Nothing for retail inventory planners has been easy over the past three years. After the shortages of 2020 and 2021, the industry spent the past year trying to unload products as consumers cut their spending in the face of steep inflation.

Although down from their peak, many inventory positions remain elevated for current sales levels.

“I've worked at multiple apparel retailers recently that have more inventory than I've ever seen,” said Matt Garfield, managing director with FTI Consulting. “It looks like you're walking into a peak season distribution center and we were in the middle of February, March.”

Even though the era of bare shelves is not far behind the industry, many are learning to live on leaner inventories and plan to chase products as needed in 2023 and beyond.

In doing so, retailers are prioritizing cost control and margin protection over the risk of lost sales.

“A little scarcity is not a bad thing,” said Joe Feldman, senior managing director with Telsey Advisory Group.

Inventory levels have peaked. But they’re still bloated.

In June 2022, Target issued a mid-quarter warning that its profits for the period were in for a significant hit as the retailer worked to “right-size its inventory for the balance of the year” amid a “rapidly changing environment.” The retailer blamed intense pressure on consumer spending from inflation on necessities, including food and gasoline.

Target led the way, but discretionary retailers, with few exceptions, spent the rest of the year trying to clear inventory. Analyzing retailers across major sectors, Telsey Advisory Group analysts found that, across segments, inventory growth averaged at 46% in Q2 last year. In apparel and e-commerce, that figure was considerably higher, at 65.6% for both sectors.

“Coming out of 2021, inventory was really lean, lower than it should have been, because you couldn't get goods and everybody was chasing,” Feldman said. “I think the miscalculation was the demand level.”

Retail inventories hit their peak in October 2022, when they were up 18% from 2021 levels. Inventories have since fallen considerably but remain well above where they were three years ago, or even a year ago.

 

 

An improving supply chain has magnified the problem, at least on paper. By February, overall schedule reliability in ocean freight was up month-over-month by 7.7 percentage points and up year-over-year by a “staggering” 26 percentage points, according to DHL.

For consumer companies, that means goods have been shipping faster and arriving earlier than a year ago, which shows up in inventory levels. Apparel sellers such as Under Armour and PVH have noted this in their earnings. At PVH, which owns the Calvin Klein and Tommy Hilfiger brands, inventory was up 34% YoY at the end of Q4.

“We have seen steady progress over the course of 2022 towards pre-pandemic production capacity and significantly improved delivery times,” PVH CFO Zac Coughlin told analysts in March. “And in the fourth quarter this year, we experienced much earlier receipts of inventory as these supply chain and logistics disruptions had eased.”

Excess is costly up and down the supply chain

The inventory story played out differently for retailers and many of the brands that supplied them. As retailers moved to cut back their positions, wholesalers were often left sitting on excess stock.

“Wholesalers really got hammered,” Garfield said.

Apparel sellers GIII Apparel Group and VF Corp, for example, both cracked 100% inventory growth last year, according to Telsey Advisory Group analysis. Nike, one of the largest apparel brands in the world, hit 44% inventory growth in the period ending Aug. 31.

“If retailers have too much inventory, they're going to stop purchasing, or slow down their purchases, or push out their purchases from their vendors,” said Joel Wolitzer, SVP and business development officer with Rosenthal & Rosenthal, which provides factoring and other financing services. “We have seen that slowdown on multiple levels.”

For merchandise suppliers, life can be made tougher by the fact many retailers don’t place firm purchase orders, which means their vendors have to place informed speculative bets on how much a retailer will purchase, informed by a retailer’s projections. Even purchase orders can be changed or delayed.

Suppliers producing private label merchandise for retailers can be put in an especially tight spot if their buyer decides to pull back on their orders.

“Those goods can only go to that retailer. Suppliers can’t sell them anywhere else,” Wolitzer said. “So they’re kind of stuck.”

For larger wholesale brands, they may have ended up with higher inventory levels than their retail partners, but that’s not necessarily the worst-case scenario if they have their own sales channels.

“It's probably better for, say, Nike or Adidas to control the way they clear through the excess inventory,” Feldman said. The alternative, he added, is to “put it out there in the market and let the retailers decide what to do with it, and just cut price and potentially impact the brand.”

For all players in the market, inventory excess is costly. Additional warehousing can get expensive. As Wolitzer noted, if companies have to borrow to pay for that warehousing, then there are financing expenses such as interest as well.

Operational efficiency and capacity also declines once a certain amount of space in a warehouse is filled, Garfield noted.

"It's a very big impact to your overall profitability — your cost per pick, cost per unit, those kinds of core profitability measures that we look at for distribution,” he said.

Have retailers learned their lesson? And which lesson?

The past two years raise fundamental questions about how to buy and plan inventory, and can yield some contradictory answers. One of the biggest is: Is it worse to have too little inventory in boom times or too much in downturns?

“Two years ago, you just had to have inventory. If you had it, there was a buyer out there,” said Oliver Timsit, founder of the apparel brand Oliver Logan. “We’ve come to terms with the fact that we can’t have something for everyone.”

With supply chain problems easing, many of the same tensions that predated the pandemic are now coming back into play. While out-of-stocks could mean the opportunity cost of a lost sale, overstocks come with financial costs of storage and financing costs.

Inventory excess also comes with opportunity costs by tying up working capital, and, perhaps most importantly, means less space for fresh products.

“Much as we all thought that the retailers learned their lesson — that they're better off ordering less, chasing demand a little bit, and having very clean, profitable sales, meaning fewer markdowns — they all fell into that trap of: ‘Oh, if we just have more, we'll sell it,’” Feldman said. “And then they got caught.”

Should demand recover, Feldman thinks retailers will have an easier time chasing inventory than they did in 2021 given normalizing supply chains.

“Those bottlenecks are gone," Feldman said. "So if you do have much more normal ramping of production on the manufacturing side, getting it here shouldn't be too much of an issue, at least in the near term. I’m hopeful these guys will be smarter about it.”

Still, retailers are unlikely to ramp up purchase orders anytime soon — even if demand does come roaring back.

“I think it’s going to be awhile before merchants and executives are really ready to place that bet for a large inventory position,” Garfield said. “Those conversations were brutal last year. The earnings — they weren’t fun calls, and I don’t think anyone wants to go back to that time.”

Dive Brief:

• Tight inventory management at Macy’s continued into Q1, with inventories down 7% to $4.6 billion. Lean stock levels going into 2023 helped maintain merchandise margins even as sales fell in the quarter, the company said in its earnings release.
• The sales decline drove a 2% decrease in the retailer’s turnover rate. CFO and COO Adrian Mitchell told analysts that management expects changes to timing, volume and composition of receipts in Q2 to boost inventory productivity in the year’s second half.
• Despite the retailer’s discipline, it still made inventory missteps in Q1. Chairman and CEO Jeff Gennette noted that the retailer converted its assortment too early to warmer-weather merchandise, losing out on sales during a prolonged period of cold temperatures across the U.S.

Dive Insight:

While many retailers struggled to keep inventory from piling up in 2022, Macy’s remained relatively disciplined. Executives spoke at length about sticking to that strategy in 2023, with economic uncertainty looming.

The stakes around those efforts are amplified by deteriorating consumer demand, which Gennette said Macy's saw starting in mid-March. The company lowered its outlook for the year and tweaked operational plans as “macro headwinds continue and potentially worsen,” Gennette said.

For now, customers are currently still buying close to their needs, Gennette noted. “If demand improves, we will use our ample inventory receipt reserve, which is above last year's levels to chase into areas of strength as they materialize,” he said.

As Macy’s tries to stay nimble, Mitchell noted that the company has added to its pricing capabilities since the start of Q2 to help the retailer move inventory speedily and as profitably as possible. 

“This gives us the opportunity to bring an automated pricing solution that incorporates category elasticities, maximizes inventory turnover and optimizes unit sales left and margin dollar expansion to our owned inventory portfolio,” Mitchell said. 

Meanwhile, keeping its reserve of receipts open and allocating less in advance gives Macy’s “the liquidity that we wanted to build into the system, and that when a customer is signaling something in season, we're able to jump on that,” Gennette said. He added that “we're ordering every single week based on how things are trending.”

And as the company keeps space and budgets open to chase product as needed, Gennette noted that “there's plenty of inventory in the market” out there currently. 

To stay lean, the retailer is currently clearing through spring inventory with discounts, meaning pressure to its Q2 margins.

