The Conference Board’s Consumer Confidence Survey didn’t reveal much in the way of good cheer last week, falling for the third consecutive month.
Lynn Franco, the Conference Board’s senior director of economic indicators:
As the Fed raises interest rates to rein in inflation, purchasing intentions for cars, homes, and major appliances all pulled back further in July. Looking ahead, inflation and additional rate hikes are likely to continue posing strong headwinds for consumer spending and economic growth over the next six months.
I doubt if Walmart, which issued its second profit warning in two months last week, would disagree. The company specifically cited the squeeze on consumers from higher gas prices.
Enter the markdowns.
An air fryer marked down from $149 to $110; a trampoline discounted by 10 per cent and a set of star-spangled kids’ pyjamas priced at $9 rather than $12: the red “rollback” signs were not hard to find this week at the Walmart Supercenter closest to the retailer’s headquarters in Bentonville, Arkansas . . .
Walmart’s growth was built on aggressively competitive prices and the tempting promotions it calls “rollbacks”. But it is now having to resort to more markdowns than planned, particularly to shift inventory in apparel. At the store on South Walton Boulevard this week, bright yellow balloons marked “clearance” bobbed over $4 T-shirts and $11 Bentonville Tigers sweatshirts . . .
Target warned in May that it would have to discount products and cancel orders to clear excess stock in categories from televisions to outdoor furniture. Bed Bath & Beyond, Macy’s and Gap have admitted to similar inventory troubles in recent months.
Those excess inventories arose in part out of earlier “overordering” in order to avoid being caught out by the post-pandemic supply-chain problems.
Writing in early June about Target’s problems with its inventory management, I quoted an analyst’s comment that the just-in-time mentality was broken for now.
I added this:
That’s probably going to last a while. Major economic trauma can have a ‘scarring’ effect on corporate (and not just corporate) behavior (I wrote about this here and here). There’s a good argument to be made, for example, that the financial crisis led to a long-term reevaluation of risk, a phenomenon that goes some way to explaining the relatively depressed rates of investment activity that followed the financial crisis, and we may see an echo of that as companies begin (at some level) to price in pandemic risk, a risk not many of them had previously considered with any seriousness. The same will almost certainly hold true of supply-chain risk. Over time that will lead to reshoring/nearshoring, but it’s easy to see how the view of what is a prudent level of inventories is going to change over a wide range of industries, at least for now. However, as Target has just reminded us, higher inventories are not without their risks either.
Under the circumstances, it was interesting to read this in the FT:
Several companies, fearing a repeat of the supply chain delays that burnt them last holiday season, have been stocking up early this year.
Mattel, the maker of Barbie dolls and Hot Wheels cars, reported last week that its inventories were up 43 per cent year on year, for example, while rival Hasbro also had unusually high inventory levels as it stocked up for toymakers’ peak season.
“Importers don’t trust supply chains anymore,” explained Zvi Schreiber, chief executive of logistics booking service Freightos. “Retailers are not taking any risk. If they can afford the inventory, they’re stocking up ready now for the shopping season.”
Retailers might be able to afford the inventory now, but will they able to afford it early next year, if they have made the wrong call?
Nevertheless, scarring apart, it’s easy enough to understand the retailers’ nervousness.
The FT:
Few retailers are betting on congestion ending any time soon, as labour shortages have perpetuated delays, unions remain in negotiations with California’s ports and labour unrest threatens truck and rail disruptions.
For a recent update on that, turn to Capital Matters’ Dominic ‘Mr. Supply Chain’ Pino here, and, for trouble that ill-conceived regulations may be bringing California’s trucking sector, take a look here.
Meanwhile, stocking up on inventory is bringing good times to one, highly specialized sector of the economy.
The FT:
Retailers bringing in products long before the holiday shopping season have to contend with scarce and expensive storage. Prologis, the warehouse leasing company, said last week its average occupancy rate had risen from 96 per cent to 97.6 per cent while rents for newly leased US warehouses were up 54 per cent year on year.
That added cost piles on yet more pressure on retailers, as does this (via the FT):
What holiday demand will look like is in flux, said Vaughn Moore, chief executive of freight forwarding company AIT Worldwide Logistics, noting that two of his large retail clients have downgraded their sales forecasts ahead of the peak annual shopping period.
“The problem is, as we go into the holiday season, they’ve got the wrong stock in the warehouse,” he said, predicting that “slash and burn” sales would be needed to clear old stock and make room for new merchandise.
Whatever Elizabeth Warren might think, retail is not an easy business, even for the big players, but we can be sure that private enterprise will manage it better than the state (it’s worth reading Dominic on this topic here). That’s just as true when government steps in, as seems may well soon be the case, through an aggressive reinterpretation of antitrust.
In an inflationary era, I didn’t think that this was great news.
The Wall Street Journal, July 15:
Amazon.com Inc has started drastically reducing the number of items it sells under its own brands, and the company has discussed the possibility of exiting the private-label business entirely to alleviate regulatory pressure, according to people familiar with the matter.