How To Decide If/When To Discount A Product [Talkin’ Finance With Steve Bailey]
Do you have a financial-related question about your garden center? Send it to financial expert Steve Bailey at [email protected].
Question: If a garden center is headed into summer with an excess of inventory such as woodies or pottery, how do you determine whether it’s better to discount to move the product rather than holding it to (hopefully) sell it for full price in the fall? This assumes that it’s seasonally appropriate in the fall as well — let’s say it’s maple trees, for example.
Larry Hurley, Behnke Nurseries, Md.
Answer: Since my ballgame is the financial side, let’s begin with the factors that have to be weighed on their own merit according to your circumstances.
The one question that cannot be measured in a calculated ratio is one of visual value. After sitting in your sales yard over the course of a hot summer (or cold winter), will it still have the visual appeal of a fresh-dug and newly-arrived maple? Or how about the fertilizer that has been exposed to UV rays to the point that the label is now faded, hard to read and generally unattractive? I think we all know the verdict on this: strike one for holding the product over.
But take that pottery or any other hard good that isn’t living or subject to sun fade. With these, you can dust or spray it off, and it looks as good as new. Does this justify holding on to inventory to the next season?
For the black and white answer to that question, consider the carrying cost of inventory at 29 percent annually. This carrying cost includes the cost of money in the form of line of credit, the lost opportunity cost of money invested in inventory, labor costs for shuffling merchandise around during this period, inventory obsolescence, shrink and facility/warehousing costs. When you factor in all the costs associated with carrying over leftover inventory, you can see it is sizable.
Of course, the 29 percent quoted above is for 12 months. That’s still roughly 14.5 percent for six months, and 7.5 percent for three months. With line of credit coming in less than the three-month cost of carrying inventory, is it really worth paying those costs to hold over plants that are looking frazzled from the heat or a hard good that is faded and appears aged?
Buy it to sell it during the season in which it is paid for and in demand. Manage overstocks before or during peak season so you can discount the inventory while you still have customers coming through the door. Otherwise, those maple trees will still be there the next season, like it or not.