Inventory management is a critical aspect of any brand’s operations. Over time, brands may find themselves with excess inventory due to various reasons such as changing consumer preferences, overproduction, or seasonal fluctuations. When faced with surplus stock, one effective strategy to consider is selling it to discount retailers. However, the economics behind this approach are often misunderstood. This article delves into the rationale of discount retailing and explores why brands should consider this method to optimize resources and maximize value.
Why Discount Retailers Can Be a Good Option for Excess Inventory
Discount retailers are a great way to get rid of extra inventory, but businesses should try other things first. There are many ways to sell slow-moving inventory, such as changing the price or running a promotion. Our article on selling slow-moving inventory discusses these strategies in more detail. But if those strategies don’t work, then it’s a good idea to look at how the discount retail business works in general.
We must begin with understanding fundamentally the purpose of inventory to the retailer; it is an inventory investment, whose purpose is to earn income and profits for the business. A retailer gets to choose from literally many thousands of options for what it wants to put on its shelves. In an ideal world, the two fundamental criteria that are most appealing to retailers:
- High turnover: The inventory sells quickly and frequently so that the retailer can make money on it and reinvest in new inventory.
- High margin: The inventory sells for a high price relative to its cost so that the retailer can make a good profit on each sale.
Retailers don’t want items sitting on their shelves collecting dust. A dream scenario for a retailer is items that have a high margin AND sell quickly. But that is often just a fantasy. In reality, fast-moving inventory has low margins. Think of toilet paper or toothpaste. Retailers will take low margins for items they know will sell and sell quickly.
The items that are sold at discount retail are products that failed to meet either of these criteria for the original inventory owner. These are items that sit and sit and sit on the shelves or in the warehouse. All of their customers have passed on them, even at lower pricing. Now the retailer must decide whether to keep them in their warehouse sitting there or sell them often at a loss.
It’s important to remember that there are financial costs to the items sitting in the warehouse, such as tied-up capital, warehousing costs, and loss of other opportunities. As our article on the Impact Of The Hidden Cost Of Inventory discusses, these costs can be significant.
How Discount Retailers Can Make a Profit Selling Products at Such Low Prices
MSRP, or Manufacturer’s Suggested Retail Price, is the price that a manufacturer recommends for retailers to sell their products at. It’s a starting point for retailers to set their prices, but they’re free to charge more or less.
The MSRP is important for a few reasons:
- It helps to maintain price consistency across different stores.
- It can help to establish brand value and convey a sense of value to consumers.
- It can be used as a benchmark for promotional pricing strategies.
The MSRP is also used to determine the price that both wholesalers and retailers can expect to purchase the product and is often around 50% of the MSRP. For example, a shirt that has an MSRP of $50.00, will on average be purchased for resale at $25.00.
That discount retailer can’t sell that shirt for $50.00, rather is now selling that shirt for $15, their cost needs to be no more than $7.50. That dramatic change in MSRP just took the price that the brand gets for that shirt from $25 down to $7.50; which translates to a 70% decrease in value.
But that is only half the story, you have already done everything you could do to sell these items on your own; you’ve lowered pricing, or even put them on your closeout rack or closeout list. Every customer of yours has already passed on these items. There is a discount between you and your customer for this particular item.
The next item to go over is the Inventory Turnover rate.
The inventory turnover rate, also known as inventory turnover ratio or inventory turnover, is a financial metric that measures how efficiently a company manages its inventory. It quantifies the number of times a company’s inventory is sold and replaced over a specific period, typically a year. The formula for calculating inventory turnover is:
Inventory Turnover=Cost of Goods Sold (COGS) / Average Inventory Value
The inventory turnover rate is a critical metric for businesses because it reflects how quickly a company can sell inventory and replace it with new stock. A higher inventory turnover rate generally indicates that a company is managing its inventory efficiently, minimizing holding costs and the risk of obsolete or perishable goods. On the other hand, a lower turnover rate may suggest that a company has excess inventory, tying up capital and potentially incurring storage costs.
