Inventory that doesn’t turn over—i.e., that doesn’t sell—is often referred to as dead stock. For businesses that don’t use inventory management software, dead stock can remain on warehouse shelves, forgotten and useless.
Dead stock costs businesses money. They can’t recoup the costs of unsold goods that they either manufactured themselves or purchased from another company.
In addition, storing dead stock costs money and takes up valuable warehouse space that could be used to house top-selling products.
Ahead, you’ll learn what’s considered dead stock, and how companies avoid dead stock with various inventory management strategies.
Table of Contents
- What is dead stock?
- Why is dead stock bad for a retail business
- Dead stock costs
- Causes of dead stock
- How to avoid dead stock
- How to get rid of dead stock
What is dead stock?
Dead stock, or obsolete inventory, is merchandise that’s never been sold to a customer. It often cannot be returned to the supplier because it’s outdated, out of season, or has little to no demand.
For example, if a clothing retailer still has winter coats in stock after the winter season has ended, and consumers have shifted their buying toward spring clothing, those unsold winter coats become dead stock.
An alternative definition of dead stock
In inventory control and order management, dead stock has also come to mean products that are no longer available for sale. When used in that context, the phrase is usually spelled as one word: deadstock.
Sometimes, merchandise that is no longer available is coveted simply because it can’t be found in stores. In those situations, it can sometimes be sold for a premium price.
Sneakers, which are often sold on brand image more than function, are popular “deadstock” items that can be found for sale online and identified in searches as “deadstock.” Vintage apparel is also a popular deadstock category.
A lot of dead stock ends up online. For example, you can find Nike deadstock through online marketplaces like Etsy, eBay, and Restocks.
Why is dead stock bad for a retail business?
- Capital investment: Dead inventory represents investment that’s not yielding returns. Money tied up in unsold inventory could have been better used elsewhere in the business.
- Storage costs: Storing products costs money, whether in a warehouse, retail store, or other storage facility. Dead stock takes up space you could use for products that are selling well.
- Depreciation and obsolescence: Products lose value over time. This is especially true for trendy or seasonal items, and for tech products that become outdated.
- Risk of damage or expiry: Unsold products are more prone to getting damaged, becoming obsolete, or even expiring if they have a limited shelf life. This devalues the stock even more.
- Opportunity cost: Dead stock could have been used to purchase inventory that sells well. Your bottom line could have been higher if the investment had been made in better-performing stock.
- Negative impact on cash flow: Dead stock can negatively impact cash flow, leaving less capital for other important areas such as business expansion or marketing.
- Impacts business analytics: Dead stock makes it difficult to analyze inventory turnover rates and sales forecasting, which hinders strategic planning. For example, Overestimating demand could lead to dead stock, reinforcing a vicious cycle.
Dead stock costs
Let’s look at an example of why eliminating dead stock is important. Say you run a small clothing boutique and ecommerce store.You bought 200 designer winter coats at the start of the winter season for $100 each, an investment of $20,000. You were hoping to sell these coats for $200 each and make $40,000 in sales, which would be a net profit of $20,000 (excluding other expenses).
However, now it’s the end of winter and you’ve only sold 100 coats, with 100 coats as dead stock. This is now $10,000 worth of stock that’s tied up in inventory that isn’t selling.
- That’s $10,000 you can’t use to invest in spring collections, pay employees, manage utilities, or invest in marketing activities.
- You also have to find a place to store the unsold coats. Say you have to spend $200 per month on storage, that’s $1,600 for eight months of storage.
- If the coats aren’t in style next winter, you’ll have to sell the coats at a steep discount, say $75 each, which would only recoup you $7,500 of your initial $10,000 investment.
In general, the money associated with excess stock could have been spent elsewhere. Maybe you didn’t have the capital to offer a brand new spring collection, so you missed out on the profits from those sales.
Causes of dead stock
Here are some reasons dead stock inventory occurs:
- Overbuying or overproduction: You can purchase or produce too much stock, anticipating a higher demand than actually occurs. If you have poor sales, you’re stuck with dead stock and lower profit margins.
- Poor inventory management system: Without effective systems for tracking and managing inventory, you’ll end up with poorly managed lead times and reorder points. This leads to over ordering and the accumulation of dead stock.
- Trends and seasonality: If you sell trendy or seasonal products, you can end up with dead stock when consumer tastes change or a season ends.
- Product quality issues: If your product has a defect or doesn’t meet consumer expectations, it may fail to sell, turning into dead stock.
- Inaccurate market forecasting: Incorrectly predicting consumer demand for a product can result in surplus inventory.
How to avoid dead stock
If you don’t want to deal with dead stock in the first place, consider doing the following:
- Use inventory management software to alert you to issues, so they can be addressed in a timely way.
- Order smaller quantities when offering new products until you know how they perform, even if the per unit cost is higher.
- Survey customers to learn what other products they want.
- Base new product offerings on industry and customer research rather than intuition or personal interests.
- Set reorder points to ensure you request the correct order quantity and prevent overstocking.
How to get rid of dead stock
While some dead stock will need to leave storage in a garbage truck, there are ways to recoup some of the initial investment.
- Sell dead stock to close-out (like eBay) and liquidation retailers
- Donating to charity in exchange for a tax write-off
- Giving it away as a free gift with purchase
- Product bundling
- For apparel, selling dead stock to consignment stores
- Have a clearance sale and sell SKUs for cheaphttps://www.shopify.com/blog/what-is-dead-stock