Feature: The Magic of Dealing With Inventory

Mark Geraghty has some tips on how to deal with the problem of post-Christmas excess stock…

Unless you have the wizardry of Harry Potter at your disposal, the post-Christmas clean up in a store can become a problem that plagues a store like a New Year’s Day hangover. One of the most significant problems faced by all retailers in the post-Christmas period is how to remove unwanted stock out of the business with minimal financial pain.

Given the promotionally driven nature of Christmas retailing, it is critical that all stores have a plan of action to deal with excess levels of inventory. For large retailers, such as Mitre 10 and Bunnings, the January “SALE” period provides an excellent opportunity to move large amounts of inventory at reduced prices, with volume covering reduced margin. For smaller independent businesses, there may be some resistance to hold back on marking excess stock down because it would “appear” to be throwing margin away. The thing to keep in mind is, the longer that stock sits on a shelf the more expensive it becomes for the business.

Imagine this scenario – a piece of stock is purchased at the beginning of October for a promotion that occurs in the first week of December. The stock will be invoiced at the end of October with payment terms of 60 days, so payment will need to be made for the stock at the end of December. It now becomes really critical that the stock is sold in the promotion happening in the first week of December. If it is, the retailer has made their money. If the item turns out to be a dog, retailers need to understand the problems that the dog can cause and how it should be fixed.

Imagine the next part of the scenario – it’s now the first week of January and the invoice for the stock needs to be paid. Grudgingly, you pay the invoice, but you’re still left with the stock. You now have to make the hard decision: sacrifice the margin you would have made selling the stock at full price and get it out your front door as fast as you can. If you fail to act, every day you leave that piece of stock will have an effect on your ability to trade profitably.

For starters, that stock has now been paid for and you own it, which means it is stopping you from using your cash to purchase newer, more saleable stock. Following on from this is the fact that this unproductive piece of stock is now taking up valuable space on the shelf and does not look as though it is going to sell at its current retail price in the foreseeable future. Finally, there is the cost of interest and housekeeping associated with having this stock in the business. Most large retailers place a percentage figure on this depending on the value of their real estate, the cost of employing staff and the interest that banks charge them on their credit facility. If 15% annualized is assumed for these combined issues and the cost of the stock was $50, you’re looking at an additional $7.50 above the original cost of the stock over twelve months. This may not seem like a lot of money, but if you consider that retailers generally carry about 10% of inventory that is 12 months in age or greater, it can become a costly scenario.

These are the reasons why excess or unwanted stock should be moved out of retailers sooner rather than later. It boils down to a question of cash usage. Investment in stock has been made and the stock has not sold. That stock must be turned into cash again as quickly as possible. The cash allows a retailer to invest in another piece of merchandise, which may have a better chance of selling at a faster rate and turning into cash faster again.

The plan for dealing with this stock is not complicated, but it must be disciplined. It is most commonly known as a Quit Program. The program is cyclical in its application and is normally conducted every third month; providing four significant opportunities every year to cleanse excess and unwanted merchandise. The program applies a series of markdowns off the retail price until the stock is either sold or written off. Major retailers, such as Coles Myer, apply a 25%, 50%, 75% progression to Quit Program markdowns. For smaller, independent retailers, these types of markdowns can be quite daunting, particularly if the stock has required a significant initial investment. The evidence is incontrovertible, retailers with a disciplined Quit Program do not have significant inventory problems, nor do they experience cash flow difficulties as a result of inventory.

The lesson, at the end of the day, is that a disciplined approach to clearing inventory is a requirement for hardware retailers. Hardware retailing has one of the lowest average stock turns in all of retailing, so plenty of attention must be paid to making sure that every effort is made to keep the stock and cash flow moving in the right direction.

By Mark Geraghty, National Manager, Australian Hardware Wholesalers – Mitre 10