TD Cowen analysts led by Oliver Chen said in a research note that they have “confidence in management's ability to clear through spring inventory during 2Q and pivot the merchandise planning through the remainder of the year” to protect margins.

For Destination XL CEO Harvey Kanter, too much inventory is “the kiss of death.”

That fear comes from Kanter’s experience on the merchandising side of the retail industry. “You’re chasing your tail when you get over-inventoried and you can’t bring in fresh receipts,” he told Supply Chain Dive in a late-April interview. “Fresh goods are the lifeblood of retail.”

Plenty of retailers might agree, in principle, especially after the inventory flood of 2022. But executing isn’t always easy. In the minds of many, inventory is not seen as a cost or a drag but as a future sale.

Destination XL ended fiscal 2022 with its inventories at $93 million, up 13.7% over the past year. While in the double digits, that growth was substantially lower than the apparel sector on the whole. A Telsey Advisory Group analysis found inventory growth at 53.8% at the end of Q4 for the companies they covered in the apparel sector.

DXL noted that levels were up over the inventory-strained year of 2021, and by the end of 2022 inventory was 9.2% lower than the pre-pandemic year of 2019. Inventory turnover has increased 30% in that time.

To do that, DXL looks at inventory from across the supply chain, from the source to the store. “Every store in every market has some unique peculiarity,” Kanter said. “It may be a brand that sells better, it may be a size they sell better, it may be a color they sell better.”

Kanter said that DXL has “put in place the best AI, [machine learning] and inventory management practice that allows us to most efficiently create unique, relevant sorting in our stores.”

Chasing inventory

The effort to keep inventory under control starts with procurement and purchasing. “We have a philosophical point of view where we'd rather be chasing goods than chasing cancellations,” Kanter said.

In other words, DXL errs on the side of buying too little to stock its stores. Getting the numbers right is even more important, given how many different sizes the retailer stocks. CFO Peter Stratton said that DXL has a low unit-to-SKU count compared to other apparel retailers.

“They might be four or five units deep per size but, because we have two, three, four times the number of sizes, it's a lot fewer units that are in that stack of shirts on the on the shelf,” Stratton said. “Because our business is all about fit.”

Compared to pre-pandemic, “we are turning goods faster, we have less inventory, and we have not experienced some of the challenges that other retailers are which is they're really heavy on inventory and being promotional to get inventories back in line,” Kanter said.

To be more nimble about chasing inventory when the company needs it, DXL’s sourcing team lays the groundwork upstream.

The company procures materials in a pre-finished state and materials that are dyed but uncut. Even if the materials aren’t used the way DXL originally intended, they can still be made into other products for the company, meaning the supplier isn’t stuck with unpurchased finished products. Kanter says this reduces risk for both the company and its suppliers.

“We don’t have a lot of on-order in the warehouse. We don’t even necessarily have a lot of on-order with suppliers,” he said. “Because of all of the elements of procuring some part of the production process, they can produce much quicker.”

And while most of DXL’s come in on a boat, the company opts to send by air if it needs inventory shipped quickly.

Looking west to source apparel

Also helping to speed up shipping times is DXL’s increased sourcing from the Western hemisphere.

Some production programs have been moved to Western countries including Mexico and Nicaragua, according to the company’s most recent 10-K. Kanter couldn’t disclose exact figures but said Western hemisphere sourcing was in the double digits as a proportion of the total. The company is also eyeing possible sourcing opportunities in Guatemala and Peru, Kanter noted.

When deciding where to source, “quality trumps everything,” Kanter said. “But then it’s a balancing act between speed-to-market and cost.”

A significant chunk of sourcing comes from southeast Asian countries including Vietnam, Bangladesh, Cambodia and India. Less than 10% of products for DXL’s owned brands are sourced from China, a reduction process that has been ongoing over recent years.

“We’re basically not in China anymore,” Kanter said, pointing to the forced labor of the Uyghur people in the Xinjiang region as the primary risk prompting DXL to avoid in sourcing from the country.

Being specialists in big-and-tall apparel for men, DXL typically relies on specialized suppliers. In the clothing factories that make its products, equipment and production runs often are unique to the category given the complexity of the sizing and manufacturing. Even cutting tables need to be twice as large for shirts that are twice as large as standard sizes.

In all, DXL sourcing network includes just over 20 suppliers, in eight countries, with about 34 factories among them, and DXL sources a majority of its products directly.

“We have a pretty finite supplier base,” Kanter said. “It’s not like we have 100 [suppliers].” Ultimately that means deeper relationships with manufacturers, who, in Kanter’s view, benefit from the retailer’s growing market share and expertise in the big-and-tall sector.

“Where our suppliers can see through the day-to-day and look at the future, they're making a bet on us.” Kanter said.

The year 2022 broke the crystal balls.

Some of the largest, most sophisticated companies in the world overbought or overproduced inventory by many millions of dollars. The reason, at its simplest, is that consumers did not behave as predicted.

Planners don’t have the luxury of blaming consumers for not acting according to their forecasts — especially when many of those customers were reacting to historic inflation in food, fuel and housing.

“Demand planning went out the door for three years,” said Rick Jordon, senior managing director with FTI Consulting. “Now they’re picking it back up, because they have all this excess inventory everywhere. And they’ve forgotten how to do it, or they didn’t do it well before.”

After three years of pandemic disruption and economic volatility, sharpening demand forecasts and inventory planning across industries seems both as imperative and challenging as it has ever been.

To get better results, companies are turning to new data sets and new technological tools like artificial intelligence to analyze them.

From spreadsheets to AI

An executive survey by McKinsey from early 2022 found that spreadsheets are still the primary planning tool for supply chain leaders, with 73% of respondents relying on them.

But, 43% said they planned to use artificial intelligence and machine learning for some planning activities. Another 17% said they planned to use AI and machine learning for most activities at some point.

A survey this year from BlueYonder, a supply chain software company, found that demand forecasting and inventory optimization are among the top uses of AI and machine learning technologies by supply chain executives

“We're moving well beyond Excel, and just moving to a more advanced tool set,” Ron Scalzo, senior managing director with FTI Consulting.

In Jordon’s view, AI technologies will at some point help remove human bias from forecasting and lead to more systematic predictions, as well as run multiple predictive scenarios at the same time.

Jordon noted that AI is needed to process through many data sets and help make sense of a company’s own internal data. “Most organizations have a lot of data,” Jordon said. “Are they using that to the best of their ability, utilizing the best technology and ignoring that noise? That’s really where the next three or four years of development will happen.”

Finding the right data to analyze the right way

At the most basic level, AI takes in data and spits out predictions. To get the best predictions, the data fed into them might matter even more than the AI tools themselves.

“There are systems pulling in data which is lying inside the company already, from across their enterprise systems, POS systems, the inventory levels from their stores and all that,” said Meher Dinesh Naroju, director of AI services at Centific. “There are very few companies that actually go outside of this box and get data from sources that are completely unstructured.”

Such data sources include things like social media, which can provide clues about burgeoning market trends. Customers are “actively engaging and leaving opinions and clues about various things they intend to do in the market or a specific category,” Naroju said.

Even images from a retailer’s store cameras might house data relevant to customer behavior in the aggregate, including reactions to certain products, brands and categories. “It’s a long shot, but it can help,” Naroju said.

Other sources, such as weather data, can provide early hints about supply chain timelines and inventory arrivals, he also noted.

Still, all of these data sets have to be put into the context of local and regional cultures and other marks of differentiation.

“It is of the utmost importance to pick and choose what data you need and very clearly segment the data you want to analyze,” Naroju said.

Once a company has the best, most refined and useful data it can get, that’s where AI tools become critical. The technology can derive insights from large pools of unstructured data that “no human being can do in so short a time,” Narajou said.

But even with the most creatively sourced data and advanced tools available, a prediction is still just a prediction.

“If you crack the code on a perfect forecast with the consumer today, you're quickly going to be the richest person in the world,” said Jake Self, vice president of operations for third-party warehousing and logistics company Smart Warehousing.

‘So much noise’

Businesses for generations have relied on the past to help them anticipate the future. That may seem outdated after the pandemic and then inflation scrambled the usual patterns, with volatile cycles piggy backing on each other since 2020.

