Q4 2021 was already unprecedented. Now retailers face another uncertain peak season while navigating record low industrial capacity and record high inventory levels.
Key Takeaways
- Economic uncertainty, excess inventory levels, congested ports and tight industrial capacity challenge retailers preparing for peak
- In 2021 and early 2022, retailers built inventory levels both to circumvent long-standing shipping challenges and match record consumer spending. Some saw their inventory levels balloon as much as 43%
- Retailers shipping inbound inventory face the lowest industrial vacancy rate ever—3.3% in Q1 2022
- Retailers face a dilemma: order and hold goods in higher amounts to mitigate potential stockouts or risk empty shelves to right-size inventories. Leading retailers leverage an additional strategy to balance existing inventory and peak forecasts: flexible capacity and additional partnerships
In 2021 and early 2022, retailers built inventory levels both to circumvent long-standing shipping challenges and match consumer demand. Now, economic uncertainty, excess inventory levels, congested ports and tight industrial capacity challenge retailers preparing for peak.
As retailers finalize peak forecasts, ports brace for more imports ordered earlier than usual in preparation for peak. Once goods arrive in congested ports, retailers must then determine where to store them ahead of—and during—peak. Warehouse space is scarce. Brands face the lowest industrial vacancy rate to-date.
Retailers face a dilemma: order and hold goods in higher amounts to mitigate potential stockouts or risk empty shelves to right-size inventories. Leading retailers leverage an additional strategy to balance existing inventory and peak forecasts: flexible capacity and additional partnerships.
Economic uncertainty challenges consumer spending #
When the Flexe Institute polled retailers in Q1 2022, 95% believed online sales would stay the same or increase over the next 12 months.
In spring, inflation reached its highest level in four decades. Retail sales fell 0.3% in May, the first decline in month-over-month sales in 2022. Consumers shifted spending to cheaper alternatives in some categories—food and beverage and consumer packaged goods for example—as concerns grew over an economic recession. In June, economists polled by The Wall Street Journal raised the probability of a recession to 44% in the next twelve months.
Retailers respond unevenly. Some industries currently forecast purchase order reductions of 20-30% on Chinese goods. Others won’t interrupt orders. Overall, order volumes are still above pre-pandemic levels.
As retailers prepare for peak, an uncertain economic future only makes demand forecasts and inventory purchases harder.
Many brands contend with existing excess inventory #
Retailers face a dilemma: order and hold more goods to mitigate potential stockouts or risk empty shelves to right-size inventories.
Brands are wary of stockouts for a reason. Supply chain upheavals generated stockouts throughout the past two years. Per Adobe’s 2021 holiday report, out-of-stock messages increased 172% in 2021 versus 2020, and an astonishing 360% versus 2019. And retailers lose short-term sales and long-term customers to stockouts. Seventy percent of consumers planned to switch retailers or brands to avoid stockouts.
In 2021 and early 2022, retailers built inventory levels to circumvent long-standing supply chain challenges and match record consumer spending. Some saw their inventory levels balloon as much as 43%.
Despite modest sales growth targets, companies hold more inventory than they have in decades. As retailers prepare inventory forecasts ahead of peak, existing excess inventory could prove both burdensome and costly.
In 2021 and early 2022, retailers built inventory levels to circumvent long-standing supply chain challenges and match record consumer spending. Some saw their inventory levels balloon as much as 43%.
U.S. ports brace for peak transit periods amid high lead times
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U.S. ports brace for an earlier than usual peak import rush for the fall and holiday seasons. Retailers fear additional supply chain delays and many planned to ship peak season inventory at the end of June—weeks earlier than usual.
The factors shippers face:
Import levels are still strong. The combined monthly imports for Los Angeles and Long Beach remain on track with 2021, far above 2018-2020 trends. Ship volumes grow in East Coast and Gulf Coast ports and will exacerbate existing congestion. The port of Savannah projects 108 planned vessels in late June and early July in contrast to the 35 ship average per week held since January 2022.
China lockdowns in 2022 extend lead times for production-critical materials and maritime transits. The effects will likely last six to 12 months for retailers across industries.
West Coast port labor challenges may create bottlenecks. And longshore laborer contracts expired on July 1. Contract talks resumed June 1. Any new processing slowdowns will exacerbate congestion delays.
