21 SEP 2023 15 MIN READ

What is dead stock and how can small businesses avoid it?

Dead stock can cost businesses a lot of money, so small businesses need to understand what it is and how better inventory management can help them avoid it.

What is dead stock?

Over time, many businesses end up having stock left over and left in warehouse shelves, forgotten about and made useless, this is what is known as dead stock. This can cost small businesses a lot of money as they often can’t recoup the unsold good and the cost of it taking up room in their storage facilities adds up over time.

Often stock goes through a journey of being new stock, eventually if it’s not selling well it may become slow moving stock, then excess inventory and finally dead stock. How long it takes for stock to move through that journey will depend on the item and the inventory. There won’t be one set timeline for determining when an item becomes dead stock however for accounting purposes, it is often a year.

It’s also important to understand the difference between dead stock, as discussed above, and deadstock which usually refers to discontinued or vintage items that still have their original tags on them.

What are some examples of dead stock?

There are a number of reasons that dead stock may exists is seasonality or items for specific occasions. For example, if you’re a bookstore and sell 2023 calendars or diaries and it is now January 1st, 2024 then any unsold items are dead stock now. In fact, these likely become deadstock much earlier as their use dwindles as the year passes by.

Similarly, if you sell winter jackets and hats and you still have them in stock by the time winter ends, these may become deadstock as people are less likely to buy them and by next year there will be different styles out, making the old stock obsolete.

Returned stock, however, is not counted as part of dead stock.

Why is dead stock bad for a retail business?

Left over stock that’s slow to sell may not sound like a big deal, but it can have a lot of knock-on effects for your business. Especially if the sales of that stock isn’t expected to pick up any time soon, if ever. Here’s a few of the main ways that dead stock can impact your business:

  • Decreased profits
    Buying stock is an investment and when it isn’t sold, there is no way for a business to recoup those costs. This means that cash is following out of the business and not coming back in. Your records should include details on what you pay your employees, the deductions you make, any reports and payments sent to HMRC, employee leave and sickness absences, tax code notices, and any taxable expenses or benefits.
  • Increased storage costs
    When inventory is not sold, it has to be stored in some way. This can create additional costs, whether that’s paying additional staff to deal with inventory, insurance on items or the purchase of storage containers to protect the stock.
  • Lost employee time
    It will take more time for you employees to manage and inventory this stock which isn’t bringing in revenue. That means less employee time for other tasks such as tidying the store or creating better displays.
  • Risk of damage or expiry
    If the product is perishable, every day it is not sold it comes closer to an expiry date that will reduce its value even further. Even if an item is not perishable, the longer it sits in your store as unsold stock, the higher the chances are that it could be damaged in some way and either become unsellable or lower value.
  • Lost opportunities
    Had that stock sold, the money generated could have been used to but other stock that sells well. Money tied up in dead stock could have been better invested in other parts of the business.
  • Clutter
    Dead stock also takes up space on the shelves that could be occupied by revenue driving stock instead. It creates clutter and may distract customers from finding items they would actually buy.
  • Depreciation
    Typically, products lose value over time. Some, like cars and electronics, tend to depreciate very quickly so the longer they are held, the less they are worth and you may end up selling them at a loss.

The financial cost will depend on how much was invested in the dead stock and how much revenue it was expected to generate. So, if you’re a clothing retailer and can’t sell 100 summer dresses, each with a price tag of £50, then you have lost roughly £5000 in expected revenue.

There are other costs to consider as well such as storage cost or opportunity costs. Overall, there’s not much positive to say about dead stock – trying to avoid it as much as possible is part of any good business strategy.

What causes dead stock?

Now that you know how much dead stock can impact your bottom line, you may be wondering what leads to dead stock. Here’s eight of the most likely reasons a business ends up with dead stock:

  1. Inaccurate forecasting: When buying stock a business will forecast the demand and order accordingly. If you’ve miscalculated or have flawed data on how successful something has been selling, you may end up with too much stock.

