Wading Through the Hype of High Retail Inventory, Inflation and More

The media is portraying a dire situation right now. If you believe the hype, prices will never rationalize again, you’ll never be able to find anything you need, and it’s time to hunker down and stock up on food rations. But if retailers panicked every time the market fluctuated, they’d never open their doors, let alone run a successful business. 

How do you know what to believe, who to listen to? And how can you as a retailer survive—let alone thrive—during times like these? Personally, in times of uncertainty (which most times are!), I prefer to look at the facts, and then chart a course to uncover opportunities my competitors probably aren’t looking for.

Facts First

First, let’s attempt to examine some of these dramatic storylines in an objective manner. Then, we’ll explore what all this uncertainty means for you. Yes, some unprecedented things happened in the recent past, and because life is unpredictable, we’ll likely experience more in the future. It’s how we respond to them that matters.  

Let’s focus first on factors that affect retail, then zoom out to the bigger economic factors, and zero back in on retail perspectives.

What’s Going on with Inventory Levels?

Recently, I’ve heard a lot of noise about retailer inventory levels. In the middle of May, both Walmart’s and Target’s stock took big hits; not because they were unprofitable, but because they weren’t as profitable as they’d predicted or as the industry expected. Both companies had to absorb increased gas prices (as did we all) and increased labor costs (that’s what happens when everyone increases their base pay rates). The news that really hurt them both, though, had to do with ballooning inventory levels and reports that they were carrying too much inventory—full shipping containers’ worth—that they couldn’t sell.  

The reality? Their inventory levels were at or below 10-year averages for how much they normally carry. 

We’ll come back to this later. But first, let’s look at the big economic factors. 

Unless you live under a rock, you’ve heard that in order to try to slow the crazy inflation levels we’ve seen, the Federal Reserve made the highest interest rate percentage hike in 28 years! This is after they had already raised the FED rate several times to try to slow inflation. Now, they’re trying to do something really drastic to avoid a recession (or two sequential quarters of significant economic decline). 

Their rationale is this: Higher interest rates should slow down spending in areas like home and auto sales. However, home and car inventories are still low, and demand is strong. So, what does all this mean for retail sales?

Supply Chain Issues Persist

I’m sure you or someone in your family has experienced this scenario: you want to buy a few random items, but the stores just don’t have them. Baby formula is just one of many things on a growing list that saw dips in production or overseas shipping from the pandemic and simply haven’t yet recovered. These shortages are partly the result of a staffing crunch that, while slightly improved, continues to wreak havoc in the marketplace. The staffing crisis also means a lack of people to clean your hotel room, help you at the airport, and serve you at your favorite restaurant. 

But wait! Didn’t we also read that layoffs are picking up speed right now? Some media outlets have reported massive layoffs and hiring freezes at major tech companies. However, a closer look reveals that the job cuts have been comparatively meager, and most were at smaller companies. 

A report of 450 people laid off at Netflix failed to mention that Netflix grew its workforce from 2020 to 2022 by 20%, so the 4% they’re laying off now is basically a workforce correction. Similarly, a New York Times article reported that Tesla plans to cut about 10% of its salaried workers in response to market conditions. This amounts to a few thousand people since Tesla has roughly 100,000 employees worldwide. And at the time of the report, Tesla had 5,000 open positions for which they were actively recruiting!  

To me, these adjustments are ripples—worth noting and paying attention to, but not worth panicking over. “Widespread job cuts” and other similar headlines are, in my book, vastly overstating the situation.  

Are We Headed for a Recession or Depression?

None of us can predict the future, but let’s not forget that we endured a recession during the pandemic. As we settle into the post-pandemic new normal and face these current and sometimes volatile market conditions, all we can do is navigate the facts we have in front of us. 

Even though a wave of economic worries is cresting on one side of the picture, a wave of positive indicators is building on the other. So, which wave will be bigger for retail? I think this quote from the National Retail Federation says it all:  

Retail sales grew a record 14.1 percent in 2021, the highest growth rate in more than 20 years and well above the pre-pandemic growth rate of 3.7 percent. To put that another way, American consumers spent $1 trillion more on retail goods in 2021 than in 2020 and are spending at an even higher rate so far in 2022.” 

Turns out, the inventory levels people have been so worried about aren’t actually that high. In fact, inventories are comparatively lean, reflective of the “massive liquidation during the pandemic,” reported in a recent Bloomberg article. According to Bloomberg, people who received stimulus money during COVID haven’t spent it all. As the pandemic started to wane, consumer spending unleashed, but people are sitting on a lot of pent-up funds and demand. And many people have yet to purchase things they still want to buy. In addition, pay levels are holding strong, and the unemployment rate remains low.   

These are unprecedented times, and no one knows what tomorrow will bring. Retail is an ever-changing landscape that’s both shaped and driven by all kinds of economic factors. Through the right lens and with the right partner, though, these factors can work in your favor.  

We recommend to our clients that they look at shifts in the market as opportunities. Economic shifts can lead your competitors to pull back on their marketing, customer support, inventories, and even their feet on the street. But, carefully planned and thoughtfully timed expansions can help you capture market share and deliver key wins over competitors. Capitalizing on these scenarios can come with risks, but the right partner can empower you to grow, to zig while others zag.

Ready to talk?

You’re wise to seek a partner that isn’t afraid to lean into market shifts and take advantage of innovative opportunities to accelerate your sales. MarketSource can help. Let’s talk.

Author: Steve Wilson

Author: Steve Wilson

Steve is Executive Director of Retail Strategy and Operations at MarketSource. He has been helping steer the strategic direction of MarketSource’s retail business unit since 2010, with oversight including operations, new services and capabilities, and reporting and analytics. Steve has over 25 years of experience designing, implementing, directing, and operating retail programs focused on driving customer experience and sales.

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