U.S. consumers have been pulling back on clothing and durable goods as soaring inflation raises the cost of food and basic items. Wholesale inventory bloat, combined with a softening demand in the economy, is taking its toll on cash flow and earnings at retailers.
Retailers were sitting on $739.5 billion of inventory in October, a 21% increase from last year, according to the U.S. Census data. While it is difficult to predict demand in an uncertain economy, it is also hard to know where to allocate stock as shoppers switch between online and/or brick-and-mortar stores. This is why inventory management is key, especially as retailers look to deal with unsold merchandise after the holidays.
“Seemingly overnight, shortages are flipping to inventory surpluses in certain categories. This is complicating retailer’s ability to shift with consumer behaviors,” Dr. Madhav Durbha, VP supply chain strategy at Coupa, said. “Retailers must pay close attention to consumption patterns and build flexibility into their inventory management to address the changing needs of consumers.”
Here are 7 tips for retailers on how to better manage their wholesale inventory and get rid of some of that product bloat:
- Return for a Refund or Credit
- Offer Promotions & Product Markdowns
- Help Shoppers Find the High Stock Products
- Donate Excess Inventory
- Adopt a Probabilistic Model of Inventory Management
- Liquidate Excess Inventory
- Offer Overstock Products as Freebies or Incentives
1. Return for a Refund or Credit
Jamil Ahmad, Chief Business Officer at Fashinza, says that some wholesale suppliers offer this option to their retail partners and could be an easy way to get rid of excess inventory. This is not a bad option if you plan to keep a long-term relationship.
If these terms were not discussed or laid out in your contract, check to see if your supplier(s) is offering this as an option. If they are not, consider exploring partnerships with new wholesalers.
2. Offer Promotions & Product Markdowns
Dynamic pricing, promotions, and markdowns are strategic ways to tackle inventory management, according to Nari Viswanathan, Senior Director of Supply Chain Strategy at Coupa. Being able to course correct inventory is not just a cost management play, but also enables organizations to be more customer focused.
According to Coupa data:
- 9-in-10 said that their company is experiencing excess inventory.
- 41% are marking down excess inventory to make room for other products.
“Economic uncertainty and inflation may have consumers tightening their purse strings, but retailers can offer promotions to entice them while managing their ‘just-in-case’ inventories,” Viswanathan said. “Also, it is important to find a balance in the timeliness of deals so consumers are motivated rather than prolonging the sales. That can have an adverse effect on their purchasing decisions.”
Vikram Bhandari, Founder & CEO of Yantra, says small retailers can also collaborate with big off-price retailers. This can also help them tap into a new segment of customers, especially as holiday shoppers are motivated by value pricing amid inflation.
“Take advantage of data analytics so you have the right inventory strategy to decide which items should be pushed for sales. In the longer term, a streamlined system can help the merchandising team access the existing wholesale inventory and better forecast the situation. The management team can have a better approach to avoid problems,” Bhandari said.
Be Strategic When Offering Deals & Discounts
“When it comes to offering deals and discounts, listen to customer needs. Retailers should also re-evaluate their inventory management practices to inform when to discount. If retailers are still relying on traditional methods of inventory management and predicting customer demand based on inaccurate data, that leads to mistakes. With good practices retailers will begin to see excessive inventory slowly decrease,” Philippe Bottine, North American CEO of SES-imagotag, said.
3. Help Shoppers Find the High Stock Products
The problem is not always that consumers do not want to buy certain products, it may be that they simply cannot find it either on your website or the sales floor. From an ecommerce marketing perspective, this problem can be resolved through dynamic recommendations from email, SMS, or website pop-up notifications, according to Sarah Cascone, VP of Marketing at Bluecore. Making high stock product recommendations for shoppers who have a preference for a category will help clear out inventory, and create personalized customer experiences.
Cascone also suggests that retailers rebrand the sales section on their website to something like “ready-to-ship.” This is especially helpful for shoppers who are looking to get their merchandise as soon as possible while also still being able to receive a discount. Make your sales section more appealing so customers know where to find your high stock items.
4. Donate Excess Wholesale Inventory
Depending on what types of products you sell and how much inventory you need to upload, you can always donate items, according to Ahmad. The obvious reason is that donating is a good and charitable act of service to help those in need. But, retailers can also use a charitable giving strategy as a way to demonstrate their brand’s commitment to a good cause. Let your customers know through social media and promotions and turn this act into a larger campaign and get them involved.
Donating Excess Wholesale Inventory Can Earn Your Business a Tax Deduction
By donating that new, idle merchandise to charity, your business can earn a federal income tax deduction under Section 170 ( e )(3) of the U.S. Internal Revenue Code. The IRS Code says that regular C corporations may deduct the cost of the inventory donated, plus half the difference between cost and fair market value. Deductions may be up to twice-cost.
5. Adopt a Probabilistic Model of Inventory Management
A better way to optimize inventory is to improve the forecasting based on a probabilistic model, according to Inna Kuznetsova, CEO of ToolsGroup. The probabilistic inventory model is aligned to the manufacturing and retail reality that demand will vary. This model incorporates demand variation and lead time uncertainty based on three possibilities:
- When lead time demand is constant but the lead time itself varies
- When lead time is constant but demand fluctuates during lead times
- When both lead time and demand vary during the lead time
Using known economic, geological, and production data, the probabilistic inventory model creates a collection of approximate inventory stock quantities and their related probabilities. The advantage of this approach is that by using values within a bandwidth, you achieve greater reliability than when using deterministic figures.
“While there is a good opportunity to normalize inventory in 2023, now is the time for retailers and brands to act. Apply probabilistic AI-based models to forecasting, factoring new risks daily and adjust plans,” Kuznetsova said.
6. Liquidate Excess Wholesale Inventory
This is the best-case option in the worst of scenarios. According to Ahmad, retailers should shop around and compare liquidators to see who they can negotiate the best price with. It is pretty simple, but typically a better option than having to scrap the merchandise.
Be aware that liquidation companies may cherry-pick items and will buy merchandise at much lower price points. You likely will not see any profits with this method — but, you will at least be able to free up space and capital for your business.
7. Offer Overstock Products as Freebies or Incentives
This tactic works best for low-cost items, according to Vend. Use this merchandise as a giveaway or incentive to get shoppers to either sign up for your mailing list or spend a certain amount.
Be sure to advertise this correctly and let your customers know through in-store signage, website pop-ups, email notifications, or through social media that you are giving away free products. This can encourage shoppers to make a purchase even when they were not planning on it, and to share this news with their friends and family so everyone can take part in the free gifts.
Inventory Management in 2023
Next year we will see a reset of the supply chain, says Nicola Kinsella, SVP of Global Marketing at Fluent Commerce. These disruptions have already begun to ease up. Companies are managing their struggles better than they were at the beginning of the pandemic, and as retailers continue to clear out wholesale inventory, they will make way for new normal buying situations.
“We are finding that demand has been lumpy and not the same across all stores and regions in your network. The ability to have a finite level of control is very important,” Kinsella said. “There is definitely an interest in adding more digital channels, selling on more marketplaces, and looking at different ways to offload inventory to make more money rather than the big dump across donations just to clear it out.”