Retailers STRUGGLING to Stay Afloat Thanks to…

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According to the giant retailers, America is in for a really weird Christmas this year. Way too much product is about to be plunked down in front of lackluster consumers for the all important holiday spending frenzy. It doesn’t help that a third of Fed Ex Ground distributors are on the verge of collapse and rail workers might strike next week.

Retailers ready for ‘weird’

According to industry analysts at FreightWaves who got a look at the latest earnings reports, the “big box behemoths like Best Buy and Bed Bath & Beyond have bloated stockrooms and falling sales. Meanwhile, retailers like Amazon and Dollar General have seen an uptick in inventory value through this summer.” Wall Street, they report, is begging them to “to stop stocking up.

All the individual companies are trying to do is tread water. They struggled to “keep inventory levels on par with unusual consumer spending through 2020 and 2021.” They survived until “that retail mania finally slumped earlier this year.

What retailers are left with, Urban Outfitters CEO Richard Hayne declares, is “a sonic boom of inventory.” When the earnings calls went out for the first quarter, the big businesses “admitted that they had continued to build up their inventories as if the consumer shopping spree of the earlier pandemic would continue unabated.” That bit them in the assets.

They tried to shed ballast with expensive measures like “canceling orders, slashing prices or taking low-selling goods back to storage.” It didn’t stop the plunge. “However, it’s proved difficult for retailers to totally stop the inventory buildup. Many top retailers reported in their second-quarter earnings that they increased their merchandise inventories compared to the previous three months.

The second quarter just ended in the final week of July. Across the board, whether they managed to dump inventory or not, “inventory-bloated retailers are continuing to struggle with middling or negative sales growth.” In general, the companies “saw inventories increase more than sales.

That is a tricky problem for the stores. “It’s very hard to get an inventory situation like this under control. Orders from suppliers and distributors are made months in advance. And while some smaller retailers are actually still understocked from the retail craziness of 2020 and 2021, big box stores were able to get their orders in months ago — just in time for consumer demand to soften.

The bullwhip effect

The “sonic boom” Urban Outfitters was talking about refers to what the retailers call the “bullwhip effect.” It works like this. A retail store thinks they have a good chance to sell 10 “nifty gizmo’s.” They order 20 to get a better deal and hope to sell them later.

The distributor then has the same idea and orders 40. The manufacturer makes 80. The problem is that there is only enough solid demand in the market for 10 and now we have 70 nifty gizmo’s that nobody wants.

This is going to be a weird ‘peak season‘ for Target, Walmart, Amazon and the like,” proclaims Phil Levy, chief economist at freight forwarder Flexport. Nobody wants the job of planning orders for the retailers right now. If they didn’t have enough to worry about, “confusion around mortgage rate hikes” is a complicating factor.

If we expect mortgage rates to stay consumer friendly, a retailer like Wayfair or Pottery Barn should continue ordering more couches and bed frames to their warehouses. Even the sharpest forecasters, though, aren’t certain of anything.

Right now is the “peak season” for major retailers. “Containers full of stuff (glorious stuff!) are usually rolling up to the U.S. ports in September and October for you to buy in November and early December.” Thanks to California’s AB5 law, independent truckers are about to go out of business.

Nobody has a clue what happens from here but it’s going to happen. Another uncertainty is the serious possibility of a nationwide freight rail strike as early as next week.

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