Sometimes retailing doesn’t quite turn out as you had planned. Did last year fail to live up to what you predicted and budgeted for? Did you overestimate the popularity of a particular product? Are there areas of your inventory brimming with overstock?
If you find yourself long on inventory and short on profits — whether from overbuying, expanding product lines too quickly or overestimating sales — don’t panic; you still can whip your inventory back into shape before it devours your profits. The key is to act quickly. The longer you keep excess inventory on hand, the more it will end up costing you.
If you think the only way to reduce your inventory is to run a sale or declare a buying embargo, guess again. There are less drastic ways to get your inventory under control again.
Use a combination of the following 10 strategies to help you bring your inventory back to a more manageable level.
1. Dam the River
Look at every open purchase order you have that you know hasn’t been shipped yet. Cancel or cut back on the orders that don’t currently represent a critical need.
This doesn’t mean you should hack away at your orders with a cleaver. Instead, selectively reduce optional merchandise. Cut out marginal items. Ask yourself if you can delay adding a new line for three or four months. This isn’t the time to introduce a new product line.
Some of your suppliers may not let you cancel orders. Try explaining to them that by protecting your financial stability today, you’ll be better equipped to make future orders. Chances are, they’ll be more likely to make concessions if they think it will keep you as a stable customer.
The Cost of Excess Inventory
To see how excess inventory is affecting expenses in your store, estimate the total inventory (at cost) you currently have on hand.
For example, say you have $100,000 of inventory on hand. If you carry 10% more inventory than actually needed, what is that costing you?
$100,000 inventory x 10% excess = $10,000 in excess inventory
$10,000 excess inventory x 30% = $3,000 annual waste in expenses
You might consider that the cost of holding excess inventory could be avoided by investing in an inventory management system that would last the life of your business, and possibly pay for itself in a year’s time.
2. Take It Back
Sometimes you can persuade a supplier to let you return merchandise you’ve already received. This option comes with some drawbacks, however. At the very least, you may get stuck paying the freight, and you may not get full credit for the returned merchandise. But this is an option to consider if your condition is critical — and if state regulations allow cannabis products to be returned to the manufacturer.
3. Accelerate Chargebacks
Do you have defective merchandise for which you haven’t yet requested return authorization? Get on the horn to those suppliers and ship it back. At the same time, check for substitutions you could have legitimately refused. You can get return authorization for substitutions more easily than you can for merchandise you’ve ordered.
4. Slash Internal Processing Time
Obviously, the quicker your merchandise hits the floor, the quicker it will move. Look for jams in your processing system that may be unnecessarily tying up merchandise. Work together with your staff to find ways to cut your processing time by 50% or more.
5. Sell to Other Retailers
If you know retailers in other communities that can use some of your overstock, make them an offer. In order to make this work, you’ll have to offer either quicker delivery than they can get from the supplier, a lower price or both. But if they pay you in cash, it might be worthwhile to improve your inventory situation.
One thing to remember: Make sure you sell outside of your trade area. If you sell to a nearby retailer, you’ll be trading wholesale sales for retail sales.
6. Pair the Old with the New
Your customers will naturally gravitate toward new merchandise. Take advantage of that tendency by pairing older merchandise with new arrivals. Price the older items near cost.
Remember, the idea here is to get cash quickly. With every dollar of markup, you move away from that goal.
7. Move Merchandise Around
Watch customer traffic patterns for a couple of days. If you find one section of your store being visited more frequently than another, do some rearranging. Shift your high-draw merchandise to another part of the store.
Also, check your lighting and signage to make sure you haven’t created barriers to traffic flow with dark, foreboding corners.
8. Involve Your Staff
Now is the time to give your salespeople strong incentives to sell both basic merchandise and add-on items. Set up a contest running two to four weeks. Offer prizes for categories such as: highest total sales, highest sales per hour, highest average sale, highest single sale, most items on a single sale, highest sales in one day, highest sales in one week and largest increase over the previous period. Above all, make the contests fun.
9. Revamp your markdown schedule
The time to do markdowns is just before the sales peak, not just after. All merchandise, particularly seasonal goods, will hit peak value just before hitting peak sales. If you’ve been slow with the markdown pencil, it may be slowing your turnover and tying up your cash.
How do you know when an item is about to peak? Past sales records and the wholesale market will be indicators. When your suppliers start offering deals, it’s time to start cutting prices.
The first markdown should be the biggest. When you decide to discount an item, make it a good one. Anything less than a 30% discount barely stirs customers anymore. You may want to go straight to 40% or higher, especially if your cash needs are getting crucial.
10. Capitalize on Tax Deductions
Sometimes even drastic markdowns aren’t enough to move particularly stubborn merchandise.
With items that have been marked down two or three times without any action, non-cannabis retailers have the option of donating merchandise to their favorite charity. Donating excess merchandise — and getting a tax deduction for doing so — is probably not an option for most cannabis retailers but could be worth considering as regulations change in the future (there are plenty of patient and veteran advocacy groups that could put donations to good use).
Traditional retail shops can save a lot of carrying costs and may be able to take a full-value deduction on their next tax return. The tax savings will free up cash to reinvest in new merchandise.
Once you have your inventory pared down, you’ll free up more assets to increase profitability. Think of it this way — it’s better to have a dollar in your pocket than it is to have unsold merchandise gathering dust.
These tips and strategies are great ways to keep your cash flow healthy and inventory investment manageable, especially during tough sales periods.
Patricia M. Johnson and Richard F. Outcalt are certified management consultants and co-founders of The Retail Owners Institute. They are strategists for retailers, workshop presenters and publishers of a free and popular newsletter for store owners and managers. Sign up for The ROI News for free at RetailOwner.com. They can be reached at 206-623-3973.