But for many, historical trends are still the most useful forecasting data. “It’s not especially sexy, but we’ve actually philosophically been using the perspective that history is the best predictor of the future,” Destination XL Group CEO Harvey Kanter told Supply Chain Dive in an April interview.

“I think there's been so much noise in the last three-plus years that the roller coaster we’ve been on is almost impossible to predict,” he added. “I don’t know that the greatest level of AI and ML can predict what the consumer is going to do.”

Kanter went on to note that the apparel retailer still looks at pre-pandemic revenue and historical revenue contributions by day, week and month over the past 10 years, which he said has remained remarkably consistent.

Other businesses simply don’t have the budget to pay for or justify advanced technological tools. Smart Warehousing’s clients run the gamut from small brands operating out of their garages to Fortune 500 companies. For some of the smaller companies looking for replenishment and warehousing help, their forecasting process amounts to “hopes and dreams,” Self said.

For those companies, historical data is by leaps and bounds better than no data. “We've spent a lot of time on our replenishment program, really putting an algorithm in place that learns and understands based on historicals where we're going to need to be,” Self said.

Smart Warehousing can do that having invested in forecasting and replenishment technologies for more than two decades, and with an entire team of specialists dedicated to that one skill set. An algorithm for cold replenishment operations out of Missouri “looked like something out of Good Will Hunting,” Self, referring to the film that features actor Matt Damon playing an unknown mathematics prodigy.

But even with those resources, prediction is still tough in the current environment. “If you're not planning for an element of the unexpected, then you're probably not planning right,” Self said.

Despite its namesake, inventory excess isn’t really a problem at Overstock.com. That’s for the simple reason that the online home goods retailer doesn’t hold much of its own product. 

The company pioneered the dropship model back in the early days of internet shopping and today has a network of 2,600 partners that sell through the website. 

In one sense, that has made the company’s model relatively immune to the operational headache of inventory pileups other retailers have contended with. But for Overstock, it’s everyone else’s excess that has been the problem. 

The company’s revenue fell by 30% in 2022, and it lost some of the market share it had gained in the period since the pandemic began, which initially brought a surge in both online and home goods shopping. 

As peers struggled with falling demand and inventory buildups, they have discounted heavily to keep goods flowing and keep sales from cratering. And with prices falling, Overstock lost some of its competitive advantage last year. 

“It's created more people playing in our space that really can't afford to play there,” Overstock CEO Jonathan Johnson said in an interview. 

Expensive, slow-moving stock

Overstock might not own most of the inventory it sells through its website, but inventory gluts at its suppliers have a major impact on the retailer’s business. And the movement and pricing of that inventory is not always a simple matter of supply-and-demand economics. Banks and other financial players play a role in the sector’s inventory and sales dynamics. 

Overstock suppliers still have excess inventory bought when stock was expensive to acquire because of supply chain dynamics, Johnson explained. Now inventory is cheaper to bring in, at the same time as consumer demand is falling. But asset-based lenders that use inventory to back loans, and thus tie loan amounts to inventory value, can prevent suppliers from discounting that inventory deeply enough to move it. 

“Sometimes the banks are managing those receivables,” Johnson said. “And banks don't necessarily think like retailers who need cash freed up so they can make more cash. They think, ‘We need the full return on our loans.’” 

The upshot of all that is suppliers in the sector are still working through old inventory more slowly than they and retailers would prefer. 

To Overstock’s advantage, in Johnson’s view, is the company’s strong cash position, which helps it pay on a quicker payment cycle — 15 to 30 days — than suppliers might find elsewhere in the industry. That helps those suppliers turn their inventory into cash and keep their financial backers happy. 

Johnson told analysts in February that the company anticipates the current industry inventory glut to continue at least through the first half of 2023. 

Winning over new suppliers the old fashioned way

As Overstock eyes future growth and tries to win over new suppliers and brands to sell on its website, the company has done something it doesn’t normally do: buy inventory.  

Specifically, the retailer is trying to grow its presence in what it calls giftable home products such as housewares and small appliances. Items, Johnson says, that one finds on shelves of struggling retailer Bed Bath & Beyond, which has been scrambling to avoid bankruptcy in recent months. 

That company’s problems have become famous. Bed Bath & Beyond’s CEO said in January that its inventory cratered in Q4 as suppliers — concerned about the retailer’s financial viability — tightened up terms and pulled back on shipping to the company.

Analysis from DataWeave in January found that Bed Bath & Beyond’s inventory availability plummeted in 2022 beginning and July and worsening through the year, while levels among its peers remained stable. 

As often happens, one retailer’s loss is others’ gain. “We saw an opportunity to go to those suppliers that either weren't getting paid or canceling their contracts [with Bed Bath & Beyond],” Johnson said. 

And so Overstock has been trying to win over new brands, or convince others to increase their depth of product and sales with the retailer. Some wanted assurance that their products would sell on Overstock, so the company took the rare step of purchasing inventory from some brands.

“Some of them we said, ‘Look, we know you may have questions about our model — we’re going to prove it to you; we’re going to buy some [inventory],’” Johnson said. 

Had those brands plugged into Overstock’s dropship system, Johnson argued, they could have sold more, and more quickly, after the retailer cleared through the (admittedly conservative) inventory purchases it made. 

“Frankly, they left money on the table,” Johnson said. “We bought some, and sold out of it.”

Dive Brief:

• Walmart is working with suppliers in its grocery consumables business to “get costs down more as fast as we possibly can,” CEO Doug McMillon told analysts in May.
• McMillon said that general merchandise prices have receded from inflationary surges, but “dry grocery and consumables have held,” with prices continuing to rise and creating a problem for consumers “living paycheck to paycheck.”
• “We do need some of these branded suppliers that are in dry grocery and consumables to get top line focused more than they have been for a while,” the CEO added.

Dive Insight:

Many of the supply chain snarls that gave rise to historic inflation have eased over the past year, yet inflation has persisted. The result has pitted retailers against suppliers in some cases, including the largest retailer in the world.

Most commodity input costs fell last year from their previous peaks, with ocean freight, cotton, steel and lumber seeing some of the biggest drops, AlixPartners found in an analysis of Mintec Global data earlier in 2023.

David Bassuk, a managing director with AlixPartners and author of the analysis, encouraged retailers to negotiate savings of 15% to 25% with suppliers, which they could do largely by “clawing back most of the cost increases taken over the past two years.”

Some retailers are indeed negotiating on price, which has become public in some cases. The CEOs of spice brand McCormick & Company and Edgewell Personal Care (owner of brands such as Schick, Edge and Banana Boat) both cited Walmart in the press as among the retailers pushing back on cost increases.

Generalists like Walmart and Target, which have broad product assortments that include both discretionary and consumable categories, are uniquely positioned to watch how inflation has impacted consumers, with their grocery sales expanding and discretionary sales on things like apparel and home goods suffering.

On the call, McMillon framed the push to lower costs on food in terms of boosting a more profitable category mix for Walmart. Bringing down prices in lower-margin food and consumable categories “would help us with mix and free up cash for customers to use for discretionary goods,” McMillon said. 

He added, “It's a generalization, not everybody is in the same place, but we're looking for those [suppliers] that want to be aggressive.”

Despite retailer pushback, some brands have signaled that they intend to keep raising their prices in 2023. On an earnings call in March, McCormick CEO and Chairman Lawrence Kurzius noted that its price hikes have lagged its own cost inflation over the past two years. Kurzius said that McCormick plans to “fully recover” those costs through price increases over the course of 2023.

In the story of Bed Bath & Beyond’s bankruptcy, which hit the court docket in April after months of speculation, the retailer’s suppliers and supply chain play leading roles. 

The company is in Chapter 11 today partly because it could no longer afford to pay vendors and fully stock its shelves without protection from creditors.

As Bed Bath & Beyond’s recently appointed interim CFO and chief restructuring officer Holly Etlin put it in court papers, the retailer “is simply unable to service its funded debt obligations while simultaneously supplying sufficient inventory to its store locations.”

However, the troubles with suppliers started long before the filing. Etlin, a managing partner with AlixPartners who is frequently tasked with taking on interim executive roles at struggling companies, said that by early 2019 the retailer’s supply chain, along with its product development, was outdated and supported by old systems. 

When the retailer brought in Target veteran Mark Tritton as CEO later that year, the chief went all-in on omnichannel and private label brands.

Those strategies were successful for Target. But Etlin said Tritton’s new initiatives “proved too much for Bed Bath & Beyond’s supply chain to handle.”

