Tight inventories for the holidays

We have posted in the past about how retailers have been trimming down their inventories.  Now Fortune is reporting that many retailers are likely to be caught short this holiday season as planning based on grim economic scenarios meets a modest economic rebound (Holiday retail: Forget rock-bottom markdowns, Nov 5). 

We should first point out that the turnaround in the economy is still relatively weak.  Current performance is not so great; it is just that the immediate past was so bad. Sales at stores open more than a year rose in September, which wouldn’t be all that noteworthy except that this was the first time that measure went up in over year.  Forecasts for the holidays range from a modest losses to modest gains:

The National Retail Federation predicts holiday sales will decline 1% to $438 billion — less than last year’s 3.4% drop. Some analysts are predicting an even stronger turnout. Customer Growth Partners, a consulting firm, released a report last week that estimated holiday sales would rise 2.4%, compared with a year ago.

In normal times, such slow growth wouldn’t cause problems.  It is only an issue now because inventories have been cut so much:

During the second quarter, for example, Abercrombie & Fitch’s (ANF) inventory was down 42%, compared with a 28% decline in sales. Ann Taylor (ANN) and Talbots (TLB) both shrank inventory 30% in the period. “These are some of the biggest declines in inventory we have seen since we started tracking the measure in 1992,” says Lazard analyst Todd Slater.

And now it is basically too late to adjust.  The article describes American Eagle Outfitters as having one of the faster supply chains in the industry but it still needs 45 days to bring in new orders.  Further, there may be a simple issue of finding suppliers:

Dozens of Asian factories have gone bust during the financial crisis, which will restrict supply when demand picks up, says James Lawton, a senior vice president with Dun & Bradstreet, a research and credit-monitoring firm. “A lot of capacity is coming out of the system permanently,” he says.

That problem is not just restricted to apparel. Lawton says he knows of one retailer forced to delay store openings because the company that made its shopping carts went bankrupt. “They literally didn’t have enough carts,” he says.

“So what does this mean for me?,” you ask.  An obvious implication is that great deals could be hard to come by:

While there will still be plenty of discounts this season, the markdowns probably won’t approach last year’s rock-bottom level. And hot items — like Netpal laptop or Sony’s e-reader — will sell out fast. “You’re not going to see merchandise piled high like you did last year,” says Stevan Buxbaum, a consultant.

On the other hand, this could be good news for retailers in the long run.  I am sure that many retailing executives will kicking themselves in mid-December for not being more aggressive.  However, I think many will see this an opportunity to re-set consumer expectations about discounts.  Over the last several years, there has been much gashing of teeth over consumers holding out for deep discounts.  Department stores complain that the stores have created their own worth enemy, consumers who have been “trained” to think that nothing is worth buying until it is marked down at least 30%.  When the market is strong, one retailer cannot buck this trend.  The guy who is last to post his “SALE!” sign at the mall is the guy who gets to report crappy earnings in January.  Right now, limited inventory levels the playing field.  If demand holds up, there is much less incentives to cut prices early.  The question is whether one season without severe discounting before Christmas is enough to break customer expectations and habits.