Retailers suffer from bloated inventory as US consumers end frenzy

(Bloomberg) – U.S. retailers who have stockpiled goods to hedge against supply chain issues are finding it difficult and costly to reduce inventory as U.S. households begin to pull back from a spending spree of two years.

With inflation lingering and the Federal Reserve raising interest rates, Walmart Inc., Target Corp. and others see consumer preferences shifting towards basics, including food and necessities. At the same time, shoppers are holding back their purchases of furniture and electronics from a year ago, according to Commerce Department data released Wednesday.

Such shifts in spending behavior – when combined with excessive orders earlier this year – left those who manage supply chains in a costly mess. Products that do not attract buyers sit unsold in stores and warehouses, taking up valuable space. That’s why big retailers have worked so hard and paid such a high price to get rid of slow-selling discretionary items.

Walmart, which saw inventory levels jump nearly a third in the first quarter, canceled billions of dollars in orders and cut prices for items such as clothing. In the second quarter, it halved the number of shipping containers in its system to match inventory with demand, and inventory growth slowed to 25% year-over-year, from a 32% increase in the first trimester.

Still, “it will take a few more months to clear the backlog,” John Furner, the company’s head of US operations, told analysts on a call.

Inventory was also a hot topic in Target’s earnings call, with executives saying they had mostly solved the problem after an all-out effort. But tackling the bloat came at a cost: The company’s earnings fell far short of analysts’ estimates as the retailer moved aggressively to reduce the supply of discretionary goods.

To address backlogs in external supply chains, Target turned to air freight, automated operations and additional warehousing capacity near ports to mitigate risk. But as demand shifted, the retailer cut inventory of discretionary goods by more than $1 billion and reduced orders in the second half.

“The extra inventory would have been a permanent burden on our supply chain and stores teams as they deal with the distraction of working around it day in and day out,” said general manager Brian Cornell.

Big box retailers are not alone in their struggle with inventory.

To avoid the logistical challenges that plagued West Coast ports last year, Crocs Inc. invested $75 million in air cargo and added alternative East Coast trade gateways to its supply chain, adding said Elaine Boltz, Director of Operations and Transformations.

As a result, inventory levels are now more than double what they were a year ago. But as the company sees greater supply chain stability in the second half, it is preparing to scale back the air cargo program.

“At the start of the pandemic, we focused on managing low inventory and having our commodities available,” Boltz said in an interview. “Now we’re seeing a more normalized supply environment and shipments becoming a bit less volatile.”

For small businesses, inventory decisions can mean the difference between staying in business or going out of business.

A large majority of small businesses believe that large companies have an advantage over them when sourcing inventory, and more than 40% attribute this to their inability to pay high prices and limited access to suppliers. , according to an April survey by researcher Software Advice. .

“They don’t have the power of a target or a Walmart,” said Julie Gerdeman, CEO of supply chain risk analytics firm Everstream Analytics. “If they fail to do their inventory for Christmas, there is a risk of insolvency.”

Those kinds of worries were rampant a year ago, punctuated by a long line of container ships outside the ports of Los Angeles and Long Beach, California. The situation has improved somewhat, with two of the state’s three largest ports seeing a drop in container imports for a second straight month in July.

The latest maritime trade figures reflect a US economy where demand is moderating rather than falling off a cliff.

The National Retail Federation, which represents about 18,000 US retailers, has lowered its forecast and now expects imports to fall 1.5% in the second half of the year compared to the same period in 2021. Still, the trade group based in Washington sees a 2% increase in imports in 2022, driven by strong consumer demand amid historically low unemployment and inflated first-half wages and savings.

Comparing demand with “abnormal” levels in 2021 could paint a fuzzy picture for consumers, said Nathan Strang, director of ocean trade lane management at logistics firm Flexport Inc.

“Where would we be if the pandemic had not happened?” Strang said. “Actually, I think we’re there. This is where imports have come down again.

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–With help from Brendan Case.

© 2022 Bloomberg L.P.

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