The private label products had longer production and shipping lead times compared to the national brands with which the retailer, as Etlin put it, “built its reputation and customer base.” And customers weren’t as enthusiastic about the new assortment as hoped. 

Moreover, the pivot to private label led to “changes to previous long-standing vendor relationships,” Etlin said.

Buying shares, losing cash, spooking suppliers

In November 2021, Bed Bath & Beyond announced that it was significantly speeding up a stock buyback program, spending $400 million in cash in the second two quarters of that year to repurchase its own shares.

The buyback blitz, a move to return capital to investors, came just over a month after retailer reported a net loss and 1% decline in comparable sales, a disappointing quarter after a surge in sales and profits earlier in the pandemic as consumers invested in their home spaces. 

Etlin said that the buybacks “caused some concerns amongst its merchandise suppliers, with vendors fearing the Company would not have enough cash on hand to pay them in full, resulting in some vendors scaling back their business with Bed Bath & Beyond.”

Suppliers had every reason to worry about the cash the retailer was spending on its shares. At the end of September 2021 — just prior to the buyback acceleration — the retailer had cash and equivalents amounting $1.1 billion, and liquidity of $2 billion, according to its earnings for that period. By the next June, when Tritton stepped down, both cash and liquidity had each fallen by around $1 billion. 

A vicious cycle took hold. As Bed Bath & Beyond’s finances became ever tighter, the company began slowing payments and trimming orders with suppliers, sending some of them to competitors, according to Etlin.

Wary suppliers pulled back and tightened terms, demanding payment sooner or cash up front, as the company’s new CEO, Sue Gove, said later. Tighter terms crimped the company’s liquidity ever more. Meanwhile, the scaled-back shipments meant fewer products on shelves and significantly lower sales for the company, and thus less and less cash coming in the door. 

By January of 2023, Bed Bath & Beyond consistently trailed competitors Wayfair, Home Depot, Kohl’s and Lowes in inventory availability across major categories, according to an emailed analysis from Dataweave. 

After Bed Bath & Beyond’s inventory levels began a steep decline last summer and bottomed out in February, inventory began ticking back up in February, according to Dataweave. The company made securing cash and inventory a priority, including through a new consignment program, announced a couple weeks before it filed. 

But the last-ditch efforts weren’t enough to save Bed Bath & Beyond. By the time the retailer filed, it decided to wind down its business by closing all its stores and selling off the remaining assets, including its brand property. 

Even with liquidation pending in the coming months, the company still needs the support of its suppliers to do so in an orderly and effective way, and has sought court permission to pay key vendor bills. 

As the company put it in court papers, Bed Bath & Beyond “can ill-afford severe disruption to their flow of Merchandise at this critical juncture.”

Dive Brief:

• TJX is ready to “take advantage of the outstanding buying environment” as the off-price retailer’s inventory levels recede from last year, CFO John Klinger told analysts on a conference call in May.  
• The company’s total inventory fell more than 8% YoY in Q1, according to the discounter’s latest earnings. The fall was due to a decline in in-transit inventory compared to a year ago, when delays still held up supply chains.
• “We feel great about our balance sheet and store inventory levels,” Klinger said. The executive added that the retailer expects “better buying” to benefit the retailer’s margins in the coming quarter, while falling freight expense will increase margins for the full fiscal year. 

Dive Insight:

While other retailers have been trying to unload unwanted inventory like hot potatoes, TJX has been there with hot mitts to catch the excess. What others can’t sell at full price, the retailer — which owns the T.J. Maxx, Marshalls and Home Goods banners — can sell at off-price to consumers struggling with inflation. 

“Over the last year, our more than 1,200 global buyers have sourced merchandise from a universe of approximately 21,000 vendors, including many new ones,” CEO Ernie Herrman said on Wednesday’s call. 

The TJX chief said the company’s flexible buying strategy “allows us to seek out the best opportunities and hottest trends in the marketplace.” 

Herrman described a self-reinforcing cycle where the retailer’s attraction to consumers across multiple demographics allow it buy a range of merchandise from brands and suppliers, which then helps the retailer maintain its appeal to customers across income brackets. 

“Many vendors want to work with TJX due to our size, scale and buying power,” Hermann said. “As a growing global retailer with nearly 5,000 stores, we offer vendors a very attractive way to grow their business and clear their excess inventory quickly and discretely.”

Hermann also addressed the possibility that, as more retailers work to clean up their inventory positions, there may be less high-quality inventory for TJX when the process plays out.

“So, that has been said for years and years and years — decades,” Herrman said. “One vendor, one year could have less. But most of them are public companies that certainly and rightfully still need to grow their earnings and show growth.” 

He went on to note the sheer volume of vendors TJX works with, and that often when one vendor buckles down and cleans up their inventory, another in a similar category “just happens to have more at that time.”

As consumer wallets tighten, GlobalData Managing Director Neil Saunders said in a note that TJX’s advantages in the market include “great skills in buying which means it has relevant assortments that include a lot of compelling and ‘must-have’ products.”

For retail, the most daunting task in decarbonizing — the most complex in terms of data and execution — is also the most critical.

Scope 3 encompasses emissions up and down the value chain, from materials to the supply chain and so on to the consumer’s final use of a product. It is, by far, the largest share of retail’s footprint. Indirect scope 3 emissions account for 90%, and sometimes up to 98%, of retailers’ greenhouse gas emissions, according to the National Retail Federation. 

And because of their vast scope 3 footprints, retailers are responsible for roughly 25% of global emissions, according to a report from Boston Consulting Group and Ascential’s World Retail Congress.

Because the emissions are indirect, they also are the most difficult to track and change. Consider the difficulties retailers had in 2021 just pulling the reins on their supply chains to get products profitably in the country to sell.

And as with 2021’s struggles, the very nature of supply chains help explain the difficulties in scope 3. Instead of owning factories and directly controlling all or even much of their own production, brands outsource production to a geographically and economically complex network of suppliers who have their own interests and operations to worry about as well. Even getting data and understanding the emissions footprint of supply chains is a difficult task. 

But that’s not a reason not to take action. Retailers can get started with what they know, and what they can change today, experts say. Imperfect data and initiatives are better than none. The stakes are way too high, and the industry much too far behind, to be timid about scope 3.

“The reality of where we are as a society is that we need to put the wheels on the car as it’s racing around the tracks,” Shalini Unnikrishnan, managing director and partner at BCG, who leads sustainability for the consulting firm’s consumer and retail practice, said in an interview. “Is there a huge data problem? Absolutely. But there are smart ways for companies to get moving and have impact in the absence of perfect data.”

‘Significantly behind’

There is a huge gap to close on scope 3 emissions, and very little time to do so at this point. And yet, many in the industry still haven’t started. 

A BCG study shows just how much work is yet to be done in the industry. Of retailers surveyed, just 18% are on track to meet their scope 3 targets. Another 18% are activating plans but are behind schedule.

Nearly a quarter (24%) of retailers have scope 3 targets set but no plans for how to actually achieve them, and 6% have no plans at all. Another 35% have plans but aren’t making progress against their scope 3 targets or are unsure of their progress. 

In other words, for roughly two-thirds of surveyed retailers the most that can be said of them is that they are making zero progress on scope 3.

All of that said, some retailers are starting to set targets and take action on scope 3. According to a Fitch Ratings analysis, the number of retail companies that have set science-based emissions targets has more than doubled since 2019, and those that have committed to targets has grown from nearly nothing in that time to 36. 

Target and Walmart — among the largest retailers in the U.S. and often agenda setters for the industry on both operational and social issues — have each made commitments on supply chain emissions and scope 3.

But the progress to date is not nearly enough to bring the industry in line with goals set by the Paris Agreement. 

“When you look at net zero targets, we’re significantly behind, and I think we will fall further behind,” Simon Geale, executive vice president at Proxima, said in an interview. “That will either be the catalyst for change, or worse. I expect there to be huge amounts of more progress over the next decade. But it’s such an important decade, there’s a risk that [with] all our progress, ... we’re still falling behind.”

Take the fashion industry as a very important example given its footprint. The sector was responsible for some 4% of greenhouse gas emissions in 2018. As of 2020, fashion is on pace to generate more than double the 2030 emissions target set by the Intergovernmental Panel on Climate Change, according to McKinsey.

