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ELIMINATING EXCESS INVENTORY

From time to time every retailer will be forced to deal with excess inventory. Usually excess inventory is the result of over-buying but it may also come from missed sales plans due to climate or other calamities. There are occasions when a knowledgeable retailer has a reasonable sales plan, has purchased carefully according to the OTB, and then Mother Nature sends a massive ice storm. Even a devout follower of the Open-To-Buy may find themselves stuck with too much inventory at the end of a season and they wonder, “What can I do?”

First, consider the needs of the store. Cash is king and if there is not sufficient cash to make payroll and pay bills, then the excess inventory must be sold as quickly as possible for whatever you can get. This may involve deep discounts of 75%-90%. You will probably lose money on the sale of these items but you will free up cash to pay bills that must be paid immediately.

Another way to generate almost immediate cash is to sell excess inventory to a liquidator. You will receive pennies on the dollar, but again if it is about getting cash for immediate use, your choices are limited.

Although it will not generate immediate cash, another idea is to bundle items. Many times bundling works well without markdowns (or at least smaller markdowns). Often, your customers do not know how to put together an outfit and make it work for them. That’s where the bundling comes in. Put together a dress (or slacks and a shirt, suit, shirt and tie, etc), handbag, shoes and accessories for “Just $XX today only (or this weekend only) to build the idea of a limited time bargain and urgency. Urgency can help to move many items.

As an aside, be sure that store mannequins are re-dressed frequently (try the re-dressing every week when times are tough) and be sure to feature those items that are not moving as well as you had hoped. Try to be proactive. Remember, “featured” does not necessarily mean “sale.”

Along the lines of bundling, try offering markdowns on multiple purchases. There are many options for this action. There are BOGOs—buy one get one 30% off, buy 3 and the 4th is free, etc. It depends on the items you need to move and who your customer is. When left with too many, it may be good to contact your known customers who have purchased the item for themselves; maybe if 1 was good, 2 will be better. If this is an offer to an established customer, make sure you communicate to them that this is a special deal for them only.

Flash sales work well with millennial shoppers; however, flash sales lose their appeal the older the customer is. As a general rule, flash sales are used to create a sense of urgency—“For the next 15 minutes,” “To the first 5 customers,” etc. If shoppers feel that they are about to lose the ability to have one, they will want one bad enough to buy it.

If you are not experiencing a cash flow crunch, a good use for those non-movers is to use those as gifts for your customers who bring referrals. There are tax laws to govern the cost of gifts, so be sure to check out current tax laws governing business gifts. In 2015, you may deduct up to $25 per recipient family gift. If you gave customers one of those slow-moving sweaters that cost you $30 each and 3 were given to the top 3 customers, you would be able to deduct a total of $75 (3 X $25).

Finally, if you are not in a cash flow crunch and can afford to be generous, consider donating the excess merchandise. The National Association for the Exchange of Industrial Resources (NAEIR), a non-profit organization based in Galesburg, Illinois, exists to make the process easy by connecting businesses that have excess inventory with those in need.
Tax law governing business donations is better than you may realize. According to NAEIR, by donating new product overstocks and returns, regular (C) corporations may deduct the cost of the goods plus half the difference between cost and fair market value; your deduction could be up to twice cost. S corporations, partnerships and sole proprietorships earn a straight cost deduction.
NAEIR has streamlined the process for donating businesses, sending the donor shipping labels and tax documentation. Although the donor company is responsible for the shipping cost, that is also a tax-deductible expense.
“Donating is clearly better than throwing product away and taking a loss, and it can even be preferable to liquidating,” said Emily Collins of NAEIR. “You also get the benefit of knowing that your donation is helping the needy.” For a free donor information kit, contact NAEIR’s Corporate Relations Department at 800.562.0955 or email donor@naeir.org.

If donating appeals to you and you are willing to put forth extra effort, contact a charity of your choosing. This may require extra work for you that NAEIR has already completed. But, the merchandise will be used by and you can feel good about helping those less fortunate here or abroad.

The most important thing is that you honestly consider and recognize what happened in your store that caused it to become over-inventoried. Did you purchase too much? Did you follow your Open-To-Buy? Was your sales plan too aggressive? Are you consciously working to build your customer base? Did your sales per square foot ratio increase over last year? Was this truly a unique event (the excess inventory) caused by a quickly changing set of circumstances? What, if anything, could you have done to prevent it?

If this is an unusual occurrence in your store, congratulations! We recommend that stores maintain a conservative inventory and always hold back part of the budget for in-season buys. In-season buys usually allow for higher profit margin but reduce the chance of and the amount of overbought. If a particular size or color proves popular, those can usually be handled via paid-in-advance special orders, though not all vendors will have the items your customer may want late in the season.

As forecasting sales is not an exact science, there will always be some classifications that will close the season with too much inventory left—items to be disposed of quickly. Whatever manner you choose to move those excess items, do not fall into “I’ll-store-it-and-sell-next-year” trap. Next year it will be out of style and possibly shelf worn. Do not allow your store to become a museum of out-dated merchandise. 

The best way to avoid over-buying, the number 1 cause of excess inventory, is to use an Open-To-Buy. An Open-To-Buy is a tool for buyers to help them purchase the correct amount of inventory to be able to meet the planned sales’ goal.



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