Retailers have invested heavily in predictive analytics to drive accurate purchases. Yet they still have significant overstock issues, as even the most sophisticated models cannot predict variable impacts like COVID-19 and drastic shifts in consumer demand resulting from supply chain delays, inflation and high interest rates.
In 2021, fueled by the convenience of online shopping, government stimulus checks and more time at home, consumers have been stocking up on electronics and household items. They even updated their wardrobes as the world reopened. Retailers hoped the spending sprees would continue; however, appetite has waned in recent months and consumers have held back on discretionary spending. Now, stuck with millions of dollars in stagnant inventory, retailers are scrambling to find an outlet, turning to price cuts, long-term storage and redirecting sales to secondary markets.
The excessive woes of retail
Excess inventory is not a new problem. Our reverse supply chain industry experience shows that 25% of a retailer’s returned inventory and 5% of a retailer’s on-hand inventory at any given time is non-performing surplus. What’s unique to this time in history is that retailers are faced with countless confounding variables that have amplified volume.
Kohl’s recently shared that they’re keeping an additional $82 million in inventory, while Gap admitted the overage grew 37% in the second quarter of 2022. Even Walmart reported an expected 13% profit loss as consumers spend general merchandise and clothing at the grocery store. We at goTRG can back these claims because we have seen this impact first hand. Over the past six months, our customers have shipped 46% more new surplus goods to our facilities than the previous year.
Some retailers are discounting excess inventory and hoping to sell in-store, but many want to back away from this strategy for fear of diluting their brands by training shoppers to expect big price drops in the future. Others store surplus goods, which they must do sparingly as some categories lose value over time.
One effective approach that retailers can take is to partner with returns management and re-commerce companies to reposition their inventory and resell their products in the secondary market. They may have to sacrifice profit margins on secondary channels, but they will browse goods faster and protect their brand integrity by having a third party sell products on their behalf. In the process, cash-strapped consumers will reap the rewards – a win-win strategy for both parties.
What Retail Overstocking Strategies Mean for Consumers
Best quality in aftermarket. The aftermarket typically offers a mix of new, used, open box, and refurbished items. What will be unique about this year’s used product lineup is the ratio of new items available as retailers unload historic volumes of excess inventory into these channels.
Retail overstock issues ahead of the holiday shopping season mean consumers will have access to a wide range of new and unopened inventory for potential giveaways on e-commerce marketplaces like Wish, Amazon, eBay, VIP Outlet, Wayfair, BackMarket and others. Plus, they’ll likely see more excess inventory pouring into clearance stores like TJX, Burlington and Ross.
We anticipate that categories such as electronics, games, and furniture will be readily available for purchase on these sites. Large items, like furniture and appliances, are expensive to ship and store, but they typically sell faster and with higher margins than other categories. Retailers can recover an average of 72% of the retail value of furniture in the secondary market.
Electronics, such as smartphones, televisions and laptops, will be another hot aftermarket category as retailers need to move these items before the next generation model arrives. Retailers can recover an average of 66% of the retail value of electronics back on the market, giving them more incentive to tap into this channel instead of sitting on aging (and possibly obsolete) inventory.
Fewer clothing deals. Countless volumes of surplus goods are a net positive for consumers’ wallets. However, we expect shoppers to see fewer apparel deals compared to the other categories previously mentioned in this article. Unlike bulky items, clothing is lightweight, easy to store, and cheaper to ship. Additionally, mass-market staples can retain their original value better than smartphones, which become obsolete when the next generation emerges. Except for trendy or seasonal high fashion items, excess clothing doesn’t need to be rushed out the door. Retailers can “pack and hold” items that won’t go out of style and resell them at (up to) full price in the future.
Several retailers have already announced their intention to implement the pack-and-hold strategy. Kohl’s said it would store unsold goods until 2023. Gap said it was keeping surplus fleeces and sleepwear until the holiday season, when it planned to sell those items at full price. . Carter’s echoed that sentiment, holding onto fall and winter items until shoppers increase demand. Even aftermarket dealers can pack and hold. Rather than pushing overstocked clothes onto resale platforms and diminishing their value, resellers can now increase and store excess inventory in Amazon warehouses.
The pack and hold strategy has several advantages for retailers, but the storage costs will undoubtedly reduce profit margins. And as a result, consumers won’t see as many aftermarket deals on jeans and shirts as they do on dressers and tablets in the coming months.
More great deals, more places. Shoppers will likely be able to find bargains on unopened items on various secondary channels and physical storefronts, sometimes snagging deals directly from the retailers themselves. Even though item discounts can weaken a brand’s image, retailers and manufacturers cannot rely solely on third-party resellers to move all of their inventory. Retailers will need to offer store-level discounts, especially for items that may be difficult or expensive for them to transport to a secondary location.
Target, Walmart, Best Buy and Bath & Body Works have announced promotions to help clear their shelves. Budget-conscious shoppers can expect to find more deals on discretionary goods such as apparel, electronics, furniture, housewares and bath until retailers run out of this stock.
In the short term, consumers will reap the rewards of poor demand planning as the secondary market is flooded with surplus goods. Unfortunately for retailers, re-commerce isn’t always as profitable as direct selling. However, reduced consumer demand, high storage costs, shipping costs and product obsolescence mean that retailers must use all available resources to recoup the highest possible margins. The key will be to be strategic about which categories to push and which to retain.
David Malka is Director of Sales at goTRG