Excess inventory plagued retailers and brands in 2022.
Key Takeaways
- Retailers held large inventories in 2022
- Many made supply chain strategy adjustments to alleviate the problem
- Initiatives like early promotions and SKU rationalization eliminated overstocks
- 21% YoY large retailer inventory reduction
- 5% YoY sales increase at discount retailers
Businesses faced overstocked supply chains last year. And leaders assured stockholders that inventory problems would dissipate. As Q2 2023 begins, it’s time to assess whether they were correct.
What drove excess inventories? #
Unpredictable consumer demand snarled forecasts and supply chains. After demand surged in 2020 and 2021, many shippers ordered inventory to counter widespread shortages. Then consumers stopped spending. This led to inventory excess at many companies, affecting stock prices and supply chain strategies.
How shippers reacted to excess inventories #
Retailers and brands used promotions, discounts and SKU rationalization to deal with excess inventories.
Holiday promotions and heavy discounting #
Brands like Gap spent 2022 eliminating excess inventory through promotions and discounts. At its peak, Gap held $3.04B in product. Through heavy markdowns, they ended 2022 with $2.4B in stock and a 21% YoY inventory reduction. Target held a three-day savings event at the beginning of October to entice customers with discounts and promote early holiday shopping. Target alleviated some of their inventory pressure, dropping levels by 3% YoY. Despite Q4 growth, Target prepares for another slowdown as consumers buy fewer discretionary items.
SKU rationalization and simplification #
Stanley Black & Decker will cut 50,000 SKUs as part of a supply chain transformation plan to save $500M by Q1 2024. Almost half of these products are eliminated, with the remainder set by the end of 2023.
The company still has excess inventory and $1.5B of products to liquidate. Stanley Black & Decker will focus on higher velocity SKUs and curb costly inventory.
Hanes completed a similar exercise. The clothier cut 30% of SKUs and temporarily reduced production.
Walmart predicts customers will spend more on groceries and necessities, not big-ticket or discretionary items. They cite low consumer sentiment and economic uncertainty. Walmart will increase high-velocity essential item inventories.
Who benefits from excess inventories? #
Discount retailers benefitted from excess inventory levels. As traditional retailers liquidated stock, discounters purchased items. Consumers intent on saving due to inflation concerns shopped at discount retailers. TJ Maxx reported $14.5B in sales in Q4, a 5% YoY increase. Dollar General’s net sales increased 11.1% YoY.
Who struggles? #
Some retailers sharply revised their guidance. Target is taking markdowns and canceling orders as consumers rein in their discretionary spending.
Columbia Sportswear saw order cancellations from wholesalers. Wolverine Worldwide said significant order postponements from retailers combined with isolated cancellations due to late-arriving product were the main reason for Sperry’s revenue miss in Q2.
Kohl’s is rethinking inventory management. Net sales fell more than 7% in 2022, while margins shrunk by five percent.
Inventories looking ahead #
Brands struggle with current macroeconomic uncertainty. Retail sales defied expectations to start 2023, jumping 3%. But then fell again in February. Consumer sentiment waffled as well after four months of gains.
As a result, retailers started to hold less inventory and shift power from suppliers.
Gap plans to balance supply and demand by chasing inventory, leaning on vendor-managed stock and responding quickly to customer trends.
Nike cites tremendous inventory progress as it clears excess stock through direct-to-consumer channels.
Levi’s inventory rose 33% YoY, a 25% improvement over last quarter’s 58% increase.
PVH’s, owner of the Tommy Hilfiger and Calvin Klein brands, inventory levels were at 34% in Q4. PVH and peers struggled to get inventory into ports and warehouses amid widespread freight snarls and other supply constraints.
Companies that eliminate slower-moving SKUs reduce stockouts and lower inventory costs by 10%. Because storage fees, insurance and labor costs account for 30% of inventory spend, SKU reduction remains a brand favorite.
Supply chain modes and nodes update #
Ocean freight
#
Container imports decreased 37% YoY
Spot rates plummeted by 94% YoY
US Ports #
Wait times at US Ports are under two days
571,177 TEUs moved by Port of New York and New Jersey, now the nation’s busiest
12.6% fall in import containers at US East and Gulf Coast ports
$33.8B port infrastructure investment needed by 2025 to keep pace with demand
Intermodal
#
16.2% decline in volume in Q4
Legislatures introduced stricter rail safety bills after multiple derailments
Freight
#
March Class 8 truck orders reset to normalized demand
Transportation prices set a record decline
1.7% increase in TL expenditures YoY
LTL volumes have “largely stabilized”
Warehousing
#
Inventory levels fell significantly
Warehousing capacity loosened to 58.2 on the LMI
Parcel
#
FedEx to combine all but LTL into one organization
The supply chain YoY changes #
The PMI index shows decreased manufacturing activity. Spot rates for ocean-to-road freight decreased, as did volume, but parcel rates increased.
Warehousing industry #
Industrial Real Estate Vacancy Rate #
Lease rates increased with vacancy rates, which is atypical. As a result, leading companies avoid long-term fixed Capex initiatives.
Industrial Real Estate Net Absorption #
Warehousing demand and rates increased in Texas, Florida, Pennsylvania, California and Georgia, driving secondary market popularity.
Industrial Real Estate Construction Pipeline #
Q1 marked the end of seven growth quarters in the national construction pipeline. Past construction and increasing vacancy will decrease future lease rates.
