The Excess Inventory Challenge

In a 2021 blog post, the online retail platform company Shopify describes e-commerce returns and the excess inventory buildup that they cause as a ‘disease.’ A strong diagnosis. However the numbers do back it up. According to the National Retail Federation, US consumers returned products worth $428 billion in 2020 alone with the expectation for that number to climb in coming years. No wonder Shopify went on to explain the returns disease as one that “aggressively attacks profit margins, guts conversion rates, and ultimately threatens your business.”

This is the flipside of the growing boom in online retail. While this exodus away from in-person commerce has saved many under-pressure brick-and-mortar retailers, the unprecedented volume of returns has led to new headaches. But returns are not the sole cause of skyrocketing inventory costs. The pandemic also caused considerable supply chain disruptions leaving manufacturers with out-of-season unsellable merchandise. Social factors too are changing the landscape. Consumers are becoming more environmentally conscientious. Many react negatively to companies that take low-cost shortcuts—like sending unwanted stock to landfills for disposal.

These factors are combining to create an inventory crisis for a growing number of companies. And the problem is not just cost, but wasted man hours and storage space.

Fortunately, there is a way to beat these challenges. Here we’ll explore the current state of liquidation and reverse logistics, examine the factors that are forcing companies to confront this crisis, and see how innovative new practices are offering a pain-free and profitable way forward.

What’s Causing the Excess Inventory Crisis?

In the US alone, the market for liquidated goods doubled between 2008 and 2020 to hit $644 billion according to data from Colorado State University. The data reflects the growing consumer demand for (and acceptance of) products sold through the secondary market.

This is undoubtedly a positive trend—not the least because a circular economy is better for the environment—but it raises a few questions: Where are these $644 billion in goods coming from? What factors are bringing so much excess stock to the market?

We can summarize them as follows:

1. Returns

According to the UN, online retail as a proportion of all retail rose from 16% to 19% in 2020 alone. E-commerce is becoming just commerce. This shift in consumer behavior has undoubtedly changed the dynamic around returns. Online shoppers now expect free and unlimited returns. Unsurprisingly, e-commerce return rates are as much as three times higher than those at brick-and-mortar stores.

Sheer convenience aside, there are good reasons for this jump in return rate. Online shoppers face several possible problems such as quality issues, wrong size or fit, slow shipping, receiving the wrong order, finding a better deal after purchase, or most common, buyer’s remorse. Because of this, the retailer ultimately has to deal with massive quantities of returned inventory. For many, this is a new and costly part of doing business. Here are the key issues:

• Retailers have little control over the flow of returns making planning difficult.
• Returns demand coordination of multiple teams, but 58% of retailers admit no one person owns the process.
• Companies may not know the exact volume or breakdown of returns by category and cause.
• A dedicated returns process requires transportation, space, and scanning and sorting tools.
• All goods have to be opened and checked before repackaging.
• Returns need an inventory management system to track products through their reverse logistics journey.
• All of this requires human power, but finding staff is a challenge given unpredictability and seasonality.

2. Overstocking, Missed Forecasts, and Seasonality

The right amount of stock to manufacture, order, and hold is an important question that often leads to surplus goods. Companies may simply underpredict customer demand. Others overstock out of a fear of underpredicting. Industry estimates suggest out-of-stocks (OOS) cost retailers $1 trillion every year. No company wants to be left with bare shelves and unsatisfied customers. The problem of overstocking varies by vertical. For example, apparel companies have to deal with seasonality and the complication of multiple clothing sizes, while the food industry has perishability and sell-by dates to consider.

A 2020 survey by Gartner found that only 45% of sales leaders have high confidence in their organization’s ability to forecast accurately. This indicates that companies base their projections on intuition rather than substantiated data.

3. Supply Chain Issues

Problems in the supply chain are nothing new. But in the era of outsourced, globalized production and just-in-time manufacturing, disruption is more of a risk than ever. Needless to say, the recent pandemic delivered the most profound reminder of supply chain fragility. Facility closures, port backups, labor shortages, and aggressive inflation caused logistics costs to spike conspicuously in recent years with overall logistics prices at the end of 2021 up 14% from the previous year.

But the pandemic is just the latest in a long history of “outlier” disruptions. In 2011, for example, a tsunami in Japan knocked out the world’s top producer of advanced silicon wafers. It’s also been estimated that 40 US weather disasters in 2019 alone caused damages exceeding $1 billion each. Alongside extreme weather events, there are newer threats such as cyber attacks and data breaches.