To keep our original example, that shirt that the discount retailer is now selling for $15 knows that it might sit on the shelf for a while, as they aren’t the top or even average performers. These are the items that nobody purchased. Let’s also factor in that the discount retailers have to pay for the logistics, freight, and warehousing of the items. These are expenses that would have been yours but have now been passed down to the discount retailer.
That shirt, which was normally $50 MSRP, is being sold at the retailer for $15 and will sit longer than expected. Instead of the retailer paying 50% of MSRP ($7.50), when you calculate the low turnover, high quantities purchased, and logistics involved, a cost of $3.00 – $5.00 is more in line with the cost they would need to purchase it for. That pricing is now less than 10% of MSRP!
What looked like a steep discount, is supported by the economics of the pricing. As an inventory owner, nobody is forcing you to sell that inventory, but as you can see, often prices offered are supported. Let’s also remember that there are some serious benefits to selling inventory to discount retailers.
Understanding the True Value Behind Steep Discounts
Let’s see what are the true value behind selling excess inventory to discount retailers:
Frees Up Capital
Excess inventory ties up capital that could be invested elsewhere in the business. Selling excess inventory to discount retailers allows brands to quickly convert unsold goods into cash, providing immediate financial relief. This capital can then be reinvested in core business activities such as product development, marketing, or expansion.
Reduces Storage Costs
Storing excess inventory incurs costs related to warehousing, security, and insurance. By offloading surplus stock to discount retailers, brands can minimize these expenses and streamline their supply chain. This reduction in storage costs can positively impact the bottom line.
Mitigates the Risk of Obsolescence
Products can become obsolete if they remain in inventory for too long. Consumer preferences change, and technology evolves rapidly. Selling excess inventory to discount retailers helps brands avoid the risk of holding onto products that may become outdated, ensuring they can recover some value before it’s too late.
Preserves Brand Image
Clearing excess inventory through discount retailers can help brands maintain their brand image and pricing integrity. Selling through alternative channels, rather than heavily discounting products through their primary retail outlets, prevents brand dilution and protects the perceived value of their core offerings.
Clears the Path for New Inventory
Selling excess inventory to discount retailers clears space for new and innovative products. Brands can introduce fresh merchandise to the market without being constrained by overstocked warehouses or store shelves, allowing them to stay competitive and responsive to changing consumer demands.
Enhances Cash Flow Predictability
Excess inventory can disrupt a brand’s cash flow, making it difficult to predict revenue and expenses. By selling to discount retailers, brands can establish regular, predictable cash flow from these sales, aiding in financial planning and stability.
Frequently Asked Questions
What is excess inventory, and why do retailers face this challenge?
Excess inventory refers to unsold products or surplus stock that retailers have beyond what customers demand. Retailers can end up with excess inventory due to poor inventory management practices, inaccurate demand forecasting, or ordering an excessive amount of stock.
What are the consequences of excess inventory for retailers?
Excess inventory can cause several problems for retailers, including increased carrying costs, the need for storage space, and potential markdowns to sell off surplus products. It can also tie up capital that could be invested in other areas of the business.
What are effective ways for retailers to manage excess inventory?
Retailers can manage excess inventory by implementing better inventory management systems, using demand forecasting to order the right amount of stock, offering promotions or flash sales, and working with inventory liquidators such as Overstock Trader to quickly offload excess products.
How can retailers avoid ending up with excess inventory in the first place?
Retailers can prevent excess inventory by regularly reviewing inventory counts, setting low stock alerts, and purchasing surplus stock from suppliers or other businesses. Having a sense of urgency and staying attuned to customer demand can also help avoid excess stock.
What is a recommended way for retailers to get rid of excess inventory efficiently?
An effective way to sell excess inventory is often through limited-time promotions, flash sales, or partnering with inventory liquidators who can quickly purchase surplus items. This not only helps retailers eliminate excess inventory but can also generate revenue and reduce losses.
Effective inventory management is essential for brand success. Selling excess inventory to discount retailers is a savvy strategy that offers numerous benefits. It not only converts stagnant stock into cash but also reduces storage costs, preserves the brand image, and opens up opportunities for new products. By partnering with companies such as Overstock Trader, brands can optimize their resources, strengthen their financial position, and maintain their competitive edge in the market.