“I don’t know that we can achieve the goal by that time, but it shouldn’t be a reason for doing less,” Ting Chi, a professor and department chair at Washington State University’s department of apparel, merchandising, design and textiles, said in an interview. “We have to do something. It’s getting worse.”

Digging into the data  

Merely measuring the size of a company’s indirect footprint is a complex, daunting task, full of sleuthing, data gathering and estimating. Even to do so with precision requires a lot of estimating. 

In the BCG survey, one of the most cited challenges in achieving emissions goals was lack of access to relevant data. “The challenges of data don’t give us the luxury of waiting,” Unnikrishnan said.

Those just starting to measure their scope 3 emissions are typically doing the most estimating and guesswork. They might use databases that convert economic inputs and outputs and send data into indirect emissions estimates. “Is that the most robust method? No,” William Theisen, CEO of climate-focused consultancy EcoAct, said in an interview. “But it is a good starting point to understand where are the hotspots within your supply chain on scope 3.”

On the other end are estimates based largely on primary data from suppliers and the specific products sold in retail spaces. Theisen also said there is a “middle ground” between pure estimates and massive primary data collection. 

“If you’re a fashion company, you can look at raw materials you’re using in your clothes, and the transportation and distribution — look at different buckets of information,” Theisen said. “We can use that to get a more accurate carbon footprint within scope 3. But of course, supplier data, primary data, is always the gold standard.” 

But even primary data is just that: data. Within data, there is a lot of variation in quality. Perfect data is, for now, probably infeasible. 

“If I'm a grocer and I'm selling a head of lettuce, perfect data is that I know … exactly where it's grown, how it's grown, how it's harvested — what happens to it every step of the way. Which refrigerator did it fit in, what truck did it move in, how many times did it move?” Unnikrishnan said. 

But it doesn’t stop there, for scope 3 tracks all the way to the final use and destination of products. “And then finally, after somebody bought [the lettuce], did they eat it? Did they waste it, and what happened to the waste? That's perfect information,” Unnikrishnan added. “So now you understand, we're not going to get there in a reasonable amount of time.”

Estimates based on spend at least give retailers a sort of heat map of where the largest sources of emissions in their supply chain are. To get primary data, retailers can build lists of their largest suppliers, core suppliers and so on, and then essentially ask vendors for the data.

“Starting from the top, they're basically building these questionnaires that are asking suppliers to provide details to what their carbon emissions are,” Tyler Higgins, retail practice lead and managing director at consulting firm AArete, said in an interview.

Data, to be useful to companies and the planet, also has to be correct. “Data has to go hand in hand with validation,” Unnikrishnan said. “It has to go hand in hand with auditability, with traceability. That’s a really critical part, that’s the holy grail.”

In Unnikrishnan’s view, advanced technologies such as blockchain can help make validation and traceability throughout the supply chain possible.

All of this is complicated even more by the tension between the desire to track emissions — perhaps for climate-minded investors or to score sustainability points for customers — and concerns about greenwashing. 

Highlighting that tension was a recent controversy around one of the most common tools used by fashion brands and retailers to track their various sustainability footprints. Earlier this summer, Norway’s consumer authority called out some retailers, including H&M, for making sustainability claims using a material index from Higg, created by the Sustainable Apparel Coalition. 

Higg also has scope 3 impact estimating tools, though those weren’t at issue in this instance. The Sustainable Apparel Coalition scrambled to review the data and methodology behind the Higg material index, which is used by hundreds of brands. Not long afterward, an investigation from Quartz found H&M wasn’t even citing Higg scores for its products correctly in many instances. 

While not directly related to scope 3 tracking, the controversey over the Higg Index and H&M shines a light once again on the difficulties even in the simpler forms of environmental tracking — that is, using indexes to provide estimates on a footprint. But time and again, experts told Retail Dive in interviews that companies need to get started tracking even in the absence of perfect data and perfect tools.

Adventures in decarbonization  

Tracking emissions isn’t the same as reducing them; it’s only a step in the process. And it doesn’t even have to be the first step in every instance. 

“A lot of firms I’m seeing at the moment are paralyzed by how difficult it is to get the data, and they forget that actually you can go and do stuff,” Geale said. “You [can] go work with a supplier to switch to an electric fleet, or to reduce the number of journeys that are needed or change the specification on packaging, or to make something circular or take water out of the process. Automatically, you are reducing the level of emissions in the bigger picture.”

Geale added, “And that’s more important to do than to necessarily be able to measure.”

As Jess Dankert, vice president for supply chain with the trade group Retail Industry Leaders Association, noted, many major retailers are already having strategic conversations within their supply networks and transportation networks for operational reasons. “We see the sustainability and emissions piece become more of a factor in that,” Dankert said in an interview. 

Retailers are also looking at the mix of modes they rely on to move goods, asking questions about the role of intermodal and rail transport in reducing emissions, according to Dankert, who added that there are many “interesting conversations” around emissions taking place and a “rapid pace of evolution.” 

Erin Hiatt, vice president for corporate social responsibility at RILA, noted also that many emissions reductions yet to be made can be tied to efficiency, such as reducing empty miles in transportation, freight matching and intermodal transport. “There’s a lot to optimize there while companies keep an eye on low and zero emission-fleet opportunities as that technology and infrastructure develops.”

When it comes to supply chains, size is a difference-maker. “The level at which you're able to influence your suppliers is really critical in how quickly you can decarbonize your own supply chain,” Geale said. “Take the example of Walmart and Costco. Some time ago, Walmart took a position they were going to be able to influence their suppliers, create some collaborative solutions. Costco took the position that they didn’t have the ability to influence their suppliers.”

There is also the question of who will pay for transforming the emissions profile of supply chains. Many factories operate on thin margins in countries less wealthy than those where retailers and their customers are located. Chi notes that for many garment factories in the developing world, which produce the vast majority of clothing, if carbon reduction adds even modestly to their costs it could wipe out their profit margin. 

“To meet one demand or one requirement that would add to the unit cost, they lower the quality for other things,” Chi said. That could end up hurting other sustainability measures. But Chi also notes, “Cost sharing could be a very important incentive.”

Scope 3’s operational and data challenges are as complex as supply chains themselves. But there is one very simple, certain way to reduce emissions: sell fewer SKUs. 

“One possible solution we talk about is we can buy less at higher price points,” Chi said. “We talk about more durable goods that you can wear for 10 years instead of two or three years and throw away a $10 T-shirt.”

The role of policy

Despite some recent progress, it’s difficult to see how the full industry gets across the finish line, or even close to it, without government intervention. 

“If you don’t get U.S., China, India and other large economies tied into this, you don’t achieve it,” Geale said. 

Or, as Chi put it a little more optimistically, “If government can take the leadership, I think it would happen sooner.”

The industry, too, acknowledges this. “There is a role for policy,” RILA’s Hiatt said. “It’s hard to say what that it is. You kind of have to react to what you see proposed.” 

As Chi pointed out, government involvement can take the form of regulation and mandates, as well as financial incentives and investments in the infrastructure needed for emissions reductions on a mass scale. 

Hiatt pointed to renewables, which currently lack the capacity to meet the demand as projected under current global climate goals. 

“These companies are setting goals based on where emissions need to be, and they're committing to doing what's necessary to meet the goals,” Hiatt said. “But a lot of that sort of relies on this collective action from investment in other industries picking up the pace as well.”

The U.S. has never passed major legislation addressing greenhouse gas emissions despite decades of warnings about climate change from scientists, and the Supreme Court recently threw cold water on the EPA’s efforts to reduce emissions. 

One area where there has been action is on disclosure from the Securities and Exchange Commission, which has proposed rules that would, among other things, require disclosures on scope 3 emissions for companies who set targets or those for whom the information would be “material” to the business.

RILA has opposed the rules in their current form. “A lot of aspects are challenging from a practical standpoint,” Hiatt said, who added that the industry group does support getting investors information but some of the SEC’s proposed “mechanisms and timing weren’t really based on what’s realistic right now based on reporting capabilities.” 

Among the issues concerning RILA are all those discussed above — the difficulty in collecting comprehensive, accurate information on supplier emissions. 

“I do understand the hesitation on scope 3 reporting because it's not like everybody's playing with the same amount of primary data all across the board,” Theisen said. “At the end of the day, though, we have to start somewhere.” Pressure to disclose, Theisen added, could force players to unify and act: “Maybe we all need our supplier data, and let’s create a coalition to get this data we need.”

