How overstock, stockouts, and returns cost retail $1.75tn

Retailers succeed when the right products are available at the right time. When they are not, the cost is far greater than a missed sale.

Too much stock locks up capital and often leads to markdowns. Too little stock sends customers elsewhere. Returned products create another layer of transport, handling and processing costs before they can generate value again.

These may appear to be separate operational issues, but they all point to the same underlying problem: inventory distortion.

Inventory distortion describes the gap between the stock a retailer expects to have available and the stock customers can actually buy. It is most visible through overstocks, stockouts and returns, but it is often driven by deeper issues such as inaccurate stock records, poor forecasting, fragmented systems and slow-moving supply chains.

The financial impact is substantial. A landmark IHL Group study published in 2015 estimated that retailers worldwide were losing $1.75tn each year through overstocks, out-of-stocks and preventable returns.

The study attributed $471.9bn to overstocks, $634.1bn to out-of-stocks and $642.6bn to preventable returns.

Those figures are now more than a decade old, but the challenge remains. More recent IHL research estimates that inventory distortion, measured through overstocks and out-of-stocks, will still cost the global retail industry around $1.7tn in 2026, equal to 6.2% of worldwide retail sales.

Returns continue to add billions more in costs. The US National Retail Federation (NRF) estimates that consumers returned merchandise worth $849.9bn in 2025, representing 15.8% of annual retail sales.

These figures should not be combined because they measure different markets, time periods and types of economic impact. Together, however, they tell the same story. Retailers continue to lose significant value whenever products are unavailable, overstocked or returned unnecessarily.

The challenge has become harder to manage as retail has grown more complex. The same product may now need to support store sales, ecommerce orders, click-and-collect services and ship-from-store fulfilment.

Inventory also moves more frequently between suppliers, warehouses, stores and customers than it did a decade ago. Every movement creates another opportunity for data to become inaccurate or demand to change.

This is why inventory distortion has become more than a supply chain issue. It affects profitability, cash flow, customer loyalty and long-term competitiveness. Retailers that understand where value is being lost are better placed to recover it.

Overstock: where inventory distortion begins

Retailers cannot afford to run out of popular products. Equally, they cannot afford to buy more than customers will purchase.

When stock builds up faster than demand, working capital becomes tied up in inventory that is no longer generating value. Warehouses fill, storage costs rise and products often have to be discounted to clear space for new ranges.

In categories such as fashion, consumer electronics and grocery, where products quickly lose value, excess stock can erode margins long before it is eventually sold.

Overstock rarely has a single cause. Small decisions made across forecasting, buying, merchandising and supply chain planning can combine to create a much larger problem.

Long supplier lead times, inaccurate sales forecasts and changing customer behaviour all increase the risk that retailers will order too much stock.

Recent IHL research illustrates the scale of the challenge. It estimates that overstocks account for 34.4% of global inventory distortion, while out-of-stocks account for the remaining 65.6%.

The research also found that almost half of retailers extended purchasing lead times during 2025 in response to tariff uncertainty, increasing advance buying by an average of three months.

Ordering further in advance can reduce the risk of supply disruption. It also reduces flexibility. Consumer demand can change quickly, particularly in markets influenced by seasonality, promotions, weather or social media. Inventory purchased months earlier may no longer reflect what customers want by the time it reaches stores.

For many retailers, this is where the real challenge begins. Overstock is not simply the result of buying too much. It is often the outcome of decisions made months earlier, when information was incomplete and market conditions looked very different.

Technology is helping retailers improve demand forecasting, but forecasting alone cannot solve the problem. Every forecasting model depends on accurate stock data. If retailers do not know what products they actually have, or where they are located, even the best forecasting tools will produce unreliable recommendations.

Reliable stock data has therefore become one of retail’s most valuable operational assets. Modern retailers increasingly manage merchandise across stores, distribution centres and digital channels as one connected stock pool. When records are inaccurate, the effects are felt across the entire business rather than in a single location.

Research continues to demonstrate the commercial value of getting the basics right. A 2025 field study covering around 24,000 stock keeping units across 11 grocery stores found that inventory audits increased overall sales by 11%. The biggest improvement occurred where systems showed products were available even though staff could not physically locate them.

The finding highlights a simple but important truth. Stock only creates value when customers can buy it. Products that exist in a retailer’s system but cannot be found are little different from products that are not there at all.

The challenge does not end with excess stock. In many cases, retailers face the opposite problem at the very same time: customers are ready to buy, but the products they want are unavailable.

Stockouts: the cost of poor inventory visibility

If overstock ties up capital in products customers are not buying, stockouts create the opposite problem. Customers are ready to buy, but retailers cannot meet demand.

The commercial impact is immediate. Sales are lost, customers switch brands or retailers, and loyalty can weaken over time. What appears to be a simple availability problem often has much deeper causes.

IHL estimates that out-of-stocks account for almost two-thirds of global inventory distortion, making them the largest single source of lost value. Yet many stockouts occur even when products are somewhere within the retail network.

A product may still be sitting in a distribution centre when demand has shifted to stores. It may be in a store stockroom but not on the shelf. It may have been allocated to fulfil an online order rather than an in-store purchase. In other cases, the retailer’s system shows stock that staff cannot physically locate.

For customers, these distinctions are irrelevant. If they cannot buy the product, it is out of stock.

This is why many retailers now view stockouts as a visibility problem rather than simply an inventory problem.