Lead times remain unpredictable. Lead times ticked up again in Q2 2022, and it now takes 111 days for vessels to arrive at West Coast ports—a 246% increase from pre-pandemic transits.
Logistics professionals expect a chaotic peak season. Fifty-one percent expect this year to be worse than 2021.
Logistics professionals expect a chaotic peak season. Fifty-one percent expect this year to be worse than 2021.
Once goods arrive in port, retailers still need warehouse space to store inventory for Q4 2022
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Retailers face substantial peak challenges—economic uncertainty, inventory imbalances and uncertain transit conditions. As they prepare inventory forecasts and orders, retailers will also consider what to do with peak inventory once it actually arrives state-side.
Brands will experience the lowest industrial vacancy rate ever—3.3% in Q1 2022, per Cushman Wakefield.
Retailers encountered tight warehouse capacity throughout 2021 and into 2022. This isn’t new. The question retailers must now answer: Where does early inventory go after it lands in ports? After all, many retailers face highly constrained warehouse networks today—with existing inventories.
Consumer eCommerce expectations add additional pressure #
Consumer eCommerce expectations create additional pressure for retailers. Customers want eCommerce orders—fast.
According to the Flexe Institute’s 2022 Omnichannel Retail Report, 44% of consumers define “fast” as next day in 2022, compared to only 14% in 2020.
Most peak shopping occurs online, and retailers lose customers over slow shipping. Eighty-three percent of consumers switch retailers for faster delivery. And 72% skip repeat purchases due to late deliveries.
Retailers not only manage existing inventory and net new goods shipped in for peak, they will also consider how to optimally place inventory closer to customers to meet shipping expectations. That means the right goods, close to the right customers.
Again, warehouse capacity is tight and expensive. The national average industrial rent hit $8.93 per square foot in April 2022, up 11.8% year-over-year. Increased industrial construction provides some future relief—though not in 2022.
Retailers can reevaluate existing inventory #
Retailers face substantial challenges—but they are surmountable. Here are three logistics strategies retailers can leverage to meet today’s complex environment.
Liquidate existing inventory to create capacity
Cancel outstanding orders and phase out products to reduce unnecessary imports
Seek flexible capacity and additional partnerships to manage inventory levels through peak
Liquidate existing inventory to create capacity #
Retailers can offer deep discounts and liquidate existing, depreciating inventory to create capacity, reduce inventory holding costs and recapture remaining value.
Many large retailers may target once-popular pandemic products, such as electronics, furniture, high-margin appliances and casual apparel. Many retailers already position discounts in-line with Amazon’s Prime Day, announced for July 12-13 this year. Deep discounts erode margins. But retailers can balance margin risks when they reallocate the warehouse space necessary for peak season goods.
Retailers may also pursue alternative liquidation strategies: Shift goods to outlets, sell excess inventory to off-price retailers or leverage liquidation services.
Cancel outstanding orders and phase out products to reduce unnecessary imports #
Consumers may no longer desire stale product categories or SKUs, so retailers may also right-size inventories by canceling outstanding shipments. They can then reallocate space for new inbound orders. Some industries currently forecast purchase order reductions of 20-30%. Others haven’t interrupted orders.
Many retailers plan to phase out certain product lines or variations to reduce inventory complexity. The downside: Retailers may lose consumers who rely on those product lines when they switch to other brands.
Seek flexible capacity and additional partnerships to manage inventory levels through peak #
Leading retailers leverage an additional strategy to balance existing inventory and peak forecasts: flexible capacity and logistics partnerships.
Successful brands can store inventory in secondary and tertiary markets, like Las Vegas, NV or Greenville, SC. This frees capacity for the goods needed for peak season success. Secondary and tertiary markets offer warehouse capacity at lower labor and space costs and still serve critical regions.
Enterprises can also identify additional logistics service providers (LSPs) and parcel carriers to offset capacity and rates. Additional LSPs and carriers can position high-velocity SKUs closer to customers to decrease mileage, increase efficiency and meet customers’ elevated delivery expectations. Retailers can pursue and select partners fast, however, to establish flexibility ahead of peak deadlines.
Access to additional partners allows retailers to leverage network capacity where and when it’s needed—a strategic advantage critical for this year’s peak season. Likewise, strategic partnerships help enterprises navigate rising costs across the supply chain, from inventory management costs to rapidly accelerating transportation costs.
