Why Is There More Overstock Inventory During A Recession?

what is a recession

Our current economic slow-down might not be an official recession yet, but small businesses are already feeling the pain all over the US and abroad. As the business cycle continues to trend down due to the Fed tightening, closeouts become more prominent and overstock inventory will be something we all have to deal with. All the major retail chains have been selling old inventory to liquidation buyers, so there is no reason to think mom and pop distributors won't be affected the same way. Technically a recession is two quarters of negative economic growth and, of course, small businesses will know long before the economists that revenue is down, supplies are more expensive, and uncertainty is high. It seems the Fed and our government has no idea how to combat this and liquidation buyers may be the only businesses with anything to look forward to. Companies that buy overstock inventory are often called closeout buyers, excess inventory buyers or surplus dealers. These outfits specialize in helping businesses reduce inventory when they have too much merchandise that isn't selling. What are some time-tested strategies for making sure your small business stays healthy throughout the slow-down?

Economic slow-downs can be an opportunity to take a step back and evaluate and renew your business. Information gathered from customer feedback, cash flow analysis, and reviewing your goals may uncover new opportunities for you and for your business. If you are in the discount store or closeouts business you may find downturns offer an opportunity to search out new customers looking for deals on overstock inventory and excess inventory. Keep in mind, aggressive liquidation buyers will always have a budget to spend on goods below cost including closeout housewares, closeouts of toys and sporting goods, excess stock of lawn and garden closeouts and more. Update your business plan with the new information. Take inventory of your processes and procedures, assess your equipment and supplies, and prepare for the future. Business conditions are always changing, and by evaluating your business in light of the new conditions you can make better decisions about the future of buying and selling closeouts. No one knows how long the slow-down will last or how mild or severe it will be. The rules for surviving and thriving remain the same regardless of what the future holds. Concentrate on selling closeouts and overstock inventory or discontinued merchandise where you can buy goods at 50% off regular cost, or even less.

With recessionary winds whirling, many small business owners have already cut back and are selling old inventory, but more trimming may be needed to weather the economic storm that’s brewing. Closeout websites offer consumers an alternative to purchasing regular goods on Amazon or in retail stores. National discount chains like Dollar Tree, Ross, Burlington, Dollar General and Costco give consumers deals on excess inventory, liquidation products and discontinued merchandise. In difficult times like these, closeouts become more important to both wholesale distributors and consumers because they have less discretionary income to spend. U.S. economic growth fell 0.9% in the second quarter, the Bureau of Economic Analysis reported on Thursday, the second consecutive quarter of negative GDP. That will ratchet up fears that the economy has entered a recession, though it is not technically an accepted definition for that change in the economic cycle. Fed Chair Jerome Powell said on Wednesday he did not think the economy was in a recession but small businesses are shutting down 3PL warehouses and downsizing warehouses indicating harsh times ahead.

Some small businesses have already been paring back, based on signals of a slowdown. If a business has too much inventory on hand they may downsize their warehouse or shut down operations entirely. Many Amazon sellers are shutting down FBA accounts due to slow sales and high storage costs. Liquidation buyers have been busy purchasing overstock inventory, closeouts and liquidation inventory from distributors and importers who are seeing slow sales and order cancellations. A report released Thursday by the finance automation platform Ramp found that small business spending on electronics dropped by 59% between May and June. Many small businesses spent 28% less on shipping, 14% less on advertising and 11% on SaaS and software purchases over the same time period, the report showed.

During a recession, it’s even more critical for sales teams to focus on current clients. It can cost as much as five times more to find a new client than to retain one. Selling closeouts is one of the easiest ways to keep you inventory levels in check and keep them from growing out of control. Selling old inventory is like converting dead stock into cash so you don't have old inventory sitting in the warehouse. Companies that buy overstock and excess inventory can help you by purchasing old merchandise that is either selling too slowly or not selling at all. Also consider that the probability of closing business with an existing customer is 60-70%, while the likelihood of closing a deal with a new prospect is between 5%-20%. In an economic downturn, it can be the death of a sales quarter or even a year by losing a high-value client, and even more challenging to make up the deficit in a slow economy. Most sales organizations spend only 18% of the time on retention/client relationships versus 44% on new customer acquisition. Also, if you sell surplus merchandise to a new account at a loss, they will likely do well with the stock because they are buying it below regular import cost. They can sell it to closeout buyers, overstock distributors or other discount liquidators of inventory.

Account planning meetings can yield surprisingly great results with additional insight and increased collaboration from the broader engagement team. Often, customer service or project leaders have more frequent communication with a client after the sale and can offer valuable information that could otherwise go unnoticed without a monthly account planning meeting. It also helps to periodically review dead stock and slow moving inventory to figure out what you need to get rid of. Closeout liquidation companies may be a good outlet for you if you are shutting down a warehouse or downsizing warehouses. It might take additional time to initiate the first liquidation sale, but they require minimal effort, and the reward always outweighs the effort.

Recessions don't affect everyone the same way. "If your neighbor gets laid off, it's a recession. If you get laid off, it's a depression," Harry Truman once said.1 The same could be said of the effects of a recession on businesses large and small. And while recessions can have disparate effects for different companies, some of the hardships are predictable based on the type and size of the business. A small consulting firm might experience cash flow issues as clients delay payment on invoices, while a Fortune 500 corporation may be able to save money by cutting jobs and extracting better terms from suppliers. They might also liquidate dead inventory or overstock inventory to reduce overhead. Understanding how an economic downturn may affect your closeout company or liquidation business can help ensure it won't become one of the casualties having to shut down your business during the next recession.

U.S. small businesses have impressive numbers in the aggregate. Defined expansively as those with fewer than 500 employees, they accounted for 43.5% of U.S. GDP in 2014, though that was down from 48% in 1998.3 Those with fewer than 100 employees still accounted for 30% of U.S. wages and 35% of employment from 2012 through 2016. Many small business fail due to having too much inventory and not enough cash. This is another reason liquidating inventory is so important to the bottom line. Surplus merchandise sitting in the warehouse is dead weight and does not help anything. It is best to eliminate dead stock and get rid of inventory taking up warehouse space needed for new merchandise.

Those figures shouldn't obscure the fact that most small businesses are tiny. Nearly 40% had revenue below $100,000 and more than 70% generated sales below $500,000, according to Internal Revenue Service (IRS) statistics from 2013. Just 20% of the 29.6 million small businesses counted by the U.S. Census Bureau were employers.5

This lack of scale leaves the vast majority of small businesses with less of a financial cushion, market power, and leverage within their industry to weather the tough times a recession brings. Most companies that get themselves into trouble have overstock inventory that isn't selling or they get stuck with canceled orders customers determine they cannot use due to slowing sales or having too much inventory.

Lenders know that. They are likely to be less enthused about lending to a closeout business without significant cash reserves and capital assets that can serve as collateral during periods of heightened uncertainty and business risk associated with recessions. During challenging times importers may reduce inventory by shutting down Amazon stores or closing 3PL warehouses to save money on storage. Selling dead stock can be one of the best ways to reduce inventory and make more room in the warehouse.

Merchandise USA is a wholesale closeout liquidator that buys overstock inventory of all categories. If you want to sell excess inventory of toys, housewares, lawn and garden closeouts, overstock pet products or any other excess inventory we can help. We also buy Amazon FBA stock if you are shutting down a business or downsizing your warehouse and reducing inventory.