Retailers’ inventory levels are heavy going into the holiday season as supply chain pressures eased (evidenced by the latest readings in the RSM US Supply Chain Index) and consumer demand shifted away from products and toward experiences.
Consumer goods companies have discounted product to right-size balance sheets leading into the next year. Retail and wholesale inventory levels reached $743 billion dollars as of September, 30% higher than the low point in June 2020, according to data from the U.S. Census Bureau.
Companies sitting on excess stock and managing resulting operational pressures—both through holding higher-priced goods and the physical challenges caused by increased inventory levels, including the need for additional storage facilities—expanded third-party logistics footprint and increased labor costs to maintain those inventory levels. These challenges are costly and will continue to affect margins, supported by many public comments from consumer products executives who have spoken to margin compression from elevated inventory.
These challenges are a 180-degree turn from a year ago, when inventory levels were low and customer demand exceeded stock levels. At that time companies were focused on supply allocations and increased production capacity, a far different story from forecasts for next year of a pending recession and the impact on future consumer spend.
As we move into the new year, companies will need to develop strategies to improve consumer demand for both the short- and long-term. A focus on profitability and driving consumer engagement through targeted discounts, consumer loyalty programs and regionalized marketing strategies will drive future profitability. Today’s uncertain economic conditions, including high interest rates and inventory forecasting challenges, will test executives as forecasts continue to evolve.
Middle market consumer products companies will need to invest in sophisticated sales forecasting tools to be successful. The use of customer data to make smart decisions as well as customer loyalty programs will be at the forefront of a smart business strategy. Brands will look for opportunities to interact directly with their consumer and build their stories based on consumer preferences. Data analytics tools with forecasting that includes macro-economic trends will help companies better plan for the future.
Look for additional insights as we continue our consumer products holiday season insights series.