Ways to Optimise Retail Inventory & Overcome Excess Stock

Ways to Optimise Retail Inventory & Overcome Excess Stock

Written by Aqilah ZailanJanuary 15, 2021

Ways to Optimise Retail Inventory & Overcome Excess Stock

The threat of a retail inventory crisis still looms over the industry as no one can say for certain when the Covid-19 pandemic will end. For many, excess stock has been an issue since last year, when retailers had exceeding amounts of products while demand plummeted. The supply chain crisis also left Spring inventory stuck in production or at warehouses, depleting brands’ sales and hurting their bottom lines. Excess stock from Spring/Summer 2020 is estimated to be worth €140 billion to €160 billion worldwide.

Most of us are still walking on eggshells, tethering on the razor-thin line between adequate inventory levels and the current demand. In a crisis climate, the conservative approach is best at limiting losses. Carryover inventory from last spring need not go to waste now that the opportunity to launch them as new products while minimising overstock risk is here. 

Due to the cyclical nature of trends, most spring products from last year are still relevant in 2021 depending on the stages of the trend cycle. Retailers can better prepare for launches by monitoring the market for emerging or diminishing trends. This way, backed retail inventory can be spread out across several launches as demand increases. Not only can retailers avoid overstocking, they can also save on buying capital and improve their bottom lines.

Apart from excess retail inventory, aged stock leaves retailers liable to reduced margins. Staying on top of problem areas within the inventory will be crucial to address risks before it is too late.

Constantly Monitor Retail Inventory

In order to act quickly, retailers need full visibility on the inventory segmented by age to spot issues before they get out of hand. Being able to swiftly examine the current stock leaves less room for errors and a comprehensive analytics platform like Omnilytics fits the bill. Additionally, a wider view of the market allows retailers to compare against their competitors and understand their strengths and weaknesses.

Manage retail inventory by monitoring yours and your competitors' product ageing
Ageing analysis of Zara and H&M. Source: Omnilytics

Compared against H&M, Zara has healthier stock levels as most of its products are concentrated in the 1-30 days range. Ideally, the amount of product diminishes with each ageing bracket. However, the fast fashion giant has more products aged over 120 days than its main competitor. The general rule of thumb for fast fashion is to sell products within 60 to 90 days. Anything over 90 days should be dealt with immediately as they lose value each day.

Analyse product ageing by category to maintain healthy retail inventory
Zara’s product ageing by category. Source: Omnilytics

There are two factors that indicate poor category performance, sell-out rate and product ageing. Analysing Zara’s product ageing by category, dresses make up its core collection but registers a lower sell-out rate than others. The concentration of new products against the aged stock is also off-balance, as there are more SKUs over 120 days old than there are in the 1-30 days ageing bracket. This is a clear example of a red flag within a retail inventory and indicates that immediate action is required to stabilise it.

Deploy Smart Discounting

To accurately spot slow-sellers, a high-level overview is insufficient. Retailers must dig deeper to at least by subcategory if not at SKU level to identify patterns in poor performing products.

Retail inventory: product ageing by subcategory
Zara’s product ageing by subcategory. Source: Omnilytics

Retailers can identify the direst subcategory with the same method used to spot a risky category, by observing the sell-out rate and product ageing. In this example, shift dresses can be deduced as a high-priority subcategory as most of the products have been trading for over 120 days with low sell-out. When products are segmented by ageing, retailers can easily determine where they fall on the staggered markdown cycle.

Staggered markdown method
Markdown cycle of items following the staggered markdown method.

In a staggered markdown approach, the depth and timing of markdowns are determined by the length of time the products have been in stock. Selling inventories that are 3-4 months old at full price is best to maximise profit. Anything that exceeds that timeframe should be discounted at increasing depth intervals until stocks are cleared.

Zara's retail inventory consists of slow sellers in the dresses category
Zara slow-sellers under shift dresses. Source: Omnilytics

A granular analysis of slow-movers provides insights to carry into the next season planning or to inform dynamic pricing strategies. Data-driven Zalora prides itself in its algorithms derived from retail data that helps the e-tailer determine when products need to be discounted and at what rate according to the current demand. Downtrending categories and stagnant sell-out rates are some of the key indicators that retailers must pay attention to in demand-led smart discounting.

Back Markdowns with Creative Promotions

Discounts are not likely to fulfil its purpose of driving sales with minimal exposure and promotion. Investing in creative promotions to boost conversions is a more cost-effective way of maintaining healthy retail inventory levels than deep discounts and new launches.

Limited time offers are an effective way to encourage purchases while limiting the loss of margin. The time crunch pressures consumers to buy the items they want while promoting different items during each cycle allows retailers to determine the best-selling product attributes for better targeting.

Another promotional tactic that is often used to clear stocks is curated edits revolving around themes like back to school or stay at home. In the new year, consumers are revisiting their resolutions that include fitness goals. This signals an opportunity for retailers to leverage with fitness edits.

Boohoo activewear edit
Boohoo activewear edit. Source: Boohoo

Boohoo was quick to jump on the opportunity by pairing its activewear edit with compelling messaging to drive conversions, touching on relevant events like home workouts and the new year. The right messaging and images can greatly influence purchase decisions. Boohoo took this a step further by optimising its website with creative visual merchandising.

Boohoo visual merchandising. Source: Boohoo

The power of visual merchandising should not be underestimated, especially on e-commerce sites. Displaying product images according to well-planned themes captivates consumers and encourages them to stay longer on the website. The longer the view page duration, the more likely are consumers to purchase products. Boohoo’s creative use of colour coordination for each row of products on its website sets itself apart from other brands and creates a memorable experience for its customers.

Key Takeaways

Excess retail inventory is inevitable but how you pre-empt and manage stock movement has a huge impact on your bottom line.

Monitoring inventory levels consistently provides retailers with some leeway for action and having access to real-time data enables that. Advanced analytics gives detailed insights on individual product demand and localised seasonality, which allows businesses to be proactive and move excess stock with markdown activities.

With complete visualisation and some elbow room, retailers can effectively plan their next steps and prevent losses.

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