Retail Crisis: Why Mountains of Excess Inventory and Overselling is Set to Kill Off Many Promising Businesses

Remember the early days of the pandemic? The never-before-seen surge in online shopping meant retailers were overwhelmed with demand. Locked-down consumers, desperate for a distraction, scrambled for everything from at-home fitness equipment and game consoles to gazebos and scatter cushions — and warehouses were cleared of stock as supply chains buckled under the extraordinary pressure.

Stockouts were disastrous for retailers during the pandemic — up by 250 percent — and with 37 percent of consumers saying they would simply shop elsewhere if they couldn’t find what they wanted, the general mood was one of impatience. Rather than benefit from the surge, retailers suffered. According to data from our sister company, Brightpearl, almost half of retailers (46 percent) said they experienced stockouts, leading to a loss of sales.

It’s fair to say that most companies that survived these e-commerce waves emerged rattled at best. The lucky ones managed to balance stock levels reactively, replenishing a steady stream of their best-selling products as the orders came in, even successfully growing their business. Most, though, had taken a severe hit to profits, and in what’s called a ‘bullwhip effect’ in supplier circles, ended up over-purchasing a mass of stock as a safety cushion.

From Stockout to Overstock

When we consider the unpredictability of the last couple of years, overstocking seems a forgivable choice. Worldwide shutdowns made the period when people were stuck indoors, sustained only by a stream of online deliveries, seem like it would never end.

Of course, this level of demand couldn't be maintained, and in 2022, they have dropped considerably. What no one could have anticipated was the number of coinciding crises that would emerge, sending retailers across the globe into a state of cash flow paralysis.

Among them, a global supply chain crisis — rife with driver shortages and lengthy shipping times, buttressed by a lack of resources and skyrocketing costs brought on by the Ukraine war. High rates of inflation and increased cost-of-living means consumers are buckling down on discretionary purchases and saving their cash for food and gas. Even returns are up, reaching 16.6 percent in 2021 from 10.6 percent in 2020 (National Retail Federation).

The result? Retailers that overstocked during the pandemic are now stuck hoarding a mountain of goods in their warehouses that they can’t shift. With the return on inventory investment slowed, that can damage cash flow predictability.

Unsold stock is another revenue drain that's an absolute killer for cash flow; the other side of the out-of-stock coin. It not only loses retailers money, but the cost of stock liquidation delivers a devastating blow to the bottom line that can be lethal for business.

Retail Week recently warned that the post-pandemic problem of excess stock could be the final nail in the coffin for retailers, while other reports describe merchants being overstocked by more than 30 percent with no space to keep it all.

For example, Target recently announced its plans to "rightsize its inventory" by making additional markdowns across the board.

But these reactive, stop-gap solutions aren’t viable for all, and are actually making things worse. Six out of 10 retailers have increased prices to cover expenses and recoup losses, whereas 29 percent are instead choosing to "take the hit" in order to keep their prices stable. In either case nobody wins, as it’s either the retailer or the customer that gets hit in the pocket.

In addition, there are no indicators of when the outlook will change, not with so many global factors at play. In terms of supply chain issues at least, experts have predicted the effects could last well into 2023. This means firms will have months of uncertainty to battle with, alongside a warehouse of overstock trapping their cash; stuck in a tug of war between what they can sell and trying to dispose of what they can’t.

It’s clear that this inability to smartly manage stock is a corrosive force on retailers — both in terms of revenue and their long-term viability. The crisis is severe. In fact, 26 percent of online retailers are only six weeks away from going bust if their cash flow issues don’t improve.

Clearing the Mist Over Inventory

These unforeseen circumstances have upped the pressure on retailers, but there are lessons we can learn operationally. The crux of the issue here is a lack of visibility — across inventory planning and purchasing, stock control, and supply chain.

Without the ability to target these cash flow blockers lurking in the stockroom — the overstocks, the out-of-stocks, and which products are either driving sales or going stale — retail businesses have struggled with intelligently solving their inventory issues. There needs to be a means of laser-focusing on sources of trapped revenue, smartly preparing for unpredictable peaks and valleys in demand, and factoring supply chain issues such as extended lead times, into purchasing decisions.

So what’s the solution? One thing’s for certain — it isn’t in spreadsheets. To calculate something as nuanced as forecasting predictions among so many environmental factors would be almost impossible, not to mention time consuming.

The key lies in using solutions that drive business intelligence forward, such as inventory planning and demand forecasting software. With it, firms can gain visibility into their inventory, accurately forecast sales, and factor in variables such as supplier costs and lead times down to meticulous levels of detail.

We know that access to this data leads to better decision making and more optimized cash flow, which is essential for survival as we enter a tough recessionary climate.

Manual analysis and guesswork will no longer serve companies in the rapidly shifting e-commerce world. It will invariably lead to mountains of excess inventory and many doomed businesses as a result.

New solutions like data-fueled demand forecasting are needed to empower retailers to keep a consistent stock of their best-selling items, release their duds, eliminate the risk of overselling, and make informed decisions around purchasing, marketing, pricing and even staffing. Then, they can step off the overstock/stockout see-saw and get back on the ladder towards profitability and growth.

Conclusion

Drawing consumers back online will be a hardy task, but the multifaceted disruption to e-commerce makes it vital that retailers do everything possible to take back control of the service they provide. Their long-term survival may — and probably will — depend on it.

Jill Liliedahl is the vice president, revenue, for Inventory Planner by Sage. After six years as an entrepreneur, Liliedahl now works with e-commerce businesses, helping them to be more efficient and make informed purchasing decisions that boost their bottom line.