Stockouts and overstock are usually treated as opposite problems, one for the sales team and one for the warehouse. In fact they are the same illness: goods in the wrong place at the wrong time. And for a retailer with several stores they cost far more than the income statement suggests, because the largest part of the damage never shows up on any line of the accounts. Sales you never made leave no accounting trace, and capital sitting on shelves looks like an asset until it turns into a discount.
In this article I try to put a price on both, with a formula any business owner can apply to their own data in an afternoon.
What stockouts and overstock cost retail
Let's start with the scale of the problem. According to industry estimates of what is called inventory distortion, in 2025 stockouts and overstock cost global retail about 1.73 trillion dollars, equal to 6.5% of worldwide retail sales. Of that, about 1.157 trillion is sales lost because the product wasn't there, and about 572 billion is the cost of surplus cleared through deep discounts.
The figure that interests me most isn't the total but the proportion. Two thirds of the damage comes from empty shelves, which is exactly the part the accounts don't see. Surplus stock sooner or later reveals itself, in a sale or a write-down. A customer who walks in, can't find their size and walks out doesn't even leave a receipt to analyse.
The cost of a stockout: the lost sales formula
The cost of a stockout isn't the price of the missing product. It is the margin that sale would have brought in, plus the value of the customers who, after one disappointment too many, stop coming back.
The basic formula is simple. The cost of a stockout equals unserved demand, multiplied by the share of customers who won't accept a substitute, multiplied by the contribution margin. On top of that comes a second part, harder to estimate but often heavier: the number of customers you lose altogether, multiplied by what they would have spent in the following months.
The share of customers who won't substitute varies enormously by category. In apparel and footwear, where size and colour are not negotiable, it is high. In everyday consumer goods with plenty of alternatives it is lower, but there the risk is that the customer discovers a competing brand and never switches back. That is why the first job isn't technological: it is estimating, category by category, how willing your customers are to settle for something else.
The cost of overstock: idle capital, markdowns and disposal
Surplus stock has a more visible cost, but an underestimated one, because it is spread over time. There is the tied-up capital, which could fund something else or simply reduce debt. There is space, insurance, handling and the risk that the product ages. And in the end there is the markdown, the moment when a buying mistake becomes lost margin.
For anyone selling fashion in Europe there is now one more reason to take this seriously. Since 19 July 2026 the EU ecodesign regulation has banned large companies from destroying unsold apparel, clothing accessories and footwear, except under specific derogations, and requires them to disclose what they discard and why. Medium-sized companies will fall under the same ban in 2030. In plain terms: the last exit for surplus stock is closing, and extra stock will have to be sold, donated or reused, with recycling allowed only under the derogations, at a cost either way.
More stores, more waste: the multi-store paradox
Here is the point that matters to anyone with more than one store. In a chain it is perfectly normal to have, on the same day and for the same item, a stockout in one store and a surplus in another thirty kilometres away. The company-wide total looks right, and that is exactly why the buying team often doesn't see the problem. But customers don't buy the company total; they buy what they find on the shelf in front of them.
Every additional store multiplies the chances of error, because demand fragments and becomes less predictable store by store. Two stores with similar demand never sell at the same pace, and you pay for the difference twice: with the lost sale where stock is missing and with the discount where it is left over. That is why a multi-store retailer that only looks at total stock is looking at the least useful number it has.
The solution has three ingredients, and none of them is exotic. You need to see the real stock in each store in near real time, not at the end of the month. You need to be able to move goods between stores, or sell online what is sitting idle in a shop. And you need to reorder based on what each store sells, not on the chain average. That is why, in my view, a retail project starts by unifying catalogue and stock data, and only then moves on to forecasting and automation: without reliable data for each store, any algorithm optimises the wrong thing.
The full stock cost formula for a multi-store retailer
Putting the pieces together, the annual cost of stock distortion can be written like this. Total cost equals margin lost to stockouts, plus the value of lost customers, plus the carrying cost of surplus, plus margin lost in markdowns, plus any disposal costs.
Let's take an example with hypothetical, deliberately round numbers. Picture a retailer with ten stores and eight million euros in annual revenue. Suppose 4% of demand finds an empty shelf and 40% of those customers don't choose an alternative: that is 128,000 euros in lost sales. With a 40% contribution margin, that is 51,200 euros of margin that never comes in. Now suppose average stock of two million at cost, of which 400,000 euros is more than needed, and an annual carrying cost of 20%: another 80,000 euros. Add 60,000 euros of margin burned in sales to clear the surplus. The total comes to 191,200 euros, almost 2.4% of revenue, without counting the customers who don't come back.
Now the comparison that matters. For a company that closes the year with a net profit of 3 or 4% of revenue, those 191,000 euros are worth between 60% and 80% of annual profit, gained or lost. And the figure is conservative, given that worldwide the same item weighs 6.5% of sales.
What changes before the year-end peak
The time to run these numbers is now, before Black Friday and Christmas. This autumn's signals all point the same way. In the United States, retail sales in August grew by almost 1% in value but units sold fell by 1.7%: people are spending more because prices are rising, not because they are buying more. A survey of 661 inventory professionals found that 40% fear more than 10% of their stock could become unsellable, and nearly one in four admits to overbuying for fear of running out.
It is the classic reflex: to avoid a stockout you inflate the order, and you swap a visible problem for one that will arrive in January in the form of markdowns. A European retailer planning its year end would do well to ask, store by store, where it bought out of fear and where it is genuinely at risk of running short.
My position
I believe stock management is today the most neglected margin lever in physical retail. There is plenty of debate about prices, promotions and new channels, and much less about the fact that an average chain loses every year a share of revenue comparable to its profit simply because goods are not where they are needed. Before opening one more store or buying forecasting software, I would measure what stockouts and overstock really cost in the stores I already have. Those who do almost always discover that the margin they were looking for elsewhere was already in their stockroom, in the wrong place.
CEO & Co-Founder of BusinessLabs. I have attended major international trade shows since 2015 and share here experiences and insights for online sellers.
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