Supply chain chaos still reigns for retailers, but different retailers face different types of chaos.
By Wolf Richter for WOLF STREET.
There are now stories of retailers suddenly being “overcrowded” and the shortages having turned into flooding, and suddenly people are already seeing that the supply chains have been miraculously fixed or whatever. But overall retail inventories remain very low, and the largest category of retailers — auto dealers — have desperately low inventories and they’re low at other retailer categories, but general merchandise retailers like Walmart and Target are suddenly inundated with some merchandise types.
What happened at these general store retailers and some others is that endless lead times and pitfalls and chaos delayed the goods, and by the time they finally got there, consumers had moved on to other things. And these retailers were running out of the stuff consumers were switching to and overstocked with the stuff consumers were no longer interested in.
Total retail inventories, as measured by monthly supply, are still near historic lows.
Having the wrong inventory on hand is a classic retailer problem. To minimize this risk, retailers have shortened their supply chains and postponed important product decisions until the last moment. And then the pandemic came and that solution became a huge problem and retailers had to adapt on the fly. And some retailer categories have been caught off guard and are overstocked, while many other retailer categories are very low on inventory or have bottlenecks, including the largest retailer category – auto dealers – which are still out of stock. The total inventory-to-sales ratio – or monthly supply – at retailers improved only slightly to 1.18 monthly supply:
Inventories in dollars = frenzied cost inflation, not rising inventories.
Inflation on goods – which retailers sell – was far higher than the headline CPI. For example, wholesale prices for used vehicles, which become the cost of inventory for dealers, rose 35% to 45% year over year between October last year and February this year. These cost increases have bloated dollar-denominated inventories, although in terms of vehicles, used vehicle inventories remain tight and have actually declined over the past three months.
What counts: monthly supply.
To rule out the impact of the rising cost of goods and get a feel for how actual inventories compare to sales, let’s look at the “inventory to sales ratio,” a classic industry metric that shows how many months it took to sell sell the inventory at the end of the month at the current sell rate.
Last week, the Census Bureau released retail inventory data through April. Late April also marks the end of the first fiscal quarter for most retailers, including Walmart and Target.
We will look at it by category of retailers because there are big differences.
At car dealerships, the largest category of retailers, which account for over 35% of total retail inventories in normal times, inventories remain desperately low at 1.28 months supply, up from around 2.2 to 2.4 months pre-pandemic supply. And they made little progress:
Auto dealers are now grappling with a different problem: Pickup trucks and large SUVs were all the rage in 2020 and 2021, and earlier in 2022, and due to semiconductor shortages, nobody had any in stock. Automakers prioritized the production of these vehicles because they are far more expensive and profitable than smaller vehicles, and if they can only build a limited number of vehicles due to semiconductor shortages, they would build the most expensive and most profitable ones to maximize their revenues and profits – what they did.
Then gas prices started to rise earlier this year and suddenly consumers were chasing more fuel efficient cars and compact SUVs and hybrids and now dealerships are out of them, they’re pretty much all gone from inventories while pickup trucks are piling up at some brands. But overall, new car inventories remain desperately low.
The number of new vehicles in dealershipshas fallen by 70% since 2019 to just 1.13 million vehicles at the end of May, according to data from Cox Automotive. Many models, especially now more economical vehicles, have essentially disappeared from stock.
The number of used vehicles on the dealerships, close and below pre-pandemic levels at 2.47 million vehicles, but there is ample supply for the current lower sales rates, held down by a partial buyer strike against these sky-high prices:
In grocery and beverage stores, Supply is almost back to pre-pandemic levels at 0.78 months, which is a good thing:
In the building material and garden tradesupply is back at the high end of the pre-pandemic normal range at 1.87 months, as in April and May 2019:
In clothing and accessories stores, Inventories have improved from desperate levels over the past year. The current supply of 2.12 months is about 13% below the level of the same period in 2019:
At grocery stores, which accounts for about 12% of total retail inventory and includes Walmart and Target, inventories have surged as their goods finally arrived. Meanwhile, consumers shifted their spending to services like travel and dentists and entertainment events and items those stores suddenly ran out, so there’s now plenty on offer, but some of it is the wrong stuff, with shortages of the right stuff. The supply of 1.58 months was the highest since 2007:
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