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Op-Ed | The Cost of Dead Inventory: Retail’s Dirty Little Secret

Among the many problems facing today's retail market, unsold stock might be one of its biggest handicaps, argues Haley Smith Recer.
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By
  • Haley Smith Recer

NEW YORK, United States — Check any recent retail headline and it's hard to miss the headwinds the industry has been experiencing. A warm winter, consumers focusing more on experiences than their closets, and the ever elusive "omnichannel strategy" are just a few reasons why retailer's top lines have been struggling.

These misses translate to exponentially weaker bottom lines as retailers and fashion houses struggle to adapt their organisations quickly enough to make up for lower sales. We’re all aware of the layoffs permeating retail headlines and of the constant promotional activities as brands try to prompt purchasing — but one plan of action that has received little, if any attention (at least publicly) is the effort to buy more responsibly up front and limit the amount of dead inventory at the end of a season.

Retailers define success at the end of a season in many ways. Did we hit our retail sales or gross margin dollar plan? Did our biggest investments sell well? One of the most common metrics used is full-price sell through: the percentage of units that sold at full price. Full-price sell through varies by brand, garment and season (i.e. during the highly promotional holiday season, when full-price sell through is meaningfully lower for all retailers), but a good industry standard is around 60 percent for the intended life of a given product, meaning a retailer expects to sell the other 40 percent of units on markdown.

Estimates indicate dead inventory is costing the US retail industry $50 billion a year.

But this begs the question: what happens when those markdown units don’t sell? Retailers don’t have unlimited space in stores or our endless attention when we shop online. Brands are forced to prioritise which products remain in the markdown zone (often it’s the most recent markdowns that win this precious real estate, regardless of which products represent the highest cost or are most liable). For an e-commerce business, a similar struggle exists as retailers decide which markdowns to feature in the prized top spots of their e-commerce grid.

Styles that are bumped from the markdown sections despite having hefty costs behind them become dead inventory — inventory that exists in a warehouse or stockroom, and certainly represents dollars in a merchant’s open-to-buy file — but doesn’t have a real shot at ever being sold.

This dead inventory becomes the silent killer of retailers.

Dead inventory can handicap a retailer in many ways — but most importantly, dead inventory ties up precious working capital. Every dollar spent on what becomes dead inventory is valuable money that could have been put towards better talent, an improved backend system, or, most obviously, more productive inventory. Dead inventory dollars are held captive in a retailer’s EOP inventory rather than being available to purchase newer, more compelling product.

Dead inventory is also valued at cost, not at the retail sales or gross margin dollars a brand could have generated, so looking at inventory at the end of a period understates its true value. Depending on a brand’s standard margin (let’s assume 60 percent), $40,000 of dead inventory can actually represent $100,000 worth of retail sales and $60,000 of gross margin dollars.

Of course, some amount of excess inventory is necessary — to ensure a certain level of size flexibility, retailers often slightly overbuy. Most brands should maintain some level of markdown inventory to appeal to the bargain shopper and to generate a certain level of foot traffic. But inventory-to-sales ratios are at their highest point since 2009 and we’re all too familiar with the ever-growing markdown sections at most retailers. Estimates indicate that dead inventory is costing the US retail industry as much as $50 billion a year.

We’re all aware that the retail environment is tough and that consumers are spending less on apparel these days. But part of the solution lies not in addressing how little consumers are buying, but in how much retailers are purchasing in the first place. Buying leaner (and thus being more comfortable with stock outs) has been the source of recent success for some retailers — but much of the industry still needs to catch up.

The solution lies not in addressing how little consumers are buying, but in how much retailers are purchasing.

Of course, learning to buy lean is tricky. Without a crystal ball, how can a retailer know which trends, colours or fabrics will resonate most with their customer? Even if retailers knew exactly what customers wanted, they can’t predict what foot traffic will be or control what their competitors will be offering. But that doesn’t mean retailers are helpless either; they have already responded to these risks in a few ways.

Some brands purchase fabric on the normal timeline, but don't determine the body of the garment until the very last moment. Some spread their risk across more products to minimise the threat of certain items not performing. Others progressively "chase" into more products — purchasing closer to the in-store date, but paying a hefty premium to rush order garments, often flying them to stores rather than shipping them.

But these solutions leave much to be desired: they prevent brands from realising the full potential of their assortment if it had been funded appropriately or committed to at the optimal time. So what can retailers do to really move the needle?

Well, a few things. First, retailers can over-index their time on perfecting the fit, colour and styling guidance of their largest investments (wouldn’t you rather have the perfect pant a month later, than a poorly fitting pant on time?). Retailers should also reassess their "need" to produce a certain amount of new styles each month. Brands should diligently consider the expected ROI of each style rather than be willing to fill stores with watered down product because they have money available in their Open to Buy (would that $80,000 be better spent on a new system so your team can be leaner — or more experienced?).

New technology is also being developed to help retailers get previews into what their customers would say about a product — before merchants even place buys. Pairing customer feedback with the intuition of merchants and creativity of designers could be the holy grail for preventing this dead inventory problem in the first place.

Regardless of which "solve" retailers pursue in addressing their inventory woes, it should be handled with the same level of diligence and attention as assorting a new season or making a multimillion dollar investment. After all, preventing this inventory in the first place may be just as valuable as increasing store traffic or sales in a given season.

Haley Smith Recer is an MBA student at Columbia Business School and consultant for machine learning platform Claire.

The views expressed in Op-Ed pieces are those of the author and do not necessarily reflect the views of The Business of Fashion.

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