provides a proper handle on your reorder point, reorder date, and reorder quantity, so you aren’t over-ordering stock that you won’t be able to sell.
If you’re experimenting with brand new products, it might be wise to test it in smaller batches before investing in a large amount. This will help gauge interest from your customers and allow you to understand the demand by doing some market research and testing. Data-backed decisions are usually the right ones.
Educating both customers and staff is also important when it comes to avoiding dead stock. If your product is newer to the market, your customers may not understand what it does or why they need it, and likewise, your staff may not understand how to sell it or explain it.
It’s important to make sure you have proper communication efforts in place for customers and staff so the products are understood and can be sellable.
By being proactive and staying on top of customer wants, shopping behaviors, and trends, as well as properly tracking and managing your own inventory, you can avoid the headache and cost that come with stocking and dealing with dead inventory.