Finally, companies face supply chain delays thanks to complications such as changes in international trade agreements, product recalls, and accidents.

The Cost of Doing Nothing

Despite getting the goods back, businesses don’t break even, but rather incur further loss on their returns. Here are three reasons why:

1. Storage Costs

The most immediate and visible impact of unsold inventory is storage. This costs money in the form of transportation, warehouse rent, utilities, security, etc. What’s more, selling overstocked goods requires more time and energy because of the need to re-package, offer discounts, and so on. Excess inventory also carries an opportunity cost, taking the place of new products that will likely sell better.

2. Tied-up Cash

Until it’s liquidated, unsold inventory represents an investment that cannot be recovered. Loss compounds over time when cash value sits in warehouses—and degrades—when it should be financing new product launches.

3. Product Expiration

In some sectors, stock comes with a ticking clock, the most obvious example being food. But even industries such as consumer electronics and apparel are time sensitive, as product upgrades and shifting fashion trends quickly devalue aging unsold stock.

The expensive reality is that the return challenges facing suppliers isn’t going anywhere. Free, no-questions-asked returns are the new normal. One in three repeat consumers say they would abandon a retailer if they had a “difficult” returns experience. It explains why, according to a McKinsey study, 83% of retailers identified returns as an ongoing threat to their overall profitability.

Doing nothing is not an option. Thankfully there are a growing number of channels available to retailers and manufacturers that are prepared to face down the challenge.

Options for Moving & Monetizing Excess Inventory

Excess inventory, rising returns, supply chain disruptions, changing seasons and missed forecasts are facts of life for modern businesses. The question for retailers and manufacturers is what to do about it.

The easy option is liquidation, but it’s a blunt instrument. Liquidators often pay just pennies per unit, and they occasionally sell to other liquidators. Because of this, brands have little control over the ultimate destination of their goods. Sending goods to landfill or the incinerator is even worse, offering zero return and bad optics to sustainability-conscientious consumers. Donation offers a more ethical and sustainable alternative, but still one that adds on to costs.

Resale is the ideal option as long as the process offers good recovery, high speed and scalability, and provides a degree of brand and channel control for the seller. Options include referral programs, flash sales, internal employee discounts, refurbish programs, outlets and factory stores, and bulk liquidation.

The B2B auction is another popular way to match sellers and buyers. In the consumer space, the online auction concept is well-established; think eBay, Mercari or Rakuten. Today, companies like B-Stock offer auction marketplaces that are tailored specifically for the needs of enterprise sellers and buyers. The unique benefits of online B2B auctions include:

• Quick, consistent clearance of unsold stock at fair market price
• Lower workload and automated sales processes
• Comprehensive tracking and valuable historical data
• More control over resale channels and vetted buyers

The Next Phase of Excess Inventory Management

For any company grappling with the challenge of excess inventory and returns, it clearly makes sense to work with a third party recommerce specialist. Outsourcing one’s liquidation processes reduces the human hours needed to handle excess stock, frees up warehouse space and, of course, recovers more cash value.

As we have suggested, there are multiple channels through which a supplier can recycle its unsold stock. But can the process of outsourcing go further? Is it possible to develop a partnership? An increasing number of retailers and manufacturers believe so. More frequently than ever, they are turning to recommerce specialists as advisors—rather than just hiring liquidators to clear their warehouse of excess and returned stock.

Recommerce specialists advise in areas such as:

• Valuing the stock accurately
• Determining the best channel for resale
• Developing viable metrics to gauge success

With a sole focus on recommerce, a specialist can offer superior selling insights, helping you achieve better reverse logistics outcomes and enabling your organization to focus on its core competency and win.

Ready for a Strategic Partner?

Excess inventory presents a major challenge for retailers and manufacturers as consumer returns and other factors add pressure on overstocked warehouses. But on the flipside, resellers and consumers are happier than ever to purchase secondary market products and support a growing circular economy. As a result, there is now a genuine opportunity to turn unsold inventory into cash while maximizing operational efficiency and saving precious space and time.

As a leader in the secondary market, B-Stock can help your organization develop, execute and continuously optimize an ever-evolving strategy for managing your returns and excess inventory while making the most profit from it.

To learn more, contact us today.