How to Value Slow Turning Inventory
In Tuesday’s post “Best Practices for End of Year Closeouts” the first step was Principle #1 – Re-valuing your inventory. Sounds simple enough, but as you look upon the price you paid for the inventory and the hopes you had for its high-margin sale, it is often difficult to put a fair market value on product your customers just aren’t buying. Here are the various “lenses” to use to look at the inventory you have and objectively value its worth:
Elasticities: Highly elastic products will require a dramatic cut in prices to sell. Examples would include sweaters at the end of the winter or Christmas décor after Christmas. You will need to mark prices down to perhaps 75% off just to entice customers to consider a purchase. Contrast that with inelastic products (like iPhones) which don’t require much of a discount at all to activate demand.
Seasonality: If the merchandise is highly seasonal, determine when the next season of demand is likely to occur and determine if the storage costs outweigh the clearance discount. Expect damage to a percentage of the inventory to occur in the transition and remember that labor and handling costs are not free. Store associates who pack up and store product are not available for customer service and sales. If you received product too late to meet the current season’s demand, it may be worthwhile* but if the school pencil pack was in your store for the entire back to school season and did not sell – chances are it will not sell next year either.
* Personal note: The ONLY time I would recommend storing seasonal product from one year to the next would be if the product had a very high value, an evergreen appeal AND was not in the store during the peak seasonal period this year. For example, a crystal Christmas ornament that was not put on the sale floor until December 21 might be a good candidate for storage. But not gift tags (low value) nor a dated ornament (will not be appealing next year) nor the same crystal ornament if it was on the sale floor from November 15 – Dec 31.
Basic Needs: If the merchandise is a basic need item – birthday wrapping paper, black toner, shampoo – there is an ongoing need for the item. Excess inventory on a product like this is an excellent candidate for a promotional price – instead of a clearance or closeout price. Slow but eventual sales may outweigh speedy liquidation costs.
Technology Changes: If the product supports a technology in retrograde (typewriter ribbons anyone?) you may have an opportunity to keep the product on your shelves at regular cost if you have the patience for recouping your investment. According to “long tail” theorists, selling products at the very end of their market lifecycle is not a matter of reducing price to incite demand as much as targeting your offering to the interested few who are willing to pay any price to stay supplied.
Keep in mind that it doesn’t matter what value YOU put on the slow turning product in your stores. Only customers know the value of that product. And if it’s not selling, it’s not worth keeping.