There are now stories out there about retailers suddenly being “overstocked,” and the shortages having turned into gluts, and suddenly folks are already seeing that the supply chains got fixed miraculously or whatever. But overall inventories at retailers remain very low, and at the biggest category of retailers – auto dealers – inventories are desperately low, and they’re low at other retailer categories, but general merchandise retailers, such as Walmart and Target, are suddenly awash in some types of merchandise.
What happened at these general merchandise retailers, and some others, is that eternally long lead-times and snags and chaos have delayed goods, and when they finally got there, the consumers had moved on to other things. And these retailers ran out of the stuff the consumers had moved onto, and were overstocked with the stuff consumers were no longer interested in.
Overall retailer inventories, in terms of months’ supply, are still near historic lows.
Having the wrong inventory on hand is a classic retailer problem. To minimize that risk, retailers have shortened their supply chains and they delay major product decisions until the last moment. And then the pandemic hit, and that solution became a huge problem, and retailers had to adjust on the fly. And some retailer categories got caught wrong-footed and are overstocked, while many other retailer categories have very tight inventories or shortages, including the largest category of retailer — auto dealers — which are still out of inventory.
Inventories in dollars = raging cost inflation, not rising inventories.
Inflation in goods – which is what retailers sell – has been far higher than overall CPI. For example, used vehicles wholesale prices, which become the cost in inventory for dealers, spiked by 35% to 45% year-over-year between October last year and February this year. These cost increases have ballooned the inventories in dollars, though used vehicle inventories in terms of vehicles remain tight and actually declined over the past three months.
What matters: months’ supply.
To exclude the impact of the surging costs of goods, and to get a feel for what actual inventory levels are in relationship to sales, we look at the “inventory-sales ratio,” which is a classic industry metric that shows how many months it takes to sell the inventory on hand at the end of the month at the current rate of sales.
Last week, the Census Bureau released the retail inventory data through April.
At auto dealers, the largest category of retailer, which in normal times account for over 35% of total retail inventories, inventories remain desperately low, at 1.28 months’ supply, down from roughly 2.2 to 2.4 months’ supply before the pandemic. And they have hardly made any progress at all:
Auto dealers are now struggling with another issue: Pickup trucks and large SUVs were all the rage in 2020 and 2021 and earlier in 2022, and no one had any in stock due to the semiconductor shortages. Automakers prioritized production of these vehicles because they’re far more expensive and profitable than smaller vehicles, and if they can build only a limited number of vehicles due to the semiconductor shortages, they’d build the most expensive and most profitable ones to maximize their revenues and profits – which they did.
Then gasoline prices began to spike earlier this year, and suddenly consumers were chasing down more economical cars and compact SUVs and hybrids, and now dealers are out of them, they’re just about all gone from inventories, while pickup trucks are starting to accumulate at some brands. But overall new vehicle inventories remain desperately low.
By Wolf Richter for WOLF STREET
United Auto Company 