Retail Inventory Glut Is About To Get Ugly

The retail industry kicked off the crucial fourth quarter of 2022 weighed down by the same inventory imbalance that greeted it in the first quarter, with the added prospects of subdued holiday sales and an anemic first half of 2023.

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

The latest casualty of note is Nike, considered among the best-managed brands in the apparel category. Nike gear had been hard to find at the start of 2021 as new merchandise was anchored in containers offshore.

Meanwhile, cooped-up consumers, flush with pandemic stimulus payments, began emerging from their pods to purchase exercise equipment and athletic leisure wear. Nike placed its manufacturing orders betting that the robust demand would endure.

Now, the company joins the long list of heavy hitters tripped up by supply chain disruptions with a flood of goods arriving post-season that had to be warehoused. The company recently reported a surge of 65% year-over-year in North America inventories and a spike of 85% in its pipeline of goods in transit. The company said it is taking “decisive action” to clear its shelves and is trimming orders for the future.

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

This problem is sometimes described as the “bullwhip effect,” a magnified ripple of demand that travels up the supply chain.

As brands boosted their orders, distributors took the cue and followed suit, prompting manufacturers to bulk up, and so on. Like a snake that just swallowed a frog, it’s a bulge 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 spotted “cracks in shopping trends” in data collected from its credit-card transactions and pared down its merchandise orders. The company’s finance chief, Adrian Mitchell, said that unlike past years, “We don’t have the inventory to pack away.”

It is clear that the industry is going to have to work its way through all this inventory, but the good news is the holiday season is just around the corner when traffic is at its peak. That said, it will be imperative that retailers and brands set the first markdown or promotional price well or set themselves up for a difficult end of the year and reporting season.

Add to those acres of warehouses filled with unpacked goods billions of dollars’ worth of 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 software analytics firm.

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

All this excess merchandise plus an astonishing rate of returns last year point to challenges ahead. It is clear retailers and brands need a pricing solution that can help them set their promotions properly and be ready for demand shifts or they are destined to recreating the “bullwhip” and feeling its effects.