From Not Enough to Too Much, Overnight

For the last two years, a chronic lack of supply of nearly everything was on display for all to see. No toilet paper on the shelves. No raw materials at factories. Monthslong wait times for appliances and furniture. 

For many industries, however, it took only a couple of months to go from having nothing to sell to being unable to sell what they have. Retailers have seen the dollar value of their inventories skyrocket. Factories now have more raw materials than they need. The number of new homes available for sale, which had been at a historic low for months, has spiked to its highest level since 2011. “Up until January, the issue was you couldn’t get product, and people were pounding on doors,” says Craig Rowley, a Korn Ferry senior client partner specializing in retailers. “Now we have too much product.”

Over the last couple of weeks, multiple retailers have surprised their investors by reporting massive buildups in their inventories. Many of these firms had made aggressive buys to get ahead of inflation and make sure items stayed in stock. Consumer sentiment has dropped dramatically since the start of the year, however. Buying power has been weakened by inflation, and the dollars people are spending are going toward staple items (food and essential clothing), rather than big-ticket furniture or discretionary items. “This is the age-old tale of marrying supply and demand,” says Seth Steinberg, a Korn Ferry senior client partner and expert on supply chains. 

Widespread warnings of excessive inventories point to the difficulty, in today’s environment, to anticipate what consumers will want, and when they will want it, experts say—even if more leaders are armed with artificial intelligence, cutting-edge marketing processes, and real-time customer data. Over about two years, buying patterns have shifted at least three times. First, the pandemic changed customer needs. Then significant salary increases changed people’s wants. Now it’s inflation that has changed consumer patterns. 

Not all firms are in the same bind, of course. Several industries could sell a lot more, if they only had the inventory to do so. Even after two years of pandemic-related supply-chain issues, inventories of computer chips and other components are low. Big backlogs in shipping goods from Asia have even forced some companies to cancel their own customer orders. 

But for others, the immediate challenge is what to do with all of their excess inventory. Some retailers are marking down prices in order to move their products—potentially a boon to consumers, who haven’t seen big sales of late. Some homebuilders are tweaking their asking prices for new homes as well. Other companies, Rowley says, are determining how much of their excess inventory they can realistically hold before it begins eating away at corporate profitability. 

At the same time, companies are leery of being stuck with even more excess inventory later in the year. Most retailers have already placed their holiday-season orders, Rowley says. Many of those orders will have a percentage of products, perhaps 20%, that is “open-to-buy”—essentially, products the retailer is not obligated to purchase. For the past two years, retailers have purchased everything they ordered. Now, Rowley says, the pattern is likely to shift.