Retail Inventory Glut Is About To Get Ugly

– Advertisement –

The retail industry weighed in on the crucial fourth quarter of 2022 from the same inventory imbalances that it greeted in the first quarter, with reduced holiday sales and additional prospects of anemic in the first half of 2023.

“I hesitate to call it a blood bath,” said Urban Outfitters CEO Richard Heaney recently told analysts, “But it’s going to get ugly in terms of the amount of discounts and markdowns.”

– Advertisement –

advertisement

The latest casualty of note is Nike, considered one of the best managed brands in the apparel category. Nike gear was hard to find in early 2021 as new cargo was anchored in containers offshore.

Meanwhile, co-consumers, with pandemic stimulus payments, began to emerge from their pods for exercise equipment and athletic leisure wear. Nike placed its manufacturing orders on the condition that strong demand would continue.

Now, the company joins a long list of heavy hitters torn apart by supply chain disruptions with the influx of goods arriving post-season that had to be stockpiled. The company recently reported 65% year-over-year growth in North America inventory and 85% growth in its pipeline of goods in transit. The company said it is taking “decisive action” to clear its shelves and reduce orders for the foreseeable future.

advertisement

Big box retailers like Walmart and Target have been talking about bloated inventory since the second quarter, when they posted 32% and 43% growth, respectively. Broadly speaking, the Census Bureau’s index of retail inventory and sales ratio hit a three-year high in July, just before the pandemic shutdown began.

This problem is sometimes described as the “bullwhip effect”, an increased wave of demand that travels up the supply chain.

As brands ramped up their orders, distributors took the cue and followed suit, prompting manufacturers to wholesale, and so on. Like a snake that has just swallowed a frog, this is a bulge that will take some time to digest.

Messi has been a notable exception. According to A report in the Wall Street Journal, the company noticed “cracks in buying trends” in data it collected from its credit-card transactions and reduced its trade orders. The company’s head of finance, Adrian Mitchell, said that unlike in previous years, “we don’t have inventory to pack.”

advertisement

It’s clear that the industry will have to work its way through all this inventory, but the good news is that the holiday season is nearing when traffic is at its peak. That said, it will be imperative that retailers and brands determine the markdown or promotional price well in advance or set themselves up for a tough end of the year and reporting season.

Add to that those acres of warehouses filled with packaged goods without billions of dollars in returns. Last year, shoppers returned an average of 16.6 percent of their purchases, up from 10.6 percent in 2020 and more than double in 2019, according to the National Retail Federation and Aprice Retail, a software analytics firm.

The NRF estimates that last year’s return translated into $761 billion in lost sales, which exceeds the US Department of Defense’s annual budget.

All this excess inventory and the amazing rate of return last year point to challenges ahead. It’s clear that retailers and brands need to pricing solutions Which can help them set their hype properly and prepare for a change in demand or they are destined to recreate the “bullwhip” and feel its effects.

advertisement