Retailers are slashing prices because they are drowning in inventory.

Over the last month, both Walmart and Target reported earnings results that took billions off their valuations.

If you want to know how it happened, then this thread is for you:

The problem started in March 2020. When COVID began spreading in the US and led to stay-at-home directives the purchasing behavior of everyone changed.

Demand for toilet paper, masks, hand sanitizer, and other "essential supplies" skyrocketed.

Retailers had to pivot quickly.

In order to meet this challenge, retailers greatly reduced purchases of non-essential supplies.

We sell at Target and were told we wouldn't receive purchase orders for several weeks.

We sell on Amazon and our deliveries went from 2-day timelines to 1 month.

If you made essential items you were working round the clock to spin up production to meet the unprecedented demand.

But for most product categories you had a sudden and violent drop off of demand.

As a CEO, I know I experienced a massive amount of FUD. I wasn't alone.

We didn't know:

How long lockdowns would last
How dangerous COVID was
When consumer behavior would normalize

As a result, every consumer products leader I know did the only sensible thing. They paused all production.

No reason to make inventory that you don't know you can sell

Thus, there was a 2 month period when ordering from Chinese factories fell off a cliff.

IMPORTANT: This is where all the pain in the logistics industry started. This is why inventory is such an issue now. It goes back to this moment.

There's a simple principle about optimization. The more optimized and fine-tuned a system is, the more fragile it is to a major shock.

The global supply chain was a highly optimized system that had been pretty stable up until this point.

This pause in ordering broke it.

So you have a 2 month period where not much gets ordered in many consumer categories.

Then around May, it becomes obvious that COVID is serious and can be deadly, but it isn't going to be a worst-case scenario. This isn't the onset of some zombie apocalypse.

Government stimulus is coming
Reopening begins
Vaccines are coming by end of year

People begin buying "non-essential" items again, but spending habits are still altered. Everyone is buying things for their homes.

Home workout, renovation materials, air fryers, etc.

Consumer companies begin reordering in a huge way. They realize that they need to do their normal ordering + account for new demand + make up for the production they missed over the last few weeks.

Factories are inundated with orders. You can probably guess what happens next.

What happens when you get unprecedented ordering?

You get unprecedented shipping and logistics demand.

Immediately, container prices skyrocket hundreds of percent. Some of the inflation we are dealing with today comes from this huge surge in logistics costs.

Even worse is one simple fact: The system is not set up to move this much product, no matter how much you pay.

The bay of the heavily trafficked Long Beach port begins to look like a nautical parking lot.

Shipments are diverted to other ports, they clog too.

Ships literally spend months waiting to unload.

The inventory planning that all consumer brands and retailers do depends on some assumptions about how long production and shipping will take.

All those assumptions are suddenly WAY off.

120 days is the new 60 days.

If you don't know when you will get your next shipment, the only way you can stay in stock is to keep more inventory on hand.

The delays cause everyone to order even MORE products. We are now fully stuck in a negative feedback loop.

Most SMB consumer brands don't have the pricing power, expertise, or personnel to fight these forces.

So they began to ask retailers to ramp up something called Direct Import.

Direct Import is when you sell goods to a retailer in a foreign country and they own shipping it.

Target, Walmart, Costco, and the other largest retailers have the best shipping rates and the most efficient logistics operations in the world.

Brands began offering better pricing to offload the uncertainty of the supply chain.

In addition, retailers are having record years so they are buying inventory at unprecedented rates.

No one knows how much of this is sustainable, but you can't say "I have a hunch that this won't last so I'm going to just start ordering less than people are buying of this item."

So to recap:

Retailers buying loads of inventory
Retailers buying a lot more inventory in China
Brands manufacturing at a torrid pace
Really unpredictable shipping time-tables
People buying heavily for their homes
Costs up across the board

What happens next is a two-headed dragon:

1. 2021 Holiday season
2. Consumer behavior changes

The holidays are the biggest buying period of the year. Many of the things people buy during the holidays, they only buy during the holidays.

Ever had egg nog in July? What about buying a gift basket of cocoa bombs in March?

The things made for the holidays NEED to sell then.

Guess what? All the uncertainty about timetables is about to matter.

Riddle me this: What happens when a retailer owns 100 containers of Christmas trees that were supposed to arrive in October, but instead they sit on the water for 70 extra days?

Disaster

There was a lot of talk and concern on the bird app (and in very knowledgable industry circles) about huge out of stocks during the 2021 holidays.

That didn't happen, but it was because everyone bought a ridiculous amount of inventory and paid through the nose to get it here.

By early 2022 we were seeing the other shoe drop.

People were buying different things. They were going back to the office. They had purchased all those items they needed for their home. A lot of spending was shifting to services.

So add it all up and what do you have:

Tons of extra inventory because demand was less than expected (see Peleton for example)

Tons of inventory that missed a critical window but has to go somewhere (our Christmas tree example)

And now we have arrived at today.

Every retailer runs their inventory through a sorting center called a "Distribution Center".

A direct quote from a major retailer: "We're stuffed so full of Christmas trees and air fryers that we can't buy or move the product we need through the distribution centers."

All the retailers are heavy on inventory.

All the consumer brands are heavy on inventory.

If you want a deflationary force, then you are going to love what comes next.

We are about to see some crazy sales! Seasonal items are going to be priced to move.

I have been told by contacts at discount stores that they are being offered the best deals they have ever seen from inventory-laden brands.

But just like anything else, this too shall pass.

Retail is described as a "Ditch to ditch" industry.

Two predictions about the future:

1. The next few months are going to see lots of sales and lower margins for everyone.

2. The next time the retail sector misses, it's going to be too little inventory instead of too much.

None of this is anyone's fault. The retail sector is full of amazing people who have worked incredibly hard throughout the pandemic to keep the good ship lollipop afloat.

I hope this thread was helpful. Retweets, comments, and likes on the original tweet in this thread are appreciated.

You can follow me for more content like this. https://twitter.com/mikebeckhamsm/status/1537303308578193408

An example of a very broad sale from today.