For the past two holiday seasons, brands and retailers have struggled with Covid-induced inventory and fulfillment delays. But this year, the big issue may be overstocked warehouses.
The risk of inventory issues during the holiday season appears to have increased in the past couple of weeks due to external variables such as Hurricane Ian in Florida, which disrupted and damaged warehouses. Separately, excess freight and uncertainty around orders being sent from China are adding to the chaos. One industry analyst told Modern Retail that because of the inventory glut brought on by bigger brands and stores, merchants — particularly the smaller ones — are worried that their sales will be lower during this very long holiday season due to steeper discounts.
“A lot of the problems that exist this year are about warehouse availability,” said Steve Bozicevic, general manager, at freight services provider Flexport Flow Direct. What’s more, “the big problems exist in storage and the movement of freight these days because of the existing inventory glut,” he said.
This summer, many big-box retailers — including Walmart and Target — got stuck with excess inventory of products. Consumers are spending less money on categories that trended during the pandemic — like athleisure and home goods — and more on travel and entertainment, leaving retailers with a supply of goods that consumers no longer want.
During their respective first-quarter earnings, Target reported that its product inventories increased 43% from last year, while Walmart’s was up 32%. To move merchandise, both retailers have turned to strategies like discounts — but it is taking months for retailers to move all of the excess product, and the inventory glut is expected to continue through the holidays.
As a result, Bozicevic said that while in normal operating conditions, warehouses generally have a 5% availability of vacancy rate, “we’re down to 3%, maybe even less than 3% nationally right now. And there are some major metros that are seeing less than 1% vacancy.”
“No one has a crystal ball on how to predict demand, which is why we’re in this situation, especially SMBs,” he added.
Even tech giant Amazon seems to be struggling with this same problem and has been placing limits on storage space and restocking for many of its vendors, said the top executive of an Amazon agency. In August, Amazon for the first time introduced a temporary holiday peak fulfillment fee to offset “increased operating costs during this holiday peak period.” The charge will be $0.35 on average for each item sold.
“Space in Amazon Fulfillment Centers is finite and not unlimited. We are witnessing this now with Amazon severely restricting storage capacity/restock limits with brands that we manage across multiple categories,” said Mark Power, chief executive at Amazon consultancy Podean, who works with clients such as Mondelez, e.l.f. Cosmetics and Sony.
Power said almost every brand he works with has experienced or been affected by FBA inventory constraints. “We have seen wild swings as large as 20,000 units of availability from one day to the next.” He added that this also includes lowering of limits beyond what is already in the fulfillment centers, meaning replenishment orders can’t even be created until inventory sells through,” he said.
Power said that this wild fluctuation in constraints at certain fulfillment centers is likely being impacted by a few factors, such as Amazon’s decision to host a first-ever second Prime Day in October, as well as the national slowdown in e-commerce sales more generally.
But Amazon also operates over 80 facilities in Florida and many of these were impacted by Hurricane Ian, which made landfall in southwestern Florida, in Fort Myers on Sept. 29. This has resulted in Fulfilled by Amazon shipments taking an additional two to three weeks to fully move through the system, said Power.
“The total impact of this will be felt throughout the holiday season and beyond as this entire region begins to recover,” Power said. This will be hard to measure initially, but with the shuttering of facilities and the logistical nightmare this will cause throughout the southeast region, you can bet that available inventory space, shipment check-in times and delivery promises will be affected.”
These inventory limits are especially hurting smaller brands and merchants who are finding it harder to move product into warehouses due to the rising cost of operation. Warehouse costs have risen 22% compared to last year, according to data shared by Flexport. “If I’m a warehouse, I want to sell some of my available space to Home Depot or Walmart rather than 50 SMB merchants,” added Bozicevic.
According to David Marcotte, senior vice president of global retail at Kantar, another issue has been sporadic timelines around shipments coming from China over the last six months. “Everybody is concerned about anything they’re ordering from China,” Marcotte said. He added that orders from the region have “a high degree of unpredictability at the moment because of the zero Covid policies. And so people are cutting back on orders from China and looking for alternative markets, say Mexico or Cambodia.”
Still, moving manufacturing operations isn’t something that can happen overnight. Marcotte said he’s not seeing a huge move into re-shoring because companies can’t find enough labor to open factories. But, he added, it’s something that retailers are looking into a lot more.
The other big uncertainty around inventory this holiday season is whether or not dockworkers at West Coast ports will go on strike, as they’ve been working without a contract since July. “A potential West Coast port strike would be truly disastrous for the economy, let alone retail,” Matthew Hertz, co-founder of logistics consulting firm Second Marathon told Modern Retail.
Ultimately, the overall inventory glut — and the potential for further inventory delays should a West Coast port strike occur — could lead to even more fire sales come Black Friday and Cyber Monday. But the question is, especially with rising inflation, if even those sales will be enough to get shoppers to spend more.
“I just don’t know how much money people have to spend on them. I think that is going to take a huge share of wallet for the enterprise sellers. And for the big retailers, they’re going to take a disproportionate share of wallet than they normally do,” said Bozicevic.