Some retail chains have announced that they will stock unsold items in their inventory as they face sluggish consumer demand and a growing burden of overstocked items.
Retailers – including Kohl’s Corp., Gap Inc., Carter’s Inc. and Target Corp. – said they would store unsold goods with the intention of selling them next year.
This transition from a shortage to a surplus for retailers happened quickly. From the start of the COVID-19 pandemic, shoppers were forced to stay home and stores were forced to close. As a result, retailers had to cancel orders from foreign suppliers.
Retailers faced a shortage due to delays at container ports and factories once economic activity picked up. As a result, retailers have been proactively ordering excess quantities of product to be better prepared for the growing demand.
Nonetheless, inflation-weary consumers cut back on non-essentials and redirected their money to soaring food and gas prices, creating a glut of discretionary items.
Various strategies are used by retailers to get rid of inventory in the least expensive way.
Kohl’s kept up to $82 million in inventory. Carter’s also has a glut of merchandise for sale at retail outlets in another season.
“We are confident that we will be able to integrate our pack and hold inventory with future assortments,” Gap Chief Financial Officer Katrina O’Connell said on an earnings call, according to CNN.
The latest move by several chains solves the problem, as retailers will not be forced to immediately apply discounts to products and can sell them at a higher price in the future when demand strengthens.
The downside to this strategy, however, is that retailers don’t have enough inventory space and must decide what to do with their unsold merchandise. There is also the risk that stock in storage may no longer be to consumer liking in the future and therefore may not sell.
To avoid this problem, retailers like Target are cutting prices on merchandise, especially during the Labor Day holiday, to attract demand and free up inventory space. But these companies risk diluting the brand.
“Promotion can be cheap today and very expensive tomorrow,” said BMO Capital Markets analyst Simeon Siegel, according to CNN.
Target reported a 90% drop in profits and its price cuts left it with 36% more inventory than last year. Additionally, its net profit dropped significantly to $183 million from $1.8 billion in the same period last year.
Target canceled $1.5 billion in discretionary product orders in the fall and used more in-store space to highlight deals.
Some retailers take returns and excess inventory and donate them to charities, ship them back to manufacturers, or, like Amazon.com Inc., even burn them in incinerators that generate electricity.
Retailers turn to liquidators to sell excess goods. In return, they only receive a fraction of the item’s value, but for them it still counts as a gain as they free up space while earning money for their products.
Such trends have affected rival retailers like Walmart Inc. and Home Depot Inc. a little differently. They both reported higher sales last quarter, which were boosted by consumers’ willingness to absorb price increases. Both Walmart and Home Depot said sales increased in part because of higher prices.
Walmart, however, expects an 8% to 10% drop in annual revenue. This drop in revenue is not as significant as that of other retailers, as much of its sales and profits depend on essentials such as groceries and not primarily discretionary items.
Walmart also reported that the number of middle- and upper-income shoppers had increased.
While this is good news for the Federal Reserve, with consumer spending down in some ways, it’s a tough time for retailers with inflation and a strong reversal in buying behavior.
Overall retail sales – a measure of spending in stores, online and in restaurants – were flat in July when gasoline prices fell. But it was the long-awaited and desired outcome of the Fed to raise interest rates.
The U.S. supply chain faces pressures on its trade lanes. One of them is a stack of German containers due to the port workers strike, leaving many of these storage containers stranded ashore. The other pressure is power rationing in China amid a heatwave, shutting down many manufacturing centers.
Glutted inventory, shrinking margins and unpredictable consumer demand are causing turbulence in the economy. If this difficult period passes with minor losses, however, the United States will be one step closer to balancing economic activity again.