Reducing Excess Inventory to Free-up Capital

Reducing excess inventory, even at a loss, can free-up capital and help a small online retailer grow.

Slow selling products sitting in a warehouse — or, for very small retailers, a garage — tie up cash and may make it hard to invest in marketing, new product lines, or site improvements.

Take an example from the world of brick-and-mortar retailing.

During a visit to a locally-owned Ace Hardware situated in a moderately busy strip mall, a shopper could find a yellowing aisle sign reading, “Electronics.” The aisle’s beige shelving has a number of tools and components hanging neatly on hooks. Among these items are a dozen S-Video analog monitor cables. Most modern computer monitors use HDMI or DVI-D connectors. S-Video is becoming obsolete. But there are those cables collecting dust and holding captive some of the retailer’s cash that could otherwise be used to grow sales.

This Ace Hardware store would probably benefit from selling the S-Video cables at a deep discount and freeing up the dollars that are otherwise languishing.

Truth is that large and successful retailers do just this sort of inventory closeout regularly, unlocking capital and using the freed funds to buy new — hopefully — more successful products or to invest otherwise in the business.

Do Your Own Inventory Spring Cleaning

Online retailers should regularly examine inventory, including sell-through and turnover rates (the number of times all of a product’s inventory is sold annually). Slow selling or seasonal items, with some possible exceptions, should be closed out and eventually removed from the store’s catalog of regular products since these items tie up vital resources and could be replaced with better selling items that generate regular and predictable revenue.

To do inventory spring cleaning, look for items that:

• Sell-through less than once each quarter;
• Are seasonal;
• Are perishable;
• Have been replaced with a newer model or version;
• Or that have not sold online in a month or more.

These items may be good closeout targets, even if they must be sold at a loss.

Where and How to Sell Closeouts

Once closeout products have been identified, consider a tiered approach to disposing of them.

First, discount the item — 10 to 25 percent, depending on margin — through normal sales channels like an ecommerce website. Set this initial discount price above cost.

If sales don’t improve in a week or two, consider a second discount, this time approaching actual item cost.

If sales still don’t improve after another week, consider selling the items on auction sites like eBay or marketplaces like Amazon at or just above item cost.

Finally, begin offering the items in all channels below the original wholesale cost, remembering that the goal is to free up any capital possible.

Exempting Some Slow Sellers from Closeouts

There are some exceptions to closing out products. Some products, however slow selling, help an online retailer. Examples of these include:

• Complementary items that should be available to support a related product that sells well;
• Brand image items that should be inventoried to support the retailer’s marketing and brand;
• Seasonal items that would cost more to replace in the next season and that will store well.

Avoiding Closeouts in the Future

While it is both a common practice to close out items and a good way to free up capital, it would be better if every product in a merchant’s inventory sold well so that it was never necessary to discount any product. With this in mind, there are several common reasons that ecommerce merchants end up with overstocked items.

• The merchant over estimates projected sales.
• The merchant is worried about selling out of an item.
• Too much is ordered to meet minimum order requirements.
• Too much is ordered because bulk buying seems like a way to save money.
• The retailer doesn’t believe the supplier is reliable and orders too much.
• There is no planning.

In each of these cases, there are things that the retailer can do to avoid ending up with too much or slow moving items. In fact, simply knowing about the possible pitfalls may be enough to help avoid them.

Remember this old saying in the retail business: “Unless you’re selling wine, your inventory won’t improve with age.”