Retailers are taking costly steps to clear inventory ahead of peak season

With consumer demand cooling, retailers have shifted from scrambling to secure supply to aggressively shedding excess inventory.

Rising inflation has tempered spending and prompted many companies to roll out steep markdowns and other measures to move unsold products. The Census Bureau reported that July retail sales remained flat compared to June, with the National Retail Federation noting that sales at clothing and clothing accessories stores fell 0.6% month over month.

“I think a lot of companies said, ‘Oh, there’s a buying frenzy,’ and forgot the frenzy part,” said Erika Marsillac, professor of supply chain management at Old Dominion University. “A party ends, it’s not something that goes on forever.”

The slowdown in spending came as many businesses received orders placed months ago when demand was higher. As a result, retailers are now overwhelmed by an “inventory boom,” said Urban Outfitters CEO Richard Hayne. a Q2 call.

Companies are employing a variety of tactics, including steep discounts, order cancellations, and packing and holding strategies, in an effort to clear their shelves of stagnant products and make room for holiday stock.

“None of them is a perfect tool, but retailers have to resort to them for lack of better options,” said Jie Zhang, professor of marketing at the Robert H. Smith School of Business at the University of Maryland, in an email.

“I hesitate to call it a bloodbath, but it’s going to be lousy in terms of discounts and markdowns”

Richard Hayne

Urban Outfitters CEO

After suffering sluggish sales from late June, Nordstrom is among retailers now prioritizing product markdowns and inventory clearance to make room for new products, the president and chief brand officer said. from Nordstrom, Pete Nordstrom, on August 23. Call for Q2 results.

Urban Outfitters, which owns brands such as Free People and Anthropologie, is also working to reduce inventory in the second half of the year with increased markdowns and order cancellations.

When it came to markdowns for the retailer’s lower-tier brands, such as Urban Outfitters, Hayne was pragmatic. “I hesitate to call it a bloodbath, but it’s going to be lousy in terms of discounts and markdowns,” the CEO said on the call.

Markdowns and order cancellations, while effective in eliminating excess inventory, are “very detrimental” to retailers’ bottom line, Zhang said. This holds true for Nordstrom – the retailer estimates it will lose $200 million in gross profit in the second half due to markdowns and clearance efforts.

Highly promoted environments also risk making discounts the norm for shoppers, further hurting retailers, Marsillac noted.

“As [discounts] become more frequent, then they become almost expected,” Marsillac said. “But above all, you have to get that markdown in front of people for the good stuff. If someone is not in the store, not looking online, they will not see these markdowns.”

Some retailers like The Gap and Kohl’s are removing less seasonal items from shelves in an attempt to sell them at a later date when demand improves. Kohl’s is saving its fleece garments to sell over the holidays, chief financial officer Jill Timm said on the company’s website. Call for Q2 resultswhile Gap clings to basics like t-shirts and shorts.

“We are confident that we will be able to incorporate our packaging and curated inventory into future assortments, as the majority of merchandise is carefully selected seasonal staples that we regularly use to complement our assortments,” the company said. Chief Financial Officer Katrina O’Connell at the company meeting. August 25 Call for Q2 results.

Either way, disposing of inventory won’t come cheap, as even packaging and storage strategies require higher storage costs. It’s also unclear whether retailers will succeed in their efforts to stabilize inventory levels, especially if inflation remains high and consumers continue to slow spending.

“If in fact that’s what most other consumers are going to do, then companies are going to have a whole bunch of leftover inventory,” Marsillac said.

This story first appeared in our Operations Weekly newsletter. Register here.

Carol N. Valencia