“Will overstocking get retailers through the holidays?” by Tom Ryan via Retail Wire

“Will overstocking get retailers through the holidays?” by Tom Ryan via Retail Wire

Big box retailers are pulling forward orders earlier than normal and aggressively investing in core items as supply chain bottlenecks threaten to lead to empty shelves over the holiday season.

In many cases, inventories are up double-digit percentage points compared to last year’s pandemic-depressed levels and also up over the same period in 2019.

Target inventories at the close of the second quarter were up 26 percent year over year. John Mulligan, COO, told analysts Target’s inventories are “well-positioned” to drive holiday sales against record year-ago gains, although the situation is not optimal.

“Our guests are still seeing empty shelves on some occasions,” he said. “In some of those situations, we’ve simply sold beyond our expectations, and our team is working quickly to secure additional quantities. In other cases, the vendors themselves are facing constraints in their ability to deliver product. And we’re collaborating with them to address these constraints together, securing as much product as possible on behalf of our guests.”

Speaking last week at Goldman Sachs’ conference, Lowe’s CFO David Denton said the home improvement chain has placed bigger orders for high-demand items and its inventory position is in better shape than it was six to 12 months ago.

At Best Buy, inventories at the second quarter’s end surged 55 percent year over year and 23 percent versus two years ago.

CEO Corie Barry told analysts merchants worked strategically to bring in as much inventory as possible during the quarter with actions like acquiring additional transportation, pulling up product flow and adjusting store assortment based on availability. She said, “There will continue to be challenges, particularly as it relates to congested ports and transportation disruptions. But our teams have set us up for as strong an inventory position as possible as we move forward into the back half of the year.”

Wall Street Journal article noted that smaller retailers are often at a disadvantage when negotiating with suppliers or competing for space on container ships. Last year, lean inventories across the marketplace drove full-price selling to help many retailers achieve record profits.

DISCUSSION QUESTIONS: Do you see more benefits than risks in aggressively stocking inventories in the current climate? What steps can retailers take to protect against the downside when operating with elevated inventory levels?

22 Comments on “Will overstocking get retailers through the holidays?”

David Naumann (Marketing Strategy Lead – Retail, Travel & Distribution, Verizon)

Overstocking inventory is probably the safest bet to help avoid potential holiday out-of-stocks due to supply chain issues. Another strategy is to encourage shoppers to buy sooner. During the past five years, holiday promotions have started sooner every year and with the current supply chain challenges, I suspect we are going to see even earlier holiday promotions this year.

Mark Ryski (Founder, CEO & Author, HeadCount Corporation)

All indications are calling for a strong holiday selling season, so it’s prudent for retailers to top up inventory where they can. As noted, supply chain issues also persist, so just having stock is going to be an advantage for retailers. That said, even in a tighter inventory environment, retailers will need to remain vigilant in managing the inventory they have. The cost of holding inventory that doesn’t sell is significant, so managing levels and moving stock that isn’t selling has never been more important. At the same time, restricted inventory means that retailers should also be able to maintain higher margins. It’s going to be a tricky holiday season.

Venky Ramesh (CPG/Retail enthusiast, blogger and a couch potato warrior)

The Consumer Brands Association just released the CPG Economic Pulse: Q2 report. As per that, “the economy grew at an annual rate of 6.5% in the second quarter. That growth, however, was below economists’ predictions of around 8%. The space between prediction and reality is not a product of consumers tightening their belts in anticipation of a rough road ahead or further pandemic-related restrictions. Economic growth has been constrained by supply chain backlogs.” Retailers and brands don’t want to miss on the additional 1.5 percent of demand, but they have to ensure they stock the right products. Demand forecasting plays a key role and it needs to incorporate the voice of the consumer to ensure their prediction is in line with consumer demand.

Dave Wendland (Vice President, Strategic Relations Hamacher Resource Group)

Unfortunately this is a very slippery slope for retailers. The pressures of the supply chain are forcing many to overstock certain items in anticipation of the upcoming holidays or to thwart the ongoing challenge of in-stock condition. As a result, the inventory carrying costs and associated storage and logistics issues are affecting their bottom lines. Balancing empty shelves and satisfying shoppers with the inflated inventory position is delicate to say the least.

There are three steps that I would recommend retailers consider: 1.) Multi-sourcing product where possible; 2.) Developing a robust “substitution policy;” and 3.) Limiting purchase quantities when necessary. None of these are failure proof but all may be prudent in protecting what is sure to be a disruptive holiday season.