The energy inside of stores in March 2020 was rushed, strained and infused with the weighty gaze of shoppers and workers that asked, "Should we even be here? Are we going to be OK?" At that point, a lot was up in the air. Sports, shopping, supply chains and society at large were changing — adapting — to the coronavirus pandemic.

Soon, stores temporarily shuttered as the result of lockdowns. And consumers flocked to digital buying channels.

When stores closed and customers moved online, retailers looked for a way to get in-store inventory moving. Fulfilling online sales from retail locations was an obvious solution. And it was one that some companies were better positioned to tackle. Target, for example, has been perfecting its ship-from-store model for years.

"Ship from store, depending on the retailer, can be incredibly efficient," said Moody's Retail Analyst Charlie O'Shea. "And in Target's case, it is because they so locally curate their stores."

Other retailers that largely rely on brick-and-mortar sales had to stand up infrastructure quickly to be able to handle e-commerce and ship from store.

"We expedited the infrastructure to be able to buy online and ship from store in order to supplement e-commerce fulfillment while leveraging labor that we would already have available in retail stores after they have reopened," Build-A-Bear CEO Sharon Price John said on the company's earnings call in June 2020.

The effort might not have been enough to make up for Build-A-Bear's store network: its sales fell 23% YoY to $249.2 million for the full year 2020. But e-commerce demand was up 133% YoY.

"​We were able to support this growth through our efforts of improving throughput in our warehouse, accelerating omnichannel initiatives in ... our last-mile delivery, including buy online pick up in store or ship from store programs," CFO Voin Todorovic said this month.

Whether this strategy will stick around after the pandemic is up for debate.

"I think every retail analyst right now is kind of scratching our head trying to figure out what's next," O'Shea said, adding that no one knows what normal will look like going forward.

The other option for shuttered retailers was to get customers to pick up at the curb. This simplifies the supply chain for the retailer compared to ship from store — and is cheaper for the retailer.

Bed Bath & Beyond, Dick's Sporting Goods and Hudson's Bay were among the retailers utilizing the curb as a result of the pandemic. But there are questions about how companies will shift and improve these offerings going forward.

"I think ... retailers are going to focus on this sort of whole curbside thing, trying to make that experience not just painless, but actually enjoyable," said Dave Gill, vice president of insights and analytics at Rakuten Intelligence.

Retails experienced demand for these omnichannel offerings. Grocers have highlighted the success of their curbside programs months into the pandemic.

"More than 50% of our BOPIC orders for the fourth quarter were delivered curbside," BJ's Wholesale Club CEO Lee Delaney said on the company's earnings call in March 2021, referring to the retailer's buy-online-pickup-in-club option.

While retailers have seen benefits from the e-commerce pivot, it wasn't easy. Amazon, which had, arguably, the most mature e-commerce supply chain, struggled to keep up with demand in the early days of the pandemic, according to figures from Rakuten. (It is worth noting that these figures are an average that includes marketplace sellers for which Amazon doesn't control the supply chain.)

The increased ship and delivery times highlight some of the labor challenges Amazon had in the early days, Gill said. The company did eventually bring on hundreds of thousands of workers to bolster its ranks.

"People that work in Amazon warehouses got sick, and went home and called in sick," Gill said. "So they actually had sort of a compounded problem in that they're trying to fulfill all this demand and their workforce, which is gigantic, was pretty hard hit by all that stuff."

The slowdown in Amazon's network resulted in an uptick in late shipments, but the retailer has seen these figures largely recover. Some areas have already seen a return of one-day shipping.

Spring spurs homeowners to tackle fresh projects with new tools and materials. For Lowe's to fulfill this incoming demand amid global supply chain challenges, it had to take on a renovation project of its own.

"Just like any other company out there, we've had to make the right pivots to survive in this environment," Don Frieson, Lowe's executive vice president of supply chain, said in an interview with Supply Chain Dive.

A combination of COVID-19-related impacts like more remote work and traditional benefits like an aging housing stock have helped boost home improvement demand since the pandemic began. This has benefited Lowe's sales, but it has also placed increased pressure on the retailer's supply chain in an era of choppier inventory flow, reduced product availability and pricier logistics.

To keep Lowe's supply chain humming during upstream snags and increased e-commerce demand, the company expanded its logistics facility footprint and launched its transition to a more efficient home delivery approach, among other measures. Cost of sales increased from fiscal year 2020 to 2021, but so did the company's gross margin.

"I think 2020 was fast paced, we were just trying to do anything we could to make it work," said Frieson, who joined Lowe's in 2018 after serving as COO at Walmart-owned Sam's Club. "In 2021, we were able to normalize that increased activity and support a new level of sales."

A 'prudent' solution for product availability

Lowe's supply chain includes a mix of regional and flatbed distribution centers to help it move a bevy of imports to stores and customers. But since the pandemic began, the company has also been adding facilities with specialized functions beyond what these centers can do.

In fiscal year 2021, the company added six cross-dock delivery terminals to fulfill last mile deliveries and four bulk distribution centers to handle large products like appliances. Lowe's is also using what's known as coastal holding facilities to carry imported products upstream, allowing the retailer to secure the products from vendors earlier and deliver them to distribution centers and stores when needed.

"When it comes in that early, you have to have somewhere to go with it, because to immediately push it downstream, that'll push your stores out of season," Frieson said. "So [coastal holding facilities] proved to be really, really important to us."

For optimal flow from a coastal holding facility, Lowe's factors in the inventory levels necessary to support its sales forecasts in addition to the average lead times from a facility to a regional distribution center and then to a store, Frieson said.

Lowe's has five coastal holding facilities in its arsenal today, including locations in Rincon, Georgia, and Pittston, Pennsylvania, that opened in Q4, according to a spokesperson. The company has two more sites under development that will come online in late 2023. A coastal holding facility's square footage ranges from around 420,000 square feet to 750,000 square feet, Frieson said.

For a business the size of Lowe's — it's the fourth-largest importer in retail, per Frieson — the investment is worth it. Chairman and CEO Marvin Ellison said on a February earnings call that taking possession of shipments early and holding them at a facility will elevate inventory levels, but said that it's "the prudent thing to do" to secure products.

From store to market delivery

Further down the supply chain, Lowe's is also ushering in a new system to reduce the steps required to deliver a product to a customer.

"Our current legacy delivery model is tremendously inefficient with each store functioning as its own distribution node for big and bulky products," Ellison said in a December conference call discussing Lowe's 2022 outlook.

The store delivery model has Lowe's holding appliances in its stock rooms and in storage containers behind stores. The company uses store-based delivery trucks and associates to then deliver those items to customers. Customers can only purchase items available in-store for delivery, according to Ellison.

The legacy model also leads to last mile inefficiencies. Frieson said two customers that live on the same street buying from different stores may be serviced by two different delivery trucks, even if their orders arrive at the same time.

"If you were able to aggregate the deliveries from several stores, then you would be able to optimally wrap those so that one truck takes advantage of ZIP code delivery versus criss-crossing across the city," Frieson said. "That's exactly what market delivery is doing for us."

The inefficiency of that system drove Lowe's to launch a new delivery model where big and bulky products skip stores entirely when shipping to a customer.

If someone buys an appliance at 4 p.m. in stock at a bulk distribution center, then Lowe's can deliver the product from that center to a cross-dock facility that night. The facility then prepares the product for delivery so it can be made the following day. The result is two less touches in the process and a one-day delivery promise for the customer, according to Frieson.

Lowe's has already converted its Florida and Ohio Valley markets to the new model, Ellison said in his outlook.

Since the model has deployed, Lowe's has seen "higher operating margins and appliance sales, improved inventory turns, reduced damages and better customer satisfaction with higher on-time delivery rates," according to Ellison. The company plans to convert the entire U.S. market to the new model over the next 18-plus months.

There will be pressure on Lowe's in the near-term as it ramps up the new model. During a market transition, "you are kind of almost running two supply chains a little bit until you get fully up to 70%, 80% utilized in those spaces, then you start to see it flip and be positive to us," CFO David Denton said at the UBS Global Consumer and Retail Conference in March.

The transition will free up space at Lowe's stores, allowing them to have more capacity for other supply chain activities such as same-day and next-day fulfillment to job sites. That will benefit Lowe's supply chain further, as expanded last mile capabilities and reduced store complexity have been among the company's priorities even before the pandemic, Frieson said.

