(Bloomberg) -- If last year’s holiday shopping season was characterized by empty store shelves and a race to meet demand in a healthy US economy, very different concerns have emerged just 12 months later: overabundance and sinking sales.
American retailers are sitting on so much inventory that brands -- particularly for apparel and housewares -- have resorted to listing their goods on resale websites, hosting sample sales, giving stuff to employees, offering deep discounts and even throwing goods away.
This period of plenty’s seeds were sown last year, when demand for merchandise was soaring but clogged supply chains caused long delays. Fearful of shortages, retailers including Gap Inc (NYSE:GPS) and Nike Inc (NYSE:NKE) ordered extra and did so earlier than usual, but a combination of poor forecasting and inflation-stung shoppers created massive gluts.
The overhang is leading to canceled orders, a sharp slowdown in global trade growth and stagnating factory activity. On one hand, it’s good that logistics networks are seeing relief from the logjams that plagued the start of 2022 -- ocean-shipping rates have tumbled close to pre-pandemic levels and delivery times are shortening.
But most supply chains don’t perform well during rapid turns in either direction, and now the snapback to a surplus of transport capacity is dimming prospects for companies including rail operator Union Pacific Corp (NYSE:UNP) and container-shipping giant AP Moeller-Maersk AS (OTC:AMKBY).
While retailers such as Kohls Corp (NYSE:KSS) and Nordstrom Inc (NYSE:JWN) expect to whittle down much of their bloated inventories by year end thanks to increased promotions, analysts and warehouse operators say it will likely take most of next year to wring out the excesses.
The pain is rippling upstream. In the US, the number of warehouse and storage jobs fell in October by 20,000, the most since April 2020, government data showed on Friday. Some workers, including those in the garment-manufacturing industry, are experiencing reductions in overtime hours and a decrease in take-home pay.
Figures released on Monday showed Chinese exports fell for the first time in more than two years in October. Last week, the trade ministry of Vietnam -- a popular alternative to China’s exports in recent years -- warned of a significant drop in the number of orders products including sneakers and smartphones.
“There’s a double-whammy phenomenon going on where companies might experience pressure on their margins because of a lot of the discounting and promoting that’s going to happen, and they’re also going to experience pressure on the margins because at the same time that prices are coming down, costs are still high,” said Jay Sole, analyst at UBS Group AG. “That’s something that Wall Street’s very worried about.”
LA Warehouses
Mountains of merchandise are parked in places like Southern California. The vacancy rate for warehousing space in the greater Los Angeles area -- home to the two largest ports in the US -- sits at 0.2%, compared with the typical 4% to 6% this time of year, according to Port of Los Angeles Executive Director Gene Seroka.
“You’re going to be buying different products on the retail shelves and online between now and the holidays than are in those warehouses -- the latest games, the latest tech, the latest fashion,” Seroka said in a recent interview. “How do you flush the inventory that’s been sitting in these warehouses for some time?”
The problem is acute for mass-market brands that cater to low- and middle-income Americans who are increasingly feeling the hit from higher inflation, devoting more of their budgets to necessities like food and utilities.
Apparel-industry sales are expected to decline by 1% in the final three months of this year, compared with 21% growth in 2021, according to data from NPD Group.
Traditional inventory-management methods like discounting and pack and hold -- a strategy where retailers hold products in warehouses and bring them back for another season -- are already being used widely.
In earnings calls in the past month, executives at brands including Vans owner VF Corp (NYSE:VFC), Levi Strauss & Co (NYSE:LEVI), and Container Store Group (NYSE:TCS) all pointed to a holiday season with deeper promotions than in recent history.
“In a promotional environment in the marketplace, it’s going to be all around us,” VF Chief Financial Officer Matt Puckett said on Oct. 26. “And we certainly expect that’s going to have some impact on our business.”
But the latest Logistics Managers’ Index shows inventory and warehousing costs remain stubbornly high, so discounting alone isn’t enough.
Companies are getting creative when it comes to liquidating excess merchandise.
“I have some clients that are asking: Can we throw away stuff? Can we give it to our associates? Can we recycle it?” said Jeff Havelka, chief executive officer of Beyond Warehousing, a third-party logistics company based in Kansas. “They just don’t want to pay to store it anymore.”
Havelka said retailer orders are down as much as 30% over last year, but inventory is up as much as 50% which is “tying up their cash and their credit.” A number of his clients are offloading their inventory at a loss, he said.
“There are some companies that are probably gonna die here because they weren’t dynamic enough to make it through this and were focused on the wrong things,” Havelka said.
Other brands are resorting to resale platforms including Poshmark Inc (NASDAQ:POSH), ThredUp Inc (NASDAQ:TDUP) and Etsy (NASDAQ:ETSY) -owned Depop to list excess inventory, said Josh Kaplan, co-founder of Ghost, an online marketplace where retailers can anonymously list excess inventory for sale. Some Ghost clients are turning to store pop-ups or sample sales to offload their goods, he said.
To prevent their stockpiles from getting any larger, retailers in some cases have deferred orders from suppliers, said Liana Foxvog, director of supply-chain strategies at the Worker Rights Consortium.
Kontoor Brands (NYSE:KTB), owner of Wrangler and Lee jeans, said on Nov. 3 that it is using downtime at its plants to control inventory levels.
Smaller Paychecks
A slower pace of inventory growth in the coming quarters is likely to be a drag on US gross domestic product, further contributing to concerns about an economy on weaker footing. Deferred or canceled orders also impact the labor market, leading to fewer hours or jobs for workers through the supply chain.
“We are hearing that there has been a decrease in workers’ take home pay, and that’s due to cutting in overtime hours,” Foxvog said of garment workers specifically. “In many places, workers are working less total hours per month and therefore taking home less money.”
The longer-term impact of the current inventory overload will become clearer in the next month when the majority of public US apparel and home goods brands report third-quarter earnings and provide an update on inventory growth.
“Even just in the past three days, we’ve seen some of the biggest or most valuable brands in the world contact us for help with excess inventory,” Kaplan said. “It’s a full tidal wave at this point. We need the customer to be spending, and until that happens, the product’s not going to move.”
©2022 Bloomberg L.P.