Knowing how much stock is available is no longer enough. Retailers also need to know exactly where it is, whether it is available to sell, and how quickly it can reach the customer. That requires accurate data across stores, warehouses, ecommerce operations and fulfilment networks.

As retail has become more connected, inventory has become more mobile. The same product may be sold through a physical store, an ecommerce site, a marketplace or a click-and-collect service.

Stock moves continually between suppliers, distribution centres, stores and customers. Every movement increases the risk that system records and physical stock will fall out of sync.

The challenge is made harder because simply carrying more stock is rarely the answer. Increasing safety stock may reduce some stockouts, but it also increases the risk of overstock, tying up more capital and creating additional markdown pressure later. Solving one problem by creating another rarely improves profitability.

Instead, retailers are placing greater emphasis on inventory visibility. The goal is not to hold more stock but to make better use of the stock already available.

That starts with accurate data. Retailers need confidence that their stock records reflect physical reality. Only then can replenishment systems allocate products effectively and respond quickly as demand changes.

Technology plays an important role, but it is not a cure on its own. RFID, computer vision, automated stock counting and integrated commerce platforms all improve visibility by creating a more accurate picture of available stock.

Their value lies less in generating more data than in improving the quality of the information retailers already use to make decisions.

This is also where artificial intelligence can deliver the greatest value. AI can identify demand patterns, improve forecasting and recommend better stock allocation. However, it can only work with the information it receives.

If stock data is inaccurate, even the most advanced algorithms will recommend the wrong actions.

For international retailers operating across multiple countries and sales channels, this becomes even more important. Inventory decisions are no longer made within individual stores or markets. They are made across connected retail networks where delays, inaccuracies or poor visibility in one part of the business can quickly affect another.

Retailers that consistently outperform their competitors are not necessarily those holding the most stock. They are often those with the clearest view of what they have, where it is and how quickly they can make it available to customers.

That visibility is becoming a competitive advantage. It improves product availability without increasing inventory investment, supports faster fulfilment and helps retailers respond more quickly as customer demand changes.

Yet even when products reach customers successfully, the inventory journey is not always complete. For many retailers, one final challenge remains: bringing returned products back into the business quickly enough to recover their value.

Returns: completing the inventory cycle

If overstock and stockouts prevent products from reaching customers efficiently, returns create the opposite challenge: products that must make the journey all over again.

Returns are often viewed as a cost of doing business, particularly in ecommerce. In reality, they represent one of retail’s most complex operational processes. Every returned item must be transported, inspected, sorted and either returned to stock, refurbished, discounted or disposed of. Until that process is complete, the product generates cost instead of value.

The scale is significant. According to the NRF, consumers returned merchandise worth $849.9bn in the US during 2025, equivalent to 15.8% of annual retail sales. Yet the value of returned goods should not be confused with the cost of returns themselves. Many products can be resold. The real financial impact depends on how quickly retailers can recover their value.

Speed matters because returned products are still inventory.

Every day that a saleable item remains in transit or waiting to be processed is another day it cannot generate revenue. Delays increase handling costs, reduce resale value and weaken stock availability. In fast-moving retail sectors, products may lose value long before they return to the shelf.

Customer expectations add another layer of complexity. Retailers have invested heavily in making returns easier because convenient returns encourage customers to buy with confidence. NRF research found that more than three-quarters of consumers consider free returns an important factor when choosing where to shop, while two-thirds say a poor returns experience makes them less likely to purchase from that retailer again.

Retailers therefore face a difficult balance. Restrictive returns policies may reduce processing costs, but they can also damage customer loyalty. Generous policies support sales, yet they increase the volume and complexity of reverse logistics.

The objective is not to discourage legitimate returns. It is to reduce avoidable returns while processing necessary ones as efficiently as possible.

The most effective way to reduce returns often begins before a product is sold. Clear product information, accurate images, dependable sizing guides and better product recommendations help customers make more informed purchasing decisions.

Preventing an unnecessary return is almost always less expensive than processing one.

Once products do come back, they need to move quickly. Retailers with efficient reverse logistics can return saleable goods to stock sooner, recover value faster and improve product availability across their wider retail network.

This is where returns reconnect with the broader issue of inventory distortion.

Returned products re-enter the same stock pool that supports stores, ecommerce, click-and-collect and fulfilment operations. If returns are processed slowly or recorded inaccurately, retailers may underestimate available stock, reorder products unnecessarily or create the very overstocks and stockouts they are trying to avoid.

The three challenges discussed throughout this article are therefore closely connected. Overstock ties up capital in products customers do not want today. Stockouts lose sales because products customers do want are unavailable.

Returns delay the recovery of products that have already been sold once. Together, they reduce the value retailers generate from every unit of stock they own.

This explains why inventory distortion remains one of retail’s biggest unresolved business challenges. Despite major advances in forecasting, automation and digital commerce, many retailers still struggle to maintain an accurate, real-time view of stock across increasingly complex operations.

The opportunity is not to eliminate uncertainty. Retail will always be influenced by changing customer behaviour, supply disruption and unexpected shifts in demand.

The opportunity is to reduce avoidable inventory distortion through better forecasting, more accurate stock data, stronger visibility and faster decision-making throughout the product lifecycle.

Retailers have spent decades competing on product, price and customer experience. Those will always matter.

Increasingly, however, they may compete just as successfully on something customers never see: knowing exactly where every product is, making it available when demand exists, and recovering its value as quickly as possible when it comes back.

That may prove to be one of the retail industry’s most valuable competitive advantages.