"Our team just built on top of that, as customer expectations get higher for faster, cheaper fulfillment options," Frieson said. "It's working its way through our supply chain network and growing the efficiency that we see in moving goods, so it's been good for us."

Small businesses are bracing for a holiday season of shipping headaches, too.

While large retailers have been responding strategically to get products to shoppers this holiday season, local crafters, makers and entrepreneurs have been thinking tactically for months about the same issues as their mainstream competitors.

"We are in for a wild ride," Katie Stack, owner of leather goods company Stitch & Rivet, told Retail Dive in regards to shipping this season.

While the public may understand recent reports of supply chain problems and shipping delays, something that may not be fully understood is that shipping logistics are different for small sellers. Large retailers bulk up on seasonal employees to expedite fulfillment, yet many small businesses are doing all of that work by themselves, or with a shoestring staff.

Additionally, Amazon and other national retailers have shifted expectations on how quickly items will arrive at a buyer's home, which can be very difficult to meet as a small seller. Once a product is out of the door and on its way to a client, there is no controlling what happens next.

Sellers like Stack are expecting another version of what happened during the unpredictable 2020 holiday season. "Shipping was really all over the place," Stack said of that time. "I would ship an item, for instance, that was scheduled to arrive in Massachusetts, in say three to five days. But then for some reason it would end up in California."

Prepping for the peak

There were warning signs of a potential shipping snafu emerging as far back as this summer.

In July, UPS said demand during the peak season of 2021 was expected to exceed capacity by about 5 million pieces per day. To mitigate the rush, UPS is adding capacity prior to the holidays, including 2 million square feet of additional sorting space and more cargo aircraft.

On its latest earnings call, the company touted its cooperation with its largest companies to navigate some of the congestion. "We began collaborating with our largest customers several months ago and we'll stay in close contact with them during the holiday shopping season," UPS CEO Carol Tomé said on the company's Q3 earnings call last week. "Our technology allows us to match daily capacity with customer demand. And where we need to, we will again control the amount of volume that enters our network."

The company also announced surcharges in order to keep up with rising demand. That's significant because, as of the second quarter, small- and medium-sized businesses in the U.S. made up over 27% of the company's total revenue — up from 20% last year.

And UPS isn't the only company that has instituted peak shipping surcharges. Over the summer, the U.S. Postal Service announced it would temporarily raise commercial prices from Oct. 18 to Dec. 27 in response to "increased expenses and heightened demand" for e-commerce parcel delivery.

FedEx followed in the footsteps of its competitors, announcing it would institute surcharges for peak season from Oct. 4 through Jan. 16 in order to keep service levels high.

All of this matters because, just like major retailers, shipping expenses cut into the bottom line for small businesses. And those companies, especially mom-and-pop shops or small crafters, don't have the clout or scale to negotiate with these services on price.

"It will be worse for small retailers as they often don't meet the shipping volume quotas," Gautham Vadakkepatt, director of the Center for Retail Transformation at George Mason University, said in emailed comments to Retail Dive. "Indeed this holiday season can be make and break for many of them due to rising pricing, labor shortages, and supply chain problems. On the flip side, due to almost certain shortages, there will be greater demand for products that small retailers carry, which can present growth opportunities for them."

Cindy Liebel, founder and designer of Cindy Liebel Jewelry, is anticipating those price increases will impact operational costs. "The cost to ship on top of the increased surcharges, it does take a huge bite," Liebel told Retail Dive. "I have added an additional dollar to shipping charges on my website to help cover that cost."

And, it's not just about the cost of shipping. Small business owners have to think about packaging materials, some of which are difficult to obtain right now. Stitch & Rivet's Stack keeps a separate storage unit full of shipping supplies.

"A bunch of my eco-mailers had gone out of stock earlier this year, and so when they came back in stock over the summer, I ordered thousands and thousands of them so that I wouldn't have to worry about it," she said.

Liebel also stocked up on shipping supplies in late August and early September. "The company I purchased my shipping supplies from sent an email out sometime in August letting us know about price increases," she said. "I went ahead and decided to stock up. I took a look at my numbers from the previous season ... to get an idea of how much I use and to make sure I had enough of it."

Liebel added that small businesses may not have the funds on hand to pre-order supplies, or there may be delays because packing materials are coming from overseas.

Etsy, a marketplace for makers and crafters, recently published a guide for its merchants regarding holiday shipping, which the company will continually update through the season as new information becomes available. The resource spells out cutoff dates for major carriers, and says surcharges will automatically be reflected in the price of shipping labels purchased on Etsy.

The platform is also encouraging sellers to add holiday cutoff dates to shop announcements and listing descriptions, and to update shipping profiles with their mail carrier, class and zip code. "We'll combine that info with your processing times to show shoppers an estimated delivery date so they can feel confident their gifts will arrive in time for all the festivities," the company said.

Shipping may be a particular point of consumer frustration, according to the "Quickbooks Commerce Small Business Shopping Report" by Intuit, which found it to be the biggest challenge for more than a quarter of customers who have shopped with small businesses online.

Yet, there are a number of things that small businesses can do to help with that friction. "Ask yourself how far you're willing to ship orders," Shilpa Reddy, vice president of QuickBooks Commerce at Intuit, said in emailed comments to Retail Dive.

Reddy also suggests that companies need to understand consumer expectations around speed and cost, and to consider flat shipping rates. "You might end up paying additional shipping on larger orders, but the smaller orders that cost less than $5 to ship will help you break even." Small businesses can also think about what they want to achieve with an unboxing experience when customers receive orders, Reddy noted, saying it is an "opportunity to surprise and delight."

Even with the looming logistics of shipping for all retailers, consumers are primed to support companies that are local. Most (93%) of shoppers say that supporting small businesses this holiday season is more important than ever because of the pandemic, and nearly half (48%) are more likely to try new businesses than they were before the pandemic, per the QuickBooks report.

Is in-store the shipping alternative?

While retailers of all sizes are gearing up for a heightened season of shipping, they are also considering a likely alternative — pushing customers to come to their stores for pickup.

During 2020, BOPIS services saw a dramatic increase. Retailers that previously didn't consider it as a viable fulfillment option scrambled to put together systems for curbside and buy online, pick up in store services.

It worked. The relative ease of picking up products at store locations, not having to wait for the mail and the ability to have contactless service shifted consumer behavior. A year ago, buy online, pick up in store and curbside services increased by 75% — a spike fueled in part by concerns about timely holiday fulfillment.

And those services are forecast to continue to be an important part of the shopping experience and a means to bypass shipping altogether. A recent Coresight Research report forecast that this year over 21% of holiday shoppers expect to use curbside and nearly 18% anticipate in-store pickup.

Retailers are therefore building upon what they already constructed or enhanced in 2020. Target recently added new features to streamline its order pickup, drive up and same-day delivery services, and Walmart extended delivery hours until 10 p.m. and added delivery windows during the holiday season.

Amazon also made a play for a brick-and-mortar delivery option. Last week, the e-commerce giant launched Amazon Local Selling, a service that is geared toward small- and medium-sized businesses. Shoppers can now select same-day pickup at a seller's local store, or opt for delivery in specific zip codes.

Small business owners that have brick-and-mortar locations can of course use their stores as a fulfillment center of sorts, too. But, what about those artists that work in small studios, or do not have the physical space to hold products?

Many are getting creative about their take on "curbside pickup." Stack, who works out of her home in Virginia, will be offering two pick-up appointments in Washington, D.C., and one in Baltimore, Maryland, during the season.

"I think people are going to want to pick up," she said. Stack is also encouraging customers to order by Nov. 4 to guarantee on-time delivery. "I feel like that's what the last 18 months has been about — how can you creatively manage what is going on?"

Liebel is considering collaborating with a local business so her customers can pick up items as well. Her website allows customers to choose the shipping carrier they prefer, and her bi-weekly newsletter has a tab to let customers check on updates regarding shipping deadlines.

Liebel has other creative solutions for those concerned about their packages arriving on time, including telling customers to print out an image of their product as a placeholder gift or she can create a certificate so it's still "kind of wrapped up."

But, as Stack points out, local businesses may be a perfect overall solution for a holiday season potentially steeped in shipping delays. "The work of local artists and makers is not sitting on a cargo ship," she said.