Paula Rosenblum (Managing Partner, RSR Research)

Normally I think retailers should buy less to avoid markdowns. Not this year. The supply chain remains unreliable and the Delta wave seems to be subsiding. I think it’s wise to have extra inventory on hand. I just don’t know how long it’s going to take to flush the backlog. I know the auto/chip situation remains a complete mess.

Neil Saunders (Managing Director, GlobalData)

Target inventories may be up and Brian Cornell may well be bullish about having enough stock – but anyone who has been to a Target store recently can’t fail to notice the enormous number of gaps on the shop floor. All retailers are affected by this, so it isn’t just Target, but there is a gap between what some executives are saying and what is happening on the ground. As such, as much as overstocking is a sensible policy this season, it won’t solve all of the issues. There are shortages across the whole supply chain from manufacturing to ships piling up outside LA ports to insufficient truckers to deliver goods. And all this at a time of elevated demand. It really is the perfect storm and I don’t think many retailers will navigate it complete unscathed.

Liza Amlani (Principal and Founder, Retail Strategy Group)

Overstocking can be very risky for a retailer as there are no guarantees that buying more stock will translate into sales. Buying more is not always the answer. Buying the right product, using data to better predict the shifts in consumer shopping behaviors is what merchants should be doing. Buying more inventory leads to excess and the impact to the climate is irreversible. We need to stop encouraging retailers to buy more and push them to leverage technology to buy smarter.

Jeff Sward (Founding Partner, Merchandising Metrics)

I hope any overstocking is done on a highly surgical basis. Meaning long shelf-life product. Overstocking on seasonal apparel has a lot more downside than upside. Bringing in winter product earlier than it would normally sell may or may not work, depending on customers embracing the “buy early or lose” advice that everybody is hearing. As a mall retailer I would not be overbuying in this environment. The demand we think is there today may or may not be there in 60-90 days. The slightest hiccup (or sneeze with fever) could send retail into chaos. And we don’t know yet what demand will look like in the absence of pandemic level unemployment assistance. What if the retailer overbuys, gets it all, and demand isn’t there? Not a pretty picture.

Gene Detroyer (Professor, International Business, Guizhou University of Finance & Economics; Executive Director, Global Commerce Education)

Panic buying is in the air.

Gary Sankary (Retail Industry Strategy, Esri)

Is there a difference between a gamble and a risk? I’m not being facetious here, but thinking about taking a measured risk, weighing costs and benefits, and just reacting to perception and going with gut feel. I don’t like the idea of overstocking without a very focused plan in place. Which sadly happens a lot in retail.

Personally, I would take a measured approach here. Having inventory on-hand above current demand would be a reasonable strategy in my mind for high performing, basic (non-seasonal) items with a strong demand history. Even there, I would select only a few SKUs that would adequately represent the category should demand take off. I would also try to hold back on final allocations by staging the inventory in DCs or fulfillment centers to allow for maximum flexibility when things heat up (hopefully) during the holidays.

Rich Kizer (Principal, KIZER & BENDER Speaking)

Customers are already complaining about empty shelves in stores in all store categories. The smart retail strategy is to cover your bet that many product categories may not be available to realize sales volume goals through the season. And remember this: when disappointed, time-stressed customers leave a store due to inventory shortages, they are much less likely to return, especially when others are flooding the market with messages of product variability!

Ken Morris (Managing Partner Cambridge Retail Advisors)

Well, I see two major issues here. The first is supply chain disruption, given the lumpy demand caused by hoarding and climate change (natural disasters). The response to the supply chain problem is a challenge, so the answer may well be to order early and often. Granted, COVID-19 has made demand forecasting more of a challenge than ever. So being overstocked is better than being out-of-stock for sure.

The second issue is not having accuracy and visibility into real-time inventory. The real-time inventory problem is a technology issue that can be solved leveraging RFID to give a retailer real-time inventory without having to modify all their legacy systems. For those retailers who already have RFID in place at the SKU level, they can react quickly enough to replenish without overstocking and sell to the last item without using a safety stock calculation.

Mohamed Amer (Independent Board Member, Investor and Startup Advisor)

Aggressively stocking high-demand products is wise given the supply chain bottlenecks. This strategy needs to be selective and calculated and not a broad-brush approach. Otherwise, the resulting risk is that any financial gains will evaporate by the heavy burden of slow-moving inventory.

