Big retail chains face mountains of excess inventory as long-delayed orders of goods that were popular during the earlier days of the pandemic pour in, only to be met by consumers whose preferences and shopping habits have changed.
Leisurewear and outdoor furniture have given way to airline tickets and restaurant meals as people catch up on experiences they put on hold during the coronavirus pandemic. To clear store shelves of unwanted stock, Target, Walmart, Macy’s and other retailers have been slashing prices on thousands of products in stores and offloading merchandise in bulk before it leaves the warehouse, often at substantial losses.
But those losses could mean big gains for off-price retailers, including TJ Maxx, Marshalls and Ross, as more consumers, squeezed by high prices for gas, food and just about everything else, rein in their spending and turn to discounters for bargains.
“I don’t think any retailer could have planned [for] this drastic sort of cliff and how it was going to happen,” said Brett Rose, the CEO of United National Consumer Suppliers, a wholesale distributor that buys discounted and overstock products from manufacturers and resells them to retailers.
“[They] have all this product that came in that nobody’s buying.”
Macy’s, Target, Walmart and other big retailers said inventory levels during the first quarter were up anywhere from 17% to 45% compared to the same time last year.
“There’s probably 20% of [inventory] if you could just wish away and make it disappear, you would,” John Furner, the CEO and president of Walmart U.S., told analysts this month. Short of that, Walmart rolled back prices on more than 10,000 products, including kitchen appliances, sports equipment and home decor. Target and Best Buy also marked down more items to move products out of stores and distribution centers.
With limited shelf and storage space and shipments of new goods arriving every other week, full-price retailers need to unload poor-selling merchandise quickly, said Lorraine Hutchinson, a retail analyst with Bank of America.
“They don’t want the clearance to cannibalize the full-price sales of those fresh products,” she said. “They would rather take the hit, move it through a channel where it can’t be compared to their full-price items and do the best they can with the new fresh product that’s arriving.”
That channel, or pipeline, often leads directly to off-price chains or to distributors like Rose, who resell surplus goods to stores that rely on closeouts, overstocks and out-of-season inventory to stock their shelves. Rose said the amount of merchandise on the overstock market is up by around 40% compared to June 2019 levels. And given the deep discounts and the wide array of goods available, brokers and off-price retailers are buying “more of more,” he said, and banking on growing demand for deals as shoppers look to stretch their buying power.
Burlington Stores CEO Michael O’Sullivan told analysts last month that the chain has been taking advantage of cheap closeout deals to pad inventories for late summer and fall, when he expects a surge in discount shoppers. “The buying environment now is better than it has been for years,” he said. “If [it] persists, then we would expect our assortment to be more compelling with even stronger values.”
Still, the competition for consumers could get fierce, especially if the economy continues to slip. Data released Friday showed consumer sentiment in June dropped to a record low, according to the University of Michigan. And a recent survey by NPD Group, a global market research firm, found that 83% of U.S consumers plan to spend less on products over the next three to six months. “The interesting thing about off-price retailers, it doesn’t feel like they have limitations,” said Ethan Chernofsky, the vice president of marketing with the retail-location analytics company Placer.ai. “They somehow managed to be value-oriented while still having an appeal to higher-income earners.”
He said that according to Placer.ai’s research, about half of all shoppers at TJX, the parent company of Marshalls, TJ Maxx and HomeGoods, as well as Burlington and Ross, have household incomes of $50,000 or less. But as inflation continues to erode earnings and the threat of a recession grows, retail industry experts say, more consumers with higher household incomes could begin to trade down.
“These fluctuations are typically good for business,” said Todd Stern, the CEO of XS Merchandise Inc., which specializes in closeout goods, including hardware, housewares and automotive products. He has been building up his inventory. Now he’s waiting anxiously for his customers to have an influx of new customers, so they will build theirs. “We’re an opportunistic company. That means whatever comes to us we buy,” he said. “But I think we have a challenge coming.”
Even longtime discount shoppers are changing how they spend. Sharla Horton-Williams, an education consultant in Fort Worth, Texas, has shopped at discount and off-price stores for more than 20 years. But over the pandemic, she said, she switched up her route to save money. At TJ Maxx, where she does the majority of her shopping, she now sifts through clearance items first before she makes her way around the store.
“I’m super excited to see more [clearance] red tags and yellow tags in Marshalls and TJ Maxx,” she said.
She recently found a massage gun that sells for about $79 retail on clearance at the store for about $32 and a large five-wick candle for about $14; it sells for $20 retail.
“If you’re putting stuff on sale, I don’t want to miss it,” she said.
Big retailers, including Target, Macy’s and Bed Bath & Beyond, have said they expect that inventories and consumer demand will return to a more profitable balance by the end of the year or early 2023.
Stern, who has been in the surplus goods business for more than 25 years, is reluctant to predict where his business will be in the next six months.
“Sometimes, mistakes are made. However, we usually buy right,” he said. “My customers are deep discounters and rely on the bargain shopper. Can you tell me when the shopper will have disposable income? That’s my biggest concern.
“I am a worrier,” he said. “What can I say?”
CORRECTION (June 28, 2022, 12:20 p.m. ET): A previous version of this article misstated the name of a company. It is Burlington Stores, not Burlington Factory.