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The Warehouse Is Retail’s New Headache

For the last two years retailers couldn’t get enough inventory, but now they have way too much and nowhere to store it all.

Supply chain disruptions have upended retailers’ inventory levels for the worse. Although in some cases, retailers really only had themselves to blame. Many adjusted their production calendars to flow goods in earlier than needed given all the disruption in the supply chain. That also meant they had to make big bets on what consumers would buy before they could gauge shifts in shopping trends. And they lost big, ending up getting whipsawed as those who took huge bets saw their mistakes come in after the consumer focus had shifted.  Now many of those retailers are taking big discounts to right size their inventory.

“Companies are looking for overflow capacity to aid in storing the excess inventory,” Wells Fargo airfreight and surface transportation analyst Allison Poliniak-Cusic said, citing the investment bank’s “State of the Supply Chain” expert series call with GXO Logistics‘ chief investment officer Mark Manuca and senior vice president for commercial strategy Steve Lewis.

GXO executives noted that retailers typically hold six weeks of inventory, but some are pushing that to three months’ worth. And as retailers continue to order earlier to better meet demand relative to logistical challenges, how to manage that inventory is driving outsourcing trends.

“U.S. warehouse capacity is near 100 percent, as companies struggle to invest in and add the capacity needed to service growing DTC (direct-to-consumer) segments,” Wells Fargo retail analyst Ike Boruchow said in another call in the series last month with logistics and supply chain expert Nabil Malouli, vice president of global e-commerce at DHL Freight.

According to Boruchow, Malouli said domestic supply chain investment is driven by e-commerce as the average DTC warehouse requires three times the commercial space of a warehouse serving a store and need to accommodate online shopping’s high return rates. Malouli cited fast fashion return rates of 30 percent to 40 percent, versus high single digits for brick-and-mortar return rates.

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The concern isn’t just at the retail level, but also upstream as well.

It’s no surprise that startups and investors are beginning to look at fulfillment and distribution options to ease some of the pressure.

For example, over the years, Pakistan has become a destination for apparel manufacturing, offering on average lower production costs than China, India and Bangladesh, while providing comparable quality. In April, Pakistan-based B2b startup Oware raised $3.3 million in pre-seed funding backed by Flexport Fund and Ratio Ventures, Seedstars International Ventures and a number of angel investors.

Oware was co-founded by Maersk and Careem alumni Raza Kazmi and Adil Nisar to help companies with flexible warehousing and distribution. They see a $35 billion-plus market opportunity in Pakistan’s logistics industry, and believe a lack of warehouse flexibility leads to overspending on warehousing and inventory. They’re building momentum across a network of five cities to store inventory close to their customers.

In the meantime, retailers are still struggling to manage their inventory issues.

Retailers have started to delay orders of core basic apparel while continuing to prioritize the novelty and fashion items that can grab consumer interest.

The creative director at an apparel vendor confirmed this week that retailers continue to hold off on basics. This person said the problem is that retailers now have nowhere to put these orders because with receipts coming in—plus too many unsold goods sitting on shelves—retailers are scrambling for storage space.

American Eagle Outfitters said that it overshot demand after aggressively planning first-quarter merchandise, and now it has a pile of inventory that will be marked down. Kohl’s is taking a page from the pack-and-hold approach that off-pricers such as TJX and Ross have used for opportunistic buys. It’s hoping consumer will buy that cold weather clothing when winter rolls around again. And Target just canceled orders from home and apparel suppliers because it needs to right-size its inventory before it can take on more.