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Last year at this time, retailers had high demand, but stock was in short supply.
This year, that’s turned on its head.
“We’re in a situation where they’ve purchased so much to try to avoid any type of risk situation that now they have all this excessive inventory on their books,” professor G. Tony Bell says.
So, what does that mean for consumers?
Today, On Point: The inventory glut — why retailers have warehouses of stuff that Americans aren’t buying.
Guests
G. Tony Bell, assistant professor of professional practice at Rutgers Business School.
Alla Valente, senior analyst at Forrester, a global market research company. (@AllaValente)
Interview Highlights
How did retailers end up with all of this excess?
G. Tony Bell: “There’s a lot that’s happened in the last number of years. … We have this pandemic, which is really a major event that has happened that we really didn’t expect. And out of that came some labor shortages. We also have the war in Ukraine, which is increasing our oil prices. We have inflation. We have a looming recession. We have port congestion, as I heard about earlier in the introduction. And if we look at this from a timeline perspective, you know, when we talk about pre-pandemic years, we were looking at retailers, their suppliers, which are particularly retail and consumer goods manufacturers, and their suppliers, raw material and component suppliers who are all operating in more of a just-in-time environment.
“In an effort to try to minimize their inventories, it was all about a strategy to try to receive goods as close as possible to the time that those goods are actually needed to either be produced or delivered to a consumer. And when we look at inventory, inventory can both be an asset and a liability, right? Because carrying too much inventory is a significant liability because too much inventory ties up capital, which could be otherwise used for reinvesting in the supply chain, for sales and marketing, for research and development improvements.
“And so having that liability then becomes a problem. So we go from this just-in-time environment of trying to keep our inventories as low as we possibly can while still, of course, making sure our service is intact. And then we move to the pandemic. Which caused an immediate shutdown of activities. So people just stop eating out. They stop traveling, they stop buying things, for the most part. So we did see some online activity as well. But you had a number of million of workers that were actually laid off.
“You had consumers even with jobs that had stopped spending. Retail sales, basically plunged. I think the number was about 20% over the first few months of the pandemic in early 2021, with the largest declines really in clothing and accessories stores, about 89%, and then department stores down about 45%. So you move from that now to post-pandemic, or at least towards the end of the pandemic, where we started to see an increase in home goods and home improvement type of products, when consumers started to receive stimulus checks.
“And they also started, of course, to look into some of the savings that they started to build as a result of the pandemic. And now you get to post-pandemic when now you have the sudden surge of consumer demand and activity. So we see these figures on consumer spending, I think $1 trillion shift to goods, you know, from services as a result of coming out of the pandemic. So that’s a huge shift. That’s a big switch to go from, you know, having very little inventories, to then coming to a pandemic where everything pretty much shuts down and there’s no activity. To all of a sudden, this huge surge in consumer demand. And so how do organizations then try to match that or meet that demand? It’s pretty difficult to do so. That’s kind of why we are where we are today.”
On systemic risks in the economy
Alla Valente: “We call these systemic risks, and these are those external forces that create events. And when those events materialize, they create these systemic risks. So it’s everything from pandemics, to climate change to geopolitical tensions, even the rise of digital attacks. We see more ransomware attacks on the supply chain. These external forces are happening. These events are going to occur whether or not a retailer is looking at those signs or not. What they can do is, first of all, identify what those factors are.
“Be able to assess what that potential impact might be on their supply chain and in what areas, on what products, in which geographies. And they can certainly make some calculated bets in those areas. So, for example, we see the rise in cyber-attacks on suppliers, on manufacturers and logistics providers. We also see the rise of bots going in and taking up inventory and getting to products before consumers even have a chance to put them in their shopping cart. I mean, bots broke the Internet when it came to Taylor Swift tickets. So anyone who was looking to make that a Christmas gift is probably out of luck at this point.
“I don’t know that you needed necessarily to be able to predict the future to see that that was happening, because that was happening very consistently, and building from 2020 all the way through mid this year at the same time. And this is something that it’s a little frustrating. Because when we talk about the looming recession and whether or not that recession happens, we don’t know. We do know there is record inflation, but at the same time, there are still good job numbers, there’s still consumer spending. So whether we call this a recession, in the typical sense remains to be seen.
“But the average recession is about 10 to 12 months long. At the same time, this whole supply chain crisis, if we look at three years that we’ve already been here, plus maybe another 12 to 18 months that this might go on before supply chains really have a chance to balance. I mean, we’re talking 4 to 5 years now. Retail CEOs are planning for economic uncertainty. They’re planning for this economic risk factor.
“I don’t remember them planning for supply chain imbalances. I don’t remember them taking proactive steps to try to de-risk their supply chains. So why is it that we’re so good at thinking and planning for economic uncertainty, but not uncertainty in the supply chain? And, you know, perhaps it’s this this notion that, well, we just have more practice with economic uncertain conditions. But I do think that there are some very clear steps that retailers and all companies can take when it comes to mitigating the risk in their supply chains.”
On when supply chains might return to normal
Alla Valente: “We need to do a better job at planning for the correct levels of demand. So getting that supply demand balance equation. But at the same time, we need to do a better job at identifying other issues that can come up that might impact the supply chain. And if we really are thinking about restoring supply chain to its former healthy state, we need to think about all of those unplanned events that we’re not necessarily thinking of right away.
“So, for example, how much longer is the war in Ukraine going to last? Are there going to be or are we expected to see climate chaos, especially in certain parts of the world? How might that impact the suppliers in those areas? What about the record inflation? How much further is it going to peak and how is that going to impact companies that are suppliers or maybe suppliers of your suppliers? So before we can start to see supply chain health increase again, we need to think about not just balancing inventory levels, but also looking at all of these other factors as well, and being able to assess the risk and plan accordingly.”
How else can retailers improve their preparation and their demand for forecasting moving forward?
G. Tony Bell: “I want to touch on that technology piece, because I think that’s really important. I think some of the challenges are the cost of some of the technology, and it’s not easy for some of these retailers to spend so much money. Heck, I’ve seen it. You know, I’ve seen where, you know, even working for a consumer products manufacturer where, hey, we have it in our plan to implement these great technologies to better enable our business processes to make them better and to make our supply chain efficient, adaptable. All those things I talked about. But it costs money. It costs a lot of money. And it takes time for them to actually make sure they get that in their business plan.
“I mean, so there’s all these other things that have to happen. But I’ll tell you, retailers and manufacturers will have to get better. They’ll have to get just better at bringing those technologies in. I don’t think at this point they really have a choice. You know, predictive analytics, A.I., all of those things are truly important. I think it’s a great way to improve their sales and operations planning processes and to make those processes more efficient, as well.”
What can consumers do now to shop in a smart way?
G. Tony Bell: “Doing research I think is important, as well. So, you know, research across different retailers to find out what’s going to be the best deal for them. Now, that may hurt specific retailers, but for the shopper themselves … that’s a really important thing to do. As far as product availability, I would say that there still are some product availability challenges out there. So if consumers are looking for a must have item, buy it. When you see the deal, don’t wait. Because more than likely it’s not going to be available later, because we’re still kind of battling or trying to figure out, and consumers don’t know what’s available and what’s not.
“You know, we have better insight into that, but they don’t. And so if you see something you really want … then definitely buy it when you see it at the right price. But I’ll also say, you know, given the fact that we have these price hikes, given the fact that inflation is where it is, I think it’s also important for customers to be smart about their purchases. So, like I said, compare those prices across retailers, but also create, you know, a budget for themselves. If you can’t afford it, don’t buy it.”
This article was originally published on WBUR.org.
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