  2. Large product catalog: The more products you offer, the more items you need to manage. Having too many variations of a product can split sales up and lead to dead stock. For example, if you have soda in cherry, lime, vanilla, and regular flavours you may end up selling some of each but you likely won’t sell every unit because there’s too many similar products on the shelf. If you don’t adjust how much stock you’re buying for each variation, then you may end up with far more stock than you need.

  3. Poor sales/drop in demand: Even if your company has forecasted sales accurately, customer wants can be fickle. For a multitude of reasons, interest in stock may drop, leading to poor sales and, eventually, dead stock. Quality issue: Even if your company has forecasted sales accurately, customer wants can be fickle. For a multitude of reasons, interest in stock may drop, leading to poor sales and, eventually, dead stock.

  4. Lack of inventory visibility: When there’s a lot of inventory lying about, it can be easy to lose track of stock. If it is sitting in dark corners of the stock room, it may go unnoticed until it is out of style and no longer holds customer interest.

  5. “Just in case” stocking up: When there was a great deal of supply chain disruption, many businesses changed from a just-in-time (JIT) model of inventory sourcing to a just-in-case (JIC) model. The former means that a business would reorder inventory only when the existing stock got very low, while the latter meant stocking up in case there was supply disruption later on and it became impossible to meet customer demand. While the JIC model obviously can have benefits such as business resilience during tough times, it does mean a higher risk of inventory becoming dead stock.

  6. Trends and seasonality: Seasonal items have a much shorter window in which to be sold before becoming dead stock than an average item, so they’re more likely to become dead stock. This doesn’t mean to never stock season products but that you need to have very accurate sales forecasting for them.

  7. Stubbornness: If money is already sunk into inventory, this can make a business owner reluctant to sell it for below cost. However sticking with the original cost for too long may mean the stock not being sold at all. An unwillingness to bend on price at all to recoup some costs may lead to bigger losses in the long run.

How do I avoid having dead stock?

Sometimes avoiding the problem is easier than fixing it – and this is certainly true with dead stock. If you’re concerned about dead stock, here’s 10 ways that a business can try to avoid it:

Consider using ABC analysis, inventory turnover ratios or reorder point formulas to help you stay on top of your inventory. If managing this manually sounds like it would be too much work, check the next bullet point.

If manually trying to keep track of all your stock is proving challenging, software can help automate some of these process. Inventory management software can help keep track of what you have in the stock room and even assist with forecasting demand.

If your products are handmade or your own manufacturing design, you may want to make small batches and test them with customers before mass-producing them. This allows some feedback and tweaking before the risk of ordering a lot of stock that may not sell well.

Establishing quality assurance processes can help ensure the stock you’re ordering is good enough for your customers. When you receive new stock, always check it against the product specifications that you had when you ordered it – if they don’t meet the standard you were expecting then get them replaced or returned. You can also set acceptable quality limits (AQL) with your suppliers. An AQL is a ratio of the number of defective items over the total items sampled. If the ratio drops below a determined limit, then the products aren’t meeting the desired quality standard.

Monitoring inventory regularly will help you identify products that aren’t selling at the rate that you expected. This will allow you to take proactive measures to sell off this stock before it becomes dead stock. Measures may include offers, discounts and phasing out the product altogether. Analyse why the product performed poorly so that you can avoid it happening again in the future.

Customer surveys and feedback can help you determine what kind of stock they’re excited about, what they’re hoping for and alert you to any issues that could lead to dead stock. If you’re going to start carrying a new product, base that decision on comer research rather than guesswork or gut feelings.

Only reordering when stocks hit a certain level can help to prevent overstocking. The challenge is finding a reorder point low enough that you don’t end up with excess stock but high enough that you don’t fully sell out and disappoint customers with long wait times before an item is restocked.

