Deflationary Tsunami On Deck: A “Tidal Wave” Of Discounts And Crashing Prices
TYLER DURDEN:
“…Three weeks ago, we showed readers what happens when the infamous “Bullwhip effect” reversal takes place by presenting the unprecedented surge in the “Inventory to Sales” ratio for a broad range of US retailers covering the furniture, home furnishings and appliances, building materials and garden equipment, and a category known as “other general merchandise,” which includes Walmart and Target. Since then, this ratio has only gotten even more extended, and as shown below it is now at the highest level since the bursting of the dot com bubble!
What does this mean for retailers and the price of goods? Three weeks ago we said “Think: widespread inventory liquidations” and added…
To be sure, not every product will see its price cut: commodities, whose bullwhip effect take much longer to manifest itself, usually lasting several years in either direction, are only just starting to see their price cycle higher. However, other products – like those carried by the Walmarts and Targets of the world – are about to see a deflationary plunge the likes of which we have not seen since the global financial crisis as retailers commence a voluntary destocking wave the likes of which have not been seen in over a decade.
Today both Wall Street and the mainstream media have caught up, with both predicting unprecedented deflationary price cuts in the coming weeks.
We start with Morgan Stanley’s bearish strategist Michael Wilson, who in his latest bearish weekly note (available to pro subs) focused on shrinking margins in general, and on retailer discounting in particular, and wrote that while there is a modest pick up in over sales, the far more concerning issue is that “inventory across the sector is up about 30% YOY and sales growth is up about 0% YOY translating to approximately 30% YOY of excess inventory” and while mark down/margin pressure did not hit in 1Q it should hit June/July. Indeed, “store checks show that aggressive discounting has already started as of the Memorial Day holiday weekend. Discounting pressure could accelerate through July.” And since more retailers are now discounting, “companies are having to offer even bigger discounts to compel consumers to buy, and it is a race to the bottom in margins in order to clear through inventory.”
It gets much worse, however, because courtesy of the delayed nature of the bullwhip effect, Morgan Stanley thinks it will be some time before retailers can cut back on forward inventory orders! Companies are no longer in a position to order 6 months in advance because of delays in the supply chain, and are currently working with about an 8 month lead time. Shockingly, this means decisions today to cut forward orders could begin to eliminate the inventory problem in 1Q23, but not likely before then.
As a result, Wilson concludes, “we are likely to see a tidal wave of discounts that carry us through December because 2022 inventory orders have already been placed.”
It’s not just Wall Street finally catching up, however: overnight the WSJ also writes that “Big discounts are coming” as “stores have too much stuff.”
Echoing everything we have written in the past two months, the Journal alerts its readers that Target, Walmart and Macy’s announced recently that they are starting to receive large shipments of outdoor furniture, loungewear and electronics (and if Morgan Stanley is correct and lead times are indeed 8 months they will keep receiving these into 2023!) everyone wanted, but couldn’t find, during the pandemic.
The problem for retailers is a windfall for those in the market for sweatpants or couches or pretty much anything else, as prices are expected to start dropping around July 4, analysts say when the deflationary retail tsunami is unleashed in full force.
“There are going to be discounts like you’ve never seen before,” says Mickey Chadha, a Moody’s Investors Service analyst who tracks the retail industry…”