Increased levels of inflation might be a global concern, but a slowdown in consumer spending is forcing retailers to make significant price reductions on existing inventory. And while this is good news for the average consumer, there is little doubt that unplanned price reductions will adversely impact the bottom line. 

CNN reported that Walmart told investors in its latest earnings call that there was a need to apply significant cost reductions to general merchandise such as clothing and big-ticket items, with the company citing food inflation as one of the reasons why existing inventory was unsold. Walmart is well known for its competitive grocery prices and the shift in consumer spending is, the news source said, likely to reflect customer priorities.

The key thing to remember is that Walmart is certainly not alone in having to make some tough pricing choices. And there is a consensus amongst analysts that over-optimistic procurement strategies across the retail sector have led to a predictable level of overstocking. In addition, the continuing disruption to certain parts of the supply chain has meant that the physical products in store are arguably not what the customer wants to buy.

Unwanted inventory = price discounts
According to Yahoo Finance, Target is also looking to reduce what a recent Bank of America analyst note called "bloated inventories."

Total retail inventories in May were worth $705 billion, the analyst note said, with an acknowledgement that certain retailers procured too much product during the post-pandemic spending boom. Add supply chain delays and seasonal purchasing habits into the mix, and retailers have been left with a double hit of unwanted inventory and limited consumer demand. 

"Big box retailers stocked a large amount of items such as home goods, electronics and big ticket items expecting continued resilience in demand," the BOA analysts said. "However, consumers quickly rotated to services spending this year and high inflation is also keeping some consumers at bay."

Unsold inventory is giving retailers a procurement headacheUnsold inventory is giving retailers a procurement headache.

This unsold inventory could also have an impact on the manufacturing industry. And while the overstocking problem across the retail industry could be a short-term issue, there is the potential for a downturn in orders. With that in mind, Reuters cited the concerns of Wall Street analysts who believe that Q2 2022 would be "the last three months of a good spell that began during the pandemic as consumers used stimulus checks to buy products." In fact, manufacturing activity slowed to a two-year low in June, the news source said.

Simply put, higher prices for physical products has been part of the reasons why inflation continues to rise, while the discretionary nature of consumer spending means that retailers need to rethink their priorities. Walmart CEO Doug McMillon told investors in the earnings call that the company expected customer spending on general merchandise to slow down for the rest of the year, an admission that gels perfectly with how BOA's analysts view the current state of play in retail.

"There is a mismatch between supply and demand in inventories," they concluded. "In other words, the inventory in stock isn't what consumers are trying to buy."

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