Thinking beyond markdowns to tackle retail’s inventory glut

Over the past 18 months, retail supply chains have experienced unprecedented demand and supply shifts. Pandemic-related disruptions from the end of 2021 to the start of 2022 led to goods arriving late—or, in some cases, after the season. As retailers sought to overbuy inventory to mitigate potential shortages, softening demand and a sudden shift in consumer spending in the middle of last year left them with an inventory glut needing to be marked down or warehoused.

How much unsold stock are we talking about? In the United States, total retailer inventories rose by $78 billion to around $740 billion over the course of 2022—an increase of about 12 percent.1 The stock prices of some mass retailers declined during the same period as they reported overstocks and forecast reductions, while suboptimal-assortment issues also hit the market value of some apparel companies.2

Some hoped consumer demand during the holiday season would clear some of the backlog, but consumers across the Unites States and Europe remained more pessimistic about economic recovery than during the COVID-19 lockdown period.3Feeling glum? You’re not alone,” McKinsey Chart of the Day, August 30, 2022; “European consumer pessimism intensifies in the face of rising prices,” McKinsey, October 27, 2022. This led to consumer hesitance, and retailers resorted to steep discounts to spur demand. With consumers globally indicating a strong preference for online channels and trading down, retailers were left with still-bloated inventory positions.

These challenges are exacerbated by three additional factors (Exhibit):

  • Inability to pack and hold. Higher interest rates and constrained warehouse capacity (often propelled by incorrect assortment taking up space) are increasing inventory carrying costs and affecting discretionary retailers’ ability to pack away products for next season. Our research finds apparel executives have less appetite to pack and hold compared with prepandemic levels, for instance.4
  • End-to-end cost pressures. The rising cost of labor in stores means price changes and markdowns are squeezing margins.
  • Impact on suppliers. Suppliers, already facing inflationary pressures and supply chain disruptions, are exposed to financial shocks and insolvency risks as retailers cut orders. This in turn is affecting long-term supply security.
Brands are less likely to hold onto inventory than they were in January 2022, but they are still holding more than in 2019.

Transforming availability and inventory productivity across five dimensions

Many retailers are deploying short-term tactics to address their inventory challenges. Though some of these tactics are essential for mitigating issues in the short term, a reactive strategy can prevent retailers from building the necessary tools, processes, and organizational capabilities to tackle similar disruptions in the future. We believe this is an inflection point for retailers to build resilient and agile supply chains that better prepare them for future disruptions, but it requires retailers to adopt short- and long-term actions across five dimensions.

Mitigating near-term inventory pressures requires retailers to keep sight of the longer-term bets so they can emerge from this crisis with stronger, more resilient supply chains. Acting across these dimensions can deliver a competitive boost. For example, one convenience retailer unlocked more than $100 million in incremental sales by improving product availability through a combination of near-term tactics (such as tailoring service levels, improving inventory accuracy, and reconciling overdue purchase orders) and long-term actions (for example, establishing an inventory health cockpit or dashboard and adopting a new cadence for vendor compliance). In an environment in which improving the productivity of working capital is critical, we believe the time is right for retailers to rethink their inventory strategy to their advantage.

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