Not every product is worth having a large inventory supply, so ordering a small amount of a product you aren’t sure of can help you understand its popularity before committing to more stock of it. When done well, scarcity marketing can help drive demand but it can also risk alienating customers if you’re frequently out of stock so this strategy should be used in moderation.

It’s worth periodic assessments of your products, considering whether or not any products cannibalise each other. If there are similar products which compete, you should decide which is best suited to your customers (consider quality, inventory turnover rates, return rates, etc) and consider no longer stocking one of the products.

Negotiate buyback agreements with suppliers that have specific terms in them. Ensure that these contracts are written down and properly documented. If suppliers are willing to buyback stock, you may be able to prevent slow moving products from sitting on the shelves for too long.

How do I get rid of dead stock?

Getting rid of dead stock can prove tricky as your main audience has already proven to not be interested in the product. If you’re struggling to shift stock, here’s a few ideas that may help – though be prepared to take a hit on your profit margins as most of these ideas require selling at a lower price point than you might have liked.

Still, earning some revenue back is better than obsolete stock sitting on the shelves indefinitely. So, let’s take a look at nine ways to get rid of deadstock:

Give a free gift with purchase
If there’s stock that you’re struggling to shift, consider giving it away as a free gift with purchase. If you’re afraid of losing too much money by giving away dead stock, then only offer the gift when customers meet a minimum purchase amount such as £50. This can promote customers making a purchase in the store and also help you free up stock space.

If there’s another business nearby that you have a good relationship with, consider partnering with them to shift some deadstock. Can you do a social media giveaway with them to gain more followers to your accounts? Or have your dead stock as a free gift with purchase in their store instead? If you have a similar but not identical audience base, this partnership may help introduce your shop to new people.

Have a sale
Selling your dead stock at a discounted price can help get the cash flowing again even if it’s not at the profit margins you originally hoped for. Sales can also help get foot traffic into the store since everyone loves a deal!

Try a new channel
If you’re struggling to sell via your usual shop or website, try other online marketplaces such as eBay, Amazon, or Etsy. This can help you reach new customers that wouldn’t ordinarily find your products. Just be sure to research seller’s fees and packaging/posting fees so that you can work all those costs into your pricing.

Bundle products
If your dead stock pairs up nicely with other stock that sells well, consider bundling them together and offering a better price than customers would get if they bought all the items separately. Again, this may cause a slight revenue loss but it is a smaller one than if you didn’t sell any of the deadstock at all.

Return goods to the supplier
If you’ve negotiated a return policy with your suppliers, take advantage of that as necessary. If you haven’t negotiated one previously it is worth inquiring if they will buy back the stock – even at a discounted price this can mean recouping some of the costs rather than losing that entirely. Be prepared for the possibility that you’ll need to pay for shipping and restocking fees or that they will only offer a credit and not a refund.

Resell it to another business
You may have other businesses in your network who would be willing to buy the stock from you. Consider wholesalers and consignment stores which may have use for your dead stock.

Donate the dead stock
You won’t be making any money by getting rid of dead stock in this way, but you may gain some good will from people who hear about your charitable deeds. Sometimes, charity donations can qualify you for tax deductions as well, so discuss whether or not you can benefit from this with an accountant.

Repackage your dead stock
Consider if your dead stock can be presented in a more interesting way that entices people to take part. As an example, consider the “Blind Date with a Book” concept or when businesses do “mystery boxes”. This type of repackaging adds some excitement to products which people might otherwise overlook.

Should I throw out dead stock?

While dead stock may take up space in your storerooms with bringing in any revenue, it’s best that you find a way to use it rather than throw it out. From a business perspective, it’s a big waste to not try an recoup some costs with one or more of strategies above but from an environmental perspective it’s even worse to throw out products.

Certain aspects of the retail industry – particularly fashion – are known for their very large and very negative environmental impact but finding ways to make your product lifecycle more circular or to upcycle unused products can be a great way to ensure they’re still used and not just ending up in a landfill.

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