As supply chain bottlenecks continue to plague the economy, hampering output and raising prices, many analysts have warned that there will not be enough goods in stock for the holiday shopping season.
Our new RSM US Supply Chain Index also reached a two-decade low in October, pointing to a problem widespread on the macroeconomic level.
While it is true that the demand for goods remains strong and supplies are constrained, the impact of inventory shortages is in fact uneven across sectors.
Large firms with more sophisticated logistics systems, inventory management strategies and, most important, better financial leverages are better prepared than smaller firms. Another reason is because of what they learned during the second half of 2020, when inventory levels were significantly lower compared to the pre-pandemic level, although demand was lower as well.
The inventory issue varies across retail groups. While durable goods retailers like automobile dealers and furniture, electronics and appliance stores have had a slight improvement in the third quarter since the beginning of the summer, other retailers that sell nondurables like food, beverage and clothing stores have been struggling with their inventory levels.
As a result, firms with goods to sell are benefiting from eager consumers flush with the $2.5 trillion in excess savings built up during the pandemic.
Now, with fewer empty shelves than predicted, we believe there is plenty of room for an upside surprise to retail sales this holiday season, which will help boost economic growth for the last quarter of the year.
The supply chain squeeze
Many large retailers like Best Buy, Walmart and Target have offered reassurances that they are well-positioned to serve their customers this holiday season.
Best Buy said that the company is “going into the holiday season with 20% more inventory than two years ago,” before the pandemic.
One reason Best Buy is in better position is that it was forced to deal with semiconductor shortages in 2020, before shortages became more widespread. The company has had about 20 months to “navigate the supply chain issues,” according to Corie Barry, chief executive of Best Buy.
Walmart and Target, in their most recent earnings calls, also reported that their inventory levels for the upcoming holiday season will be 23% to 24% higher than for the same period over the past five years. Early planning also helped Walmart and Target, which correctly predicted a strong rebound of last year’s holiday season.
On the other hand, smaller firms continue to express their concerns about low inventory levels as the index for inventory satisfaction. For example, the percent who reported “too low” minus the percent who reported “too high” from small businesses remained elevated at 9% in October compared to 3% in March 2021 and 4% one year ago in October 2020.
Supply constraints have forced manufacturers to pick which companies they want to send their outputs to, and it is understandable that they choose bigger companies that have more capital to leverage their positions. This adds to the other challenges that smaller companies have had to deal with while struggling to survive from a once-in-a-lifetime crisis.
A K-shaped recovery for inventories
Since the beginning of this summer when the supply chain issue started to worsen, we have seen two paths among retail groups in terms of the inventory problem: one with modest improvement and the other in continued decline.
Automobile and part dealers, along with furniture, electronics and appliance stores, both recorded improvement in the inventory-to-sales ratio, rising to 1.18 and 1.49, respectively, in September from 1.15 and 1.31 in April. One reason was that after a period of robust demand and heavily limited supply, demand for those durable goods has eased significantly while supply bottlenecks have shown some improvement.
If anything, middle market businesses that increased orders earlier in the year in anticipation of supply chain challenges and strong demand may now have too much inventory exposure. While merchandise sat on ships amid port congestion, consumer preferences shifted and demand for home furnishings gave way to spending on services and other nondurables.
Businesses in this situation are faced with a difficult decision to unload stockpiles at discounted prices or bear added storage costs until demand catches back up.
The other reason is that many of those products have become more expensive, effectively prompting many consumers to put their buying plans on hold, according to consumer sentiment data released recently.
The story for nondurable goods such as food, beverage and clothing are the opposite because of the impact of the delta variant’s surge this year in China and Southeast Asia, the world’s manufacturing center for apparel and the agricultural source for many varieties of exported food and beverages.
The inventory-to-sales ratio for food and beverage fell to 0.72 in September compared to 0.74 in April while clothing and accessories dropped to 1.85 in September from 1.98 in April.
Multiple rounds of port closures in China and factory shutdowns in Southeast Asia because of these countries’ zero-tolerance COVID-19 policies have put a significant dent in the inventory levels of those retail groups that have suffered from the inventory-to-sales imbalance ahead of the holiday season.
The concern over supply chains cuts across all sectors of the economy.
But the problem is not the same everywhere. Supply chain bottlenecks have heightened the competition between large firms and small firms, and among industry groups that will surely produce winners and losers as the issue persists.
From consumers’ perspective, the out-of-stock problem might not look as gloomy as many have predicted. And again, it has been quite a while since the last time everybody had a chance to enjoy a “normal” holiday season.
We believe that there is no reason to think that spending will decline this time around as consumers adjust to a new normal.
For additional insights from RSM on the holiday shopping season, check out our five-part series on the consumer products holiday season countdown.