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Beware the Bullwhip Effect: Week Ahead

Supply managers need to stay alert to stocking risks.

The supply chain has seen wide swings since the start of Covid-19, starting with a shutdown in demand resulting in canceled orders. Then as consumers began to venture out again, demand picked up enough where retailers couldn’t get enough of the goods they needed to meet the customer buying rush—and now shoppers don’t want the late-arriving merchandise they over-ordered.

A supply chain phenomenon called the bullwhip effect refers to the small shifts in demand at retail that could cause larger reactions upstream with wholesalers, distributors, manufacturers and raw material suppliers as they re-adjust their capacities for projected needs downstream.

For the most part, the high demand coming out of the pandemic last year was good for retailers. Most were able to raise prices and garner the strongest full-price selling they’ve seen in a decade. The first quarter sales surprise suggests not only a slowdown in consumer spending, but also a misallocation of the assortment mix as consumers shifted gears faster than expected.

Inflationary pressures from earlier this year had consumers rethinking their merchandise purchases, shifting more to needs than wants and forcing retailers to resort to marking down overstocked goods. And rolling out the clearance mats will bring back a bit of deflation to the sales floor. That’s good for consumers on the hunt for bargains, but not so much for retailers’ margins and profitability.

Economists from Wells Fargo believe the inventory challenge could get worse. “We expect [the retrenchment in consumer spending] to be entirely in goods spending as service outlays continue to benefit from consumers’ shift to experiences over things,” they said.

Former retail executive and Wall Street retail analyst Walter Loeb thinks retailers began seeing signs of a consumer slowdown in April, early enough in the year for them to adjust holiday-season orders.

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Those adjustments could be enough for retailers to meet the National Retail Federation’s (NRF) projected annual growth rate for 2022. NRF still expects annual retail sales to grow between 6 percent and 8 percent to a range of $4.86 trillion and $4.95 trillion in 2022. Online sales, included in the total figure, are projected to grow between 11 percent and 13 percent to $1.17 trillion to $1.19 trillion. The 2022 estimates are below 2021’s 14 percent annual growth rate, but still above the 10-year, pre-pandemic growth rate of 3.7 percent.

But U.S. foot traffic seems to be on the decline. Foot traffic for the week ending June 25 rose 22.7 percent year-over-year (YOY), within the range of the 22.1 percent YOY increase in the prior week, according to a Cowen & Co. report. And retail traffic is down 27.7 percent and down 21.4 percent, respectively, when compared with the same two weeks in 2019. And while June was up 29.6 percent YOY, that reflected declines on a monthly sequential basis from the 40.6 percent YOY increase in May 2022 and the 51.4 percent YOY increase in April 2022. Even Kohl’s on Friday noted a slowdown in second quarter sales.

Wells Fargo retail analyst Ike Boruchow remains “fairly downbeat on fundamentals looking out the next few quarters.” He said sentiment coming out of first quarter earnings is “largely negative on our group.”

Boruchow’s concerned about weakening foot traffic trends in June on a YOY basis, including “slowing traffic every week of June thus far.” He also cited “worsening inventory dynamics”, with promotions ticking up in the mid-tier apparel section as another worry. And one other concern is over “elevated supply chain headwinds.”

Loeb expects retailers will find great deals for consumers. But adjustments retailers and their buyers are making now could cause corresponding production changes for upstream supply managers. And that could result in a different set of challenges down the road, particularly if consumers make another quick change in how they shop. That means supply managers will need to pay close attention to feedback from multiple fronts, more so now than ever.