Lisa Goller (Content Marketing Strategist)

Aggressive stocking has emerged as a priority ahead of the 2021 holidays due to heightened global supply chain risks. Product availability is essential for retail success, especially for in-demand items. Out-of-stocks mean lost revenue and customer dissatisfaction, which can erode loyalty.

Relying on domestic and international warehouses to stockpile bestsellers can protect product availability. Partnering with agile logistics teams can help retailers mobilize and stay flexible as market factors shift.

Bob Phibbs – President/CEO, The Retail Doctor

It’s going to be a once-in-a-generation holiday. Anything any retailer can do to have anything sellable is right. I talked to a manufacturer Friday who confided they won’t have full stock abilities until 2023.

Cathy Hotka (Principal, Cathy Hotka & Associates)

At recent dinner events, retailers have been clear about pre-ordering as much merchandise as they can, due to supply chain shortages of fabrications and shipping delays. Hurricanes have damaged factories that make foam, further delaying furniture orders. They urge consumers to start their holiday shopping early!

Gene Detroyer (Professor, International Business, Guizhou University of Finance & Economics; Executive Director, Global Commerce Education)

Historically, retailers of all shapes and sizes have been notoriously poor in buying inventory. They end with too many products that are too small or too large and come up short on just right. They are tone deaf to the cost of carrying inventory. They seem to buy based on their own wishes rather than the desire of customers.

One wonders if under these hopefully unusual conditions, the mantra won’t be “I think we might have a problem getting it, so let’s buy more.” There is nothing wrong with that, as long as the “more” revolves around potential consumer demand and not just panic.

Ron Margulis (Managing Director, RAM Communications)

Capital is still very cheap, so that’s not a reason to hold back from padding the orders. Storage cost, especially ambient, is also relatively cheap, so that’s not a reason to overstock. The risk of markdowns is typically outweighed by the negative perception of out-of-stocks on the shelf/digital store. The competitive environment is such that consumers will almost always get what they want somewhere. If not you, then the store down the street or down the internet dial. And that is the biggest risk of all.

Andrew Blatherwick (Chairman Emeritus, Relex Solutions)

The trouble with overstocking is that buyers often get it wrong and the company is left with massive overstocks on some items and out-of-stocks on others. It is very important to have stocks of the fastest sellers for the holiday period but customers want to see a decent range of merchandise as well. If there is a free-for-all among buyers the ones who get in first get the majority of space leaving the other ranges depleted and understocked. It has to be managed carefully and that rarely happens when management says “just make sure you have enough stock.” Why would retailers believe that they will need 25 percent more stock than they did in 2019 if the item is flat or at risk from higher online sales? If they are just throwing inventory at the business and not really planning it carefully. There are excellent inventory management and planning solutions that enable you to turn up the inventory levels while keeping control rather than just letting buyers loose in the market.

Dick Seesel (Principal, Retailing In Focus, LLC)

Nobody wants to be stuck with excess seasonal inventory, but it’s clear that retailers underestimated the resurgence in consumer demand beginning in the second quarter. Store after store is out of stock on key items and core sizes, and it’s a forecasting problem as much as a supply chain issue.

The impact of COVID-19 continues to be unpredictable in the months ahead, but the opportunity to gain market share — simply by having a well-stocked assortment — is out there for the retailers prepared to be more aggressive.

Ryan Mathews (Founder, CEO, Black Monk Consulting)

Overstocking is rarely a good idea, but the state of the supply chain – especially from China – may make it necessary. Being out-of-stock on key items at the holidays is never good, which is an argument for overstocking. But overstocking impacts cash flow, margins, internal supply chain efficiency, requires multiple touches, increases shrink and – if you make a buying mistake – leaves you with the problem of liquidating huge amounts of inventory consumers apparently didn’t want. The only real protection is to buy smarter and talk to your customers to see what they really want and – perhaps more importantly in this case – what they really don’t want.

Doug Garnett (President, Protonik)

Holiday orders are always risky. This year’s are even riskier than normal — with questions of customer demand due to the pandemic and supply chain problems worldwide.

And, yet, I’m pleased to see retailers stocking up. Corporations have too often allowed risk management to be risk avoidance — yet success only comes by taking risks.

Now we will have to see which retailers win with this approach and which suffer.

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