Any business that deals with physical products carries the risk of experiencing dead stock. But the businesses’ success or failure depends on how much dead stock it encounters, how often, and how the business chooses to handle it.
We’ll explore all this in detail below.
What is dead stock?
Dead stock is the inventory that doesn’t sell and has a low likelihood of selling in the future. The unsold items sit in the warehouse or on the store shelves, occupying space that could be used by more profitable items and hampering cash flow.
This dead stock costs you money on multiple levels. Firstly, you invested money in obtaining those stocks from the supplier, and will never be able to recoup that cash if it just sits in the warehouse. Secondly, it costs money to store those items, which can be calculated as a percentage of your warehouse rental, insurance, security, workforce, and utilities. And lastly, there is the opportunity cost of not being able to use the storage space for better-selling products.
If you’re not careful, dead stock can spiral out of control and significantly affect your profits.
Alternative definitions of dead stock
Dead stock is known by many other names. It can be referred to as deadstock (one word), dead inventory, excess stock or inventory, and obsolete stock or inventory. They all refer to the same thing, or close enough to it that it doesn’t make a difference.
What causes dead stock?
There are several reasons why a particular inventory item becomes dead stock:
It’s no longer in season
Seasonal products are notoriously common dead stock items. The more seasonal a product is, the less likely it will be able to sell during the rest of the year.
Most businesses account for this and are able to hold a reasonable amount of seasonal dead stock, because they’re confident that they’ll sell the next time the season comes around. But if your item is highly specific, like for New Year’s 2020, then there is no chance of that holiday ever coming around again. Seasonal products with an expiration date are also susceptible, such as Easter-themed foodstuffs. These items are likely to spoil before the next Easter and are therefore considered a loss.
Product is defective
Products that easily break or don’t work as designed eventually get known for such defects, thanks to word of mouth, social media and online reviews. When that happens, customers actively avoid them, and they no longer get sold.
Sometimes stores take action when they receive a high number of complaints. The business doesn’t want the product’s poor reputation to tarnish the store’s image and harm customers, and so proactively pull the product off the shelves themselves.
Low demand for the product
Sometimes, despite the best of efforts, a product just won’t sell. Maybe the product is being sold at the wrong price point. Maybe there are better options on the market. Perhaps the merchandising around the product isn’t effective. Or maybe customers have tried it and just don’t like it.
Whatever the reason, this product is not moving at all and customers aren’t interested in taking it off your hands.
You need to act quickly to get rid of dead stock before they cost the business too much money. However, there are times when you will hold on to dead stock because you’re hoping it will eventually sell.
This is a sunk cost fallacy, where you refuse to take the loss on the item and sell it at a discount. The item just sits there, gathering dust and taking up space while you wring your hands hoping someone will swoop in and purchase the lot.
How to avoid dead stock
Dead stock can be avoided if you:
Order smaller quantities
Order large quantities when you can prove the demand is there. Only order smaller quantities of newer or less popular items. There’ll be a higher per unit cost, but you’ll at least minimize the risk of dead stock.
Also, ordering smaller quantities allows you to experiment with more products in the same category. It gives the customers more variety to choose from and increases the chance you’ll find a best-seller.
Ask for customer feedback
Do you want to know what your customers will buy? Ask them!
Conduct customer surveys and find out what other brands or products your customers are looking for.
But don’t just take your customers’ word for it. Tread carefully and sell small quantities before committing to a large order. After all, customers might say they want something, but might not actually buy it. Or the demand might only be limited to a vocal few.
Use inventory management software
Inventory management software is a computer application that businesses can use to track sales of every product in your store. It can also track details like expiration dates, supplier names, allowable return dates, and more.
Most inventory management platforms provide reports that can highlight which products haven’t moved in the past 12 months, as well as forecast potential losses if dead stock isn’t moved soon. Sole proprietorship businesses may not be able to afford high-end inventory management software, but there are low-cost options available with more limited features.
What to do with dead stock
You have several options for getting rid of dead stock:
Return products to the supplier
The simplest option is to just return the unsold stock to the supplier. If they don’t offer a full refund, maybe they will accept it for either a discounted price or for credit towards your next purchase. You may also get charged for shipping and restocking. You won’t get much of your money back, but it’s better than letting the stock languish in your warehouse.
Most suppliers only accept returns within a limited time window, so act fast if you discover stock is not selling as well as you expected.
Put the product on sale
Reduce the price on the product if you want to encourage buyers to take it off your hands. The actual discount amount depends on how badly you want to get rid of it. It’s not strange to see businesses selling the slow moving inventory at up to 80 percent off.
Apply a time limit on the sale to establish urgency and further entice your customers to buy. You can even sweeten the deal by making it a “buy one, get one free” promotion. Again, you might not be making as much money as you expected, but the benefit here is in clearing out your dead stock.
If dead stock isn’t being sold on its own, you can still get it to move by bundling it with other, more successful products for a single price. The price for this bundle should be less than if the individual products were purchased separately.
This group option is usually best applied to products with a similar theme or application, like partnering soap with shampoo. There should also be special marketing around the bundle to increase the chances it will sell.
Free gift with purchase
This option is different from bundling in that you are offering the dead stock for free, no matter what the customer purchases. It benefits your business on multiple levels. You are getting rid of dead stock while at the same time delighting your customer and encouraging them to shop with you more.
Donate to charity
You may be able to donate your dead stock, depending on the business. Clothing and apparel retailers can partner with a charity and have them receive your dead inventory at no cost in exchange for signed receipts. This allows your business to deduct the value of the products from your taxes.
There’s a public relations bonus to this route, as well. Customers love to support businesses that demonstrate corporate social responsibility. According to surveys, more than half of the customers are willing to drive further and pay more to shop at a store that is socially responsible.
Get the stock moving
Dead stock is a common issue for retailers, but that doesn’t mean you should just accept it. With the right amount of foresight and caution, you’ll be able to prevent dead stock from ever becoming a problem. And it’s not the end of the world should you ever accumulate dead stock, either. You can still benefit from the dead inventory in other ways, even if you don’t earn back what you initially paid.
This article offers general information only, is current as of the date of publication, and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Ventures Inc. or its affiliates.