Inventory shortages and gluts, by retailer segment: where they are and why

Overall supply at retailers is still 18% below normal, huge shortages in some segments, gluts in others. Luckily, groceries are only a little below par.

By Wolf Richter for WOLF STREET.

The measure of inventory levels in the retail sector — the inventory-to-sales ratio — hit 1.21 months of supply at the end of June, Census Bureau data showed last week. This harkens back to the era of empty shelves, but was still down 18% from the average supply in 2019. And there are big differences by retailer segment, ranging from huge shortages unabated at some, to slightly below normal in others, to overloaded in others.

New vehicle dealerships still have woefully low inventory and are essentially out of fuel-efficient vehicles. The number of new vehicles in inventory is down 70% compared to 2019. In other retail segments, such as grocery stores, the shortages are over, thank goodness, but the supply remains lower than it was before the pandemic. But some general merchandise retailers, such as Walmart and Target, overordered certain items, and by the time those items finally arrived, consumer spending had shifted to other items. More on these segments in a moment.

This inventory metric includes what is in that retailer’s stores, as well as what is in that retailer’s warehouses. So it’s not just about what’s inside the store, but the total inventory the retailer holds, including in their warehouses.

Patio furniture and certain types of clothing are what Walmart cited as problematic items. Consumers bought a slew of laptops, PCs, smartphones, and networking gear during the pandemic to work, study, and sit at home, and now they have it all, and they’re spending their money in plane tickets to go somewhere, and sales of certain types of electronic devices, furniture, etc. are weakening and stocks have accumulated.

The pandemic, from the very beginning, has upended the normal game plan for retailers, and continues to do so. And Americans, notoriously fickle about their spending preferences, are doing it again, with sudden shifts that can leave retailers with the wrong inventory.

Dollar inventory shows raging cost inflation. What matters: months of supply. Goods inflation has seeped into the entire supply chain, driving up the cost of goods for retailers. Higher costs drive up inventory dollar levels, even though the number of items has not changed. Thus, inventory dollar levels are irrelevant in measuring whether retailers are overstocked or understocked.

To eliminate much of the impact of soaring costs of goods on inventory and to get an idea of ​​actual inventory levels relative to sales, we look at the “inventory-to-sales ratio”. This classic industry measure shows how many months it takes to sell the inventory available at the end of the month at the current rate of sales.

At car dealerships, the inventory-to-sales ratio rose to 1.39 months of supply, still down 40% from the average 2.3 month supply before the pandemic. But there is a huge difference between the supply of used vehicles, which is almost back to normal, and the supply of new vehicles, which is still hampered by massive shortages, although these shortages have shifted from vans and large SUVs to fuel-efficient vehicles – more on that in a moment.

Auto dealerships are the largest retailer segment in terms of inventory size, which normally account for over 35% of total retailer inventory:

The number of new vehicles on dealer lots and in transit fell further in July to just 1.09 million vehicles, down 70% from the 2019 average level, according to data from Cox Automotive. But the composition of those stocks has changed in response to soaring gasoline prices this year:

  • Strong demand for fuel-efficient vehicles has depleted inventories of minivans, subcompact cars, compact cars and midsize cars.
  • But inventories of full-size pickups and SUVs are piling up, with some brands already at very high levels (Ram 1500 trucks):

The number of used vehicles on dealer lots has remained stable over the past three months at around 2.47 million vehicles. This is only 14% below average levels in 2019:

In food and beverage stores, supply has increased since the era of empty shelves – which is a very good thing – but it remains below pre-pandemic levels and fell in June to 0.77 months.

Note: This inventory metric covers what is in the organization’s stores, plus what is in the organization’s warehouses. Inventory levels at grocery stores are typically low as inventory moves through a pipeline, with new merchandise arriving daily, as merchandise is sold. But this measure also covers what is in the retailer’s warehouses and in transit from the warehouses to the shelf.

At building and gardening material retailersthe inventory-to-sales ratio rose to 1.93 months of supply, the highest since 2012, as consumers shifted from buying patio furniture and materials for DIY projects, which have exploded during the pandemic, buying tickets to sporting events, cruises, plane tickets, or whatever, to do what they’ve been missing for the past two years.

In clothing and accessories stores, the inventory-to-sales ratio increased to 2.22 months of supply, far from the out-of-stock levels in 2021, but still below pre-pandemic levels of 2.4 months of supply:

In general merchandise stores, the inventory-to-sales ratio jumped to 1.61 months of supply, the highest since 2007, after well above pre-pandemic levels earlier this year. This segment includes stores like Walmart and Target, and department stores.

The segment accounts for only 12% of total retail inventory. And it’s in this segment that excess inventory levels are now an issue that these retailers have acknowledged in their earnings calls. Retailer overstocking is a classic and common problem, as consumer preferences change for them and they know what to do: offer deals.

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