In response, many of the country’s largest retailers are starting holiday sales earlier than ever, hoping to clear their warehouses enough for another round of winter orders, according to company records and profit calls.
Target started winter sales last week with $6 hoodies and half-off TVs. Amazon is hosting an unusual second Prime Day sale next week, less than three months after the last. And dozens of other brands, including J. Crew and Nine West, offer huge general discounts online and in stores.
“There’s an increasing smell of despair in the air as retailers are saddled with a lot of excess,” said Elaine Kwon, managing partner at Kwontified, a retail consultancy, and former manager at Amazon Fashion. “Some brands that claim they never discount will start discounting, especially outerwear, winter wear, cold weather items, stock from last winter — they’re desperately trying to get rid of that before their new stuff comes in.”
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Companies have plagued high inventories throughout the year and played a large part in the recent contraction of the US economy. But merchandise stacks have only gotten bigger. U.S. retailers had a record $732 billion in inventory in July, up 21 percent from a year ago, according to data from the Census Bureau.
And the timing couldn’t be worse, as Americans’ hunger for clothing, furniture, electronics and other goods has cooled, partly due to rising inflation, but also because of changing pandemic patterns toward services like restaurants and travel. Household monthly expenditure on goods has declined recently.
With inflation stubbornly near its 40-year high, many are finding that even the highest discounts are not turning into sales. Americans are spend more of their budget on essentials such as gas and groceries, leaving less for non-essentials.
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“There is a serious imbalance. Consumer spending is declining, but orders are still pouring in,” said Gregory Daco, chief economist at Ernst & Young’s strategy advisory division, EY-Parthenon. “The store stocks are piling up to above the desired level. It is a very difficult rebalancing exercise for retailers to do, and it will have a disproportionate impact on the economy.”
Consumer spending makes up about 70 percent of the economy. stocks of products that consumers buy help explain how the economy is growing or not. While inventory numbers helped fuel economic growth for much of last year, that changed in the most recent quarter. An accumulation of goods dragged down overall economic growth by 1.9 percent between April and June. Economists expect that trend to continue in the next gross domestic product report, expected later this month.
“We’ve seen in the last few reports that inventory has been a major factor of volatility — in Q2 it was a huge drag on GDP growth, and that’s likely to continue,” said Daco, who expects a recession in the next six months. months. “If anything, this inventory — the destocking cycle that retailers go into — will exacerbate the downturn.”
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Meanwhile, additional goods pose new challenges for retailers, including a lack of storage space and a shortage of cash. Concerns about diminishing earnings have also led to dramatic sell-offs in the stock market.
Shares of Target have fallen more than 34 percent so far this year, largely due to inventory problems. Nike shares, meanwhile, fell nearly 13 percent in a single day in late September after the retail giant said it would have to “aggressively” mark down products on its website and in its outlet stores.
“Because we got late products for the spring, summer, and fall seasons…we actually have a few seasons on the market at the same time,” Nike’s chief financial officer Matt Friend said in an earnings call last week. “We’ve decided to take that inventory and liquidate it more aggressively.”
Even the nation’s largest online retailer isn’t immune to inventory issues. An Amazon warehouse near Nashville has been overrun by last winter’s fuzzy coats and summer cans of bug spray, according to an Amazon employee who wished to remain anonymous for fear of losing his job. (Amazon founder Jeff Bezos owns The Washington Post.)
“Our facilities are overcrowded with excess inventory,” the employee said. “We were prepared for a whole new system where everyone would order from Amazon all the time, and that just hasn’t been the case. There’s so much leftover stuff – so many big thick coats that take up space – that people just didn’t buy.
Amazon has not responded to a request for comment.
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Meanwhile, department store chain Kohl’s has 48 percent more inventory than a year ago, in part because it held $82 million worth of pajamas, fleece and other winter items that arrived late for last year’s holidays. It plans to hit shelves this fall.
“We are actively working to reduce inventory,” said Jill Timm, the company’s chief financial officer, in an earnings call in August. “We’ve been aggressive with clearance and promotions.”
Broad discounts can ease some of the pain of inflation. Total prices are up 8.3 percent from a year ago, according to the Bureau of Labor Statistics, a notch below summer highs but still much higher than historical standards.
There are already signs that prices are easing in some parts of the economy. Appliances, bedroom furniture, jewelry, TVs and smartphones were all cheaper in August than in July.
“Prices will come lower,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “We’re already seeing it to some degree: disinflation, if not outright deflation, in some areas where companies just need to reduce inventories.”
Charlie Reid, owner of Charlie’s Computers & Emporium in Las Vegas, is cutting dozens of laptops by 30 percent or more. He has nearly three times as many refurbished PCs as he’d hoped.
Sales were solid throughout much of the pandemic as people picked up laptops for remote work and schooling. But now that life has returned to normal, demand has fallen, he said.
“As far as basic laptops for basic needs – HPs, Dells – there just doesn’t seem to be much interest anymore,” he said. “At the beginning of the year, they were just starting to pile up in our back room. People seemed to lose interest.”
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Even item depreciation has become a fraught calculation for retailers after more than two years of wildly unpredictable production and transportation-related fluctuations. There is a sense that the supply chain is just one covid-related shutdown or geopolitical disaster away from another round of shortages and delays. Some retailers are hesitant to sell discounted products now, only to have to replace them with more expensive goods later.
“More than in the past, retailers are holding supplies while they wait,” said Brian Ehrig, a partner at the consulting firm Kearney. “There is still real concern about geopolitical risks that are still there, so companies are taking a more conservative approach and thinking hard about scenarios that may arise.”
In Abilene, Texas, Andrews Furniture executives are canceling orders for sofas, beds and dressers as shoppers retreat. The company has about 20 percent more inventory — mainly upholstered chairs and other living room furniture — in its warehouse than usual, according to Scott Andrews, an executive at the company.
“At the beginning of the pandemic we saw where the buying behavior was going and tried to estimate that, but now we have too much,” he said. “People change their habits. They go on vacation instead of buying another sofa. I’m constantly looking at our inventory levels and trying to figure out how to handle these extra items.”