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Hate your old stock? Here’s how to get rid of it

Old stock ties up cash, takes up space and makes stores look tired. DAVID BROWN discusses how to move slow-selling items and how to balance future ordering to stop stock waste and spark sales.

If you stopped buying today, how long would your current stock last?

The purpose of this exercise is to determine the amount of surplus product stores should carry.

Most stores have surplus product sitting around that simply doesn’t perform. Dead stock, unloved stock – call it what you will. In reality around 80 per cent of the stock retailers buy won’t sell as quickly as they thought. In fact, quite a few of these items won’t leave without a little help from you.

Old and dead product is one of the biggest drains on cash flow for retailers and is one of the top three issues raised by Retail Edge Consultant customers when talking about the frustrations of business.

On average most stores carry around one to one-and-a-half stock-turns of product per year. That is, they have enough product to sell everything once during a period of nine to 12 months, relative to their sales figure.

A store with $1 million in annual sales and a stock-turn of one at a 100 per cent mark-up (not that I would recommend doing this) will have $500,000 in stock.

Of that $500,000, around $100,000 represents fast-selling product that might turn over four to 10 times in a year. This productive stock contributes the majority of a store’s revenue.

This leaves $400,000 of inventory that is turning over at a rate of 0.50 or slower, which means this product is taking two years or longer to sell!

Would you invest $400,000 in an investment that only has a 20 per cent chance of making money and only after a period greater than 12 months? Of course not but storeowners who retain product that is clearly going nowhere for an indefinite period of time are doing just that.

Some might say this isn’t uncommon with certain investments. Stock pickers can be known to cling to bad stock for years in the hope that it will recover over time. Jewellery is not like the stock market, however; if 200 consumers have viewed an item and aren’t interested in buying it, how many more need to see it to confirm that it isn’t going to sell?

The waiting game

All investments must have an evaluation period, a point after which investors assess if that investment has been worthwhile and then decide to continue or abandon that investment.

Jewellery stock is no different. Retailers must regularly assess their stock to see whether or not it is worth the cost of retention. This should initially be done after two months. For lower-priced items this is the first litmus test of performance. If it hasn’t sold in the first two months then the item should be discussed with sales staff, possibly relocated or even receive a price amendment.

Beyond this is the six-month period, which is D-Day for most products. If items haven’t moved by now, the chances of them performing are slim and retailers should now reconsider their pricing strategies on these items – there is little point persisting with a higher margin when the demand isn’t there.

This is also a good time to involve suppliers in any product decisions. Determine which product has become old on an item-by-item basis and discuss these items with relevant sales reps when they next arrive in-store.

They may be able to suggest a strategy or even exchange certain products, usually as long as you are also re-ordering.

Re-evaluating stock investment on a regular basis is vital to ensuring a healthy business. Businesses need to act quickly and decisively and make turnover a priority. Too many retailers fall in love with their stock and this can cloud judgement.

As one successful client said, “If my customers don’t want it then nor do I.”

There are various ways to remove unwanted product and while most readers will have heard of the following strategies, a refresher course is never a bad thing – particularly in the lead-up to the end of financial year.

As previously highlighted, the important part with old product is that storeowners take action.

Here are several options to consider:

Have a sale  – This one speaks for itself because it provides quick cash flow. Yes, it can be a drastic step and is not something retailers should do on a regular basis but an occasional sale doesn’t turn a business into a cheap discount store. Don’t be afraid to use it.

Provide incentives to staff – This one doesn’t get used enough. Slashing $500 off a $4,000 ring doesn’t always cut it with the customer; however, providing a $500 incentive to staff whenever they sell a $4,000 ring is a completely different proposition.

Exchange stock – If you have a good reciprocal relationship with your suppliers, exchanging bad stock can be an effective option but this is a two-way street and not an opportunity to take advantage of your distributor. Suppliers want you to sell because they want you to re-order. Discuss ways to help items to sell quickly and discuss the opportunity to exchange items for stock that will move.

Melt stock – This may depend on metal prices but can be a last resort to recoup expenses from dead stock.

Run specials – More low-key than a sale, in-store specials have merits and can keep cash turning over. Be careful not to miss a higher-margin sale by selling a discounted item instead. There will always be customers who will pay full price so avoid using in-store specials on a constant basis.

Talk about stock in staff meetings – Discuss slow-moving stock with staff. For example, start each day by focusing on four slow-moving rings with staff and benefit from the added focus they provide to sell these items. Include this as part of the store’s regular sales team meetings and perhaps even offer incentives.

Send stock to another store – This is good if you have more than one store but, even if you don’t, try a swap with a colleague who owns another store. What might not sell for you may sell for them. I know of two stores that identified $7,000 worth of product that was slow moving for one and fast moving for the other. That’s an easy way to move $7,000!

Modify stock – A remake is always an option; however, ensure you remake items into proven sellers. Spending money to finish up with a different ring and the same problem is not a recipe for success.

Give stock away – Consider offering the jewellery as a prize for a competition or raffle. This can also help to boost other in-store sales opportunities.

Package stock with another item – This can be an option for items like beads that don’t move. Packaging them up as a deal with a bracelet and another bead could see them moving out. It’s a great way to shift cheaper items out the door.

Appoint an ‘Old Stock Champion’ – This should be someone who doesn’t have an emotional connection to the stock and who realises that the best way to get beautiful new product in store is to get rid of the old stuff first. Every week, have them target a selection of items using a combination of the specific strategies previously outlined and work with the rest of the team to clear these items. The Old Stock Champion should report to the storeowner or manager daily with progress, revised strategies and a plan of action.

How much stock is enough?

Once old stock is moved, businesses need to ensure they balance their inventories to avoid stock build-up in the future.

When considering the overall level of stock a business requires, start by determining what level of sales the business needs to survive. Imagine a business must achieve $2 million in sales each year to generate the desired level of net profit. Now, don’t just ask yourself how much stock is required to achieve $2 million in sales; businesses may already derive part of this $2 million from revenue arms that don’t require stock. Such examples are repairs, special orders, custom designs – a growing part of most profitable stores – valuations and gold trades. None of these sales require the carrying of stock from suppliers. Once these non-stock sales – which can be anywhere between 20 and 60 per cent of total revenue – have been separated, a store might only need $1.2 to $1.8 million in stock sales to achieve desired revenue of $2 million per annum.

At this point, businesses can establish how much stock they need to meet that revenue goal.  As a rule of thumb, a store with carefully chosen, well-managed stock will achieve a stock-to-sales ratio of at least 2.5, which means every $1 invested in stock will produce $2.50 in revenue. For example, a store doing $1.6 million in stock sales will need to carry a stock level of approximately $640,000, which is $1.6 m/2.5.

Stores carrying more than $640,000 in product will not make enough sales to turn over their stock. On the other hand, stores carrying less than $640,000 in stock might be costing themselves sales by starving their businesses of oxygen (stock).

Dead stock not only drains cash flow and wastes staff time but it also contributes to poor business performance. It makes sense that a planned process of controlling old stock will improve cash flow and ultimately sales. With the end of financial year looming, why not take the time to move stock out now before it becomes a burden rather than a blessing? There is no great mystery here: if what you’re doing isn’t working, change it until it does.   

David Brown

Contributor • Retail Edge Consultants

David Brown is co-founder and business mentor with Retail Edge Consultants. Learn more:

Ellendale Diamonds Australia

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