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Retail Inventory Glut Is About To Get Ugly

by Ozva Admin

The retail industry entered the crucial fourth quarter of 2022 overwhelmed by the same inventory imbalance that greeted it in the first quarter, with additional prospects for subdued holiday sales and an anemic first half of 2023.

“I hesitate to call it a bloodbath,” Urban Outfitters CEO Richard Hayne. recently told analysts. “But it’s going to be ugly in terms of the number of discounts and rebates.”

The latest notable victim is Nike, considered one of the best-managed brands in the apparel category. Nike gear had been hard to find in early 2021, as new merchandise was docked in containers offshore.

Meanwhile, consumers in lockdown, flush with pandemic stimulus payments, began to come out of their pods to buy exercise equipment and leisure sportswear. Nike placed its manufacturing orders betting that strong demand would endure.

Now the company joins the long list of heavy hitters hit by supply chain disruptions with a flood of products arriving after the season that had to be put into storage. The company recently reported a 65% year-over-year increase in North American inventories and an 85% increase in its in-transit portfolio. The company said it is taking “decisive action” to clear its shelves and is cutting orders for the future.

Big box retailers like Walmart and Target have been talking about inflated inventories since the second quarter, when they reported increases of 32% and 43%, respectively. More broadly, the Census Bureau’s retail inventories-to-sales ratio had hit a three-year high in July, just before the pandemic shutdown began.

This problem is sometimes described as the “bullwhip effect,” a magnified wave of demand traveling through the supply chain.

As brands increased their orders, distributors took a cue and followed suit, leading manufacturers to increase their volume, and so on. Like a snake that just swallowed a frog, it’s a lump that will take a while to digest.

A notable exception has been Macy’s. According to a report in The Wall Street Journal, the company detected “cracks in purchasing trends” in data collected from its credit card transactions and reduced its merchandise orders. The company’s chief financial officer, Adrian Mitchell, said that, unlike in previous years, “we don’t have the inventory to pack.”

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 just around the corner when traffic is at its peak. That said, it will be imperative that retailers and brands either set the first markdown or promotional price or prepare for a tough year-end and reporting season.

Add to those acres of warehouses filled with unpackaged goods 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 the rate in 2019, according to the National Retail Federation and Appriss Retail, a firm software analysis.

The NRF estimates that last year’s profits translate to $761 billion in lost sales, more than the US Department of Defense’s annual budget.

All this excess merchandise plus a staggering rate of returns last year point to challenges ahead. It is clear that retailers and brands need a pricing solution that can help them set their promotions well and be prepared for changes in demand or are intended to recreate the “whip” and feel its effects.

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