Etsy agrees. In a blog post published last week, CEO Josh Silverman said Etsy's marketplace is reliable, and most of its sellers don't rely on complex supply chains to create products. "The average Etsy seller works from home without complex overseas production lines and fulfillment requirements, and their supply chain looks a lot more like locally-sourced raw materials and two hands," he wrote.

That means 2021 may prove to be a great year for local commerce. "This year is a great year for people who maybe have never bought something from the little store down the street to think about doing it," Stack said.

For supply chains, the pandemic has brought unprecedented levels of disruption. The specific confluence of events was beyond anybody's ability to foresee.  But, at least in a general sense, everyone should have expected something like the year that just passed to happen.

Risks of severe stress and even failure are built into modern supply chains — unintentionally, but they were there, for decades, for everyone to see. The very idea of a globalized "supply chain" is at least in part defined by risk. 

When linking up dozens or even hundreds of firms, with thousands of workers among them, all trying to move in coordination across continents to complete the task of of getting products on shelves — all sorts of things can go wrong. And there was never any reason why a whole bunch of things couldn't go wrong at the same time. 

For all the talk of crisis and collapse, the system largely held through the holiday period. But the past two years have laid bare vulnerabilities that have long existed in the system. To name a few: lack of capacity, manufacturing concentration by geography, length and complexity of supply chains, and scale mismatches among links in the chain. 

The question for retailers, brands, vendors and governments around the world is whether supply chains will be rebuilt for the future, with unknown crises in mind, or if the industry reverts back to "normal" once the current backups in the system ease.

Concentrated risk

To name just a few things that went wrong in 2021: A ship famously became lodged in Egypt's Suez Canal, blocking traffic for six days. China closed one of the busiest ports in the world because of a COVID-19 outbreak. Vietnamese factories were fully or partially shut down because of outbreaks, wreaking havoc on apparel and footwear production. 

COVID-19 also disrupted manufacturing areas in Bangladesh, India and other major producing countries, not least of all China. A demand surge in the U.S. led to shortages in cargo space, shipping containers and other equipment that led to skyrocketing ocean freight prices.

While tied together by the pandemic and its consequences, the problems were different and exposed different vulnerabilities in the system. 

Consider the impact COVID-19 outbreaks had on ports and factories in China. On the surface, it seems like a pandemic-induced problem. But a supply chain system less reliant on Chinese production could absorb those shocks with less pain and for fewer players.  

"Some of our clients are really taking a hard look at spreading risk so that it's not so China-centric or even Asia-centric," said Ron Scalzo, senior managing director in FTI Consulting's business transformation practice. "It's a hard thing to do. It's hard to get out. There's so much infrastructure and so much manufacturing capacity that's been built up in China. So it's not like flipping a switch."

Scalzo added: "It's easy when the disruption event, the black swan event — whatever you want to call it — is over to shift right back to the lowest cost solution, which remains China. But I think this was a wake up call for a lot of companies."

Supply chains aren't just concentrated by geography alone. In many cases, production of a good can be centered on just a few factories. Garphil Julien, research associate with Open Markets Institute, a nonpartisan group that advocates for more aggressive anti-monopoly policies, points to the market for semiconductors as a prime example.

That single component feeds into countless consumer electronics and other products retailers and brands depend on. "Semiconductors were a product the U.S. used to make in a relatively large capacity," Julien said. "Over the past few decades, you've seen consolidation of the semiconductor industry, the stripping of capacity, the shutdown of plants across the U.S. to a point where there are only three integrated device manufacturers, three companies that actually make semiconductors."

Along with the potential for price gouging, supply concentration also poses an obvious supply risk. It's the old saw about too many eggs in one basket. If a hurricane or earthquake — or a plague — hits the sole factory producing a given good, there is no more of that good until the factory has recovered. 

Super-sized clogs

It's not just supply itself that is concentrated. The top eight carriers control more than 80% of the market for ocean freight capacity, and carriers further form alliances with each other to expand their scale and reach. And while shippers saw freight prices blow up by many multiples, carriers had a phenomenal year. Bloomberg reported recently that ocean-freight carriers made an estimated $150 billion in profits for 2021, up nine times over from the previous year. 

"There is hyper-consolidation of shipping lines, and they have no incentive to invest in capacity," Julien said. "At the same time, they're making record profits. You really haven't seen anything like it. It's really frustrating at the same time, we're just really captured by these shipping companies."

Craig Philip, professor and director of Vanderbilt's Center for Transportation and Operational Resiliency, thinks the capacity crunch is short-term. "The market has reacted very quickly. The order book for new vessels has exploded," Philip said. "If we'd been having this conversation pre-COVID, we would be asking questions about whether the companies that own and operate those ships were financially vulnerable because there's too much capacity in the system."

One major source of that capacity is the colossal size of freight ships. When those huge ships connect to infrastructure and supply chain links that don't match their scale, that can be the source of bottlenecks, according to Philip.

The most visible was the blockage in the Suez, when a single, askew ship blocked an entire shipping artery for days at a time. "When I cut my teeth in this business in the '80s, the largest ship carried 2,500 or 3,000 containers," Philip said. "That ship that got stuck in the Suez Canal carried 25,000 containers. Wow. It's just mind-blowing." 

Philip added: "So that's one thing that we've supersized. The other thing is the distances that we think things can and should travel on a routine basis."

When gargantuan ships traveling interminable distances meet with modes of the supply chain not up to the same scale, problems can arise. 

"There are many elements of that supply chain that haven't been supersized in an equivalent way," Philip said, pointing to trucking as well as domestic port infrastructure and concentration of traffic around two major ports in Southern California, among other things. "And so now we're confronting the places where the frictions in the system become not a nuisance, but become a real, real big issue."

'Anything but agile'

Even for those companies that have worked on their supply chain over the years, many gaps exist. 

"One thing we've seen is that supply chains are anything but agile," said Matt Garfield, managing director with FTI. "Supply chain agility has been the bingo buzzword of the past decade. But what we've seen coming out of this is that companies design agility to solve specific tactical problems. 'If I have this lever to pull, I can be agile here.' But what they didn't develop the agility for was the confluence of all these levers being pulled at the same time."

Retailers have also long been counting on the just-in-time inventory model, which obviously is scrambled when backups create widespread and often protracted delays. Companies "are at least beginning to partially rethink that whole inventory position and whether there should be more reserve or safety stock, as well as a move toward nearshoring and onshoring," FTI's Scalzo said. 

Historically, retailers and brands shifted to lean inventory models to cut down on their costs of holding inventory, while limited inventory is also seen as a hedge against price discounting. But the cost accounting for lean inventories, like the low costs of production in China, doesn't typically factor in the costs of system breakdowns and black swan events. 

"In the past we used to have more inventory. Inventory was a good risk mitigation practice," Julien said. "Shareholders don't necessarily like inventory."

When crisis hit the global supply chain, firms reversed long-standing practices, which only made bottlenecks worse. "It's no longer a just-in-time world. It's a just-in-case world — just in case we don't get it," said Craig Austin, assistant teaching professor in at Florida International University, who has worked in industry in operations, logistics and freight. Businesses, Austin added, are stockpiling "because they're not sure that they can get their merchandise just in time." 

The warehousing, freight and other expenses to stockpiling raises overall costs for retailers, who are passing the costs on to consumers and in turn helping to push inflation, according to Austin. "Because they're stockpiling, you're paying for that inventory they're carrying," Austin said. "They have fewer [employees], and they have to raise wages — you're paying for it. And there's also a shortage of equipment, there's not enough containers." 

With inventory, as with so many things in supply chain, size matters. The average inventory days for the largest retailers and their suppliers (with revenue above $100 million) have actually decreased from 2019 to 2021, from 98.6 to 81.5, according to RapidRatings data compiled for Retail Dive. For medium-sized companies, inventory days increased slightly, and for small retailers the days increased significantly — by more than 39 days.

As RapidRatings Chairman and CEO James Gellert explained, larger retailers have demonstrated "a high level of resiliency" during the pandemic, with pricing power and the scale to compete for product. Smaller players, on the other hand, may have struggled to sell product as fast or have been stockpiling for the many uncertainties of the pandemic era.

Shining a light on supply chains

Inventory is one piece of the puzzle, but setting inventory levels is ultimately the easy part. Harder is managing an extensive, global network of firms that form what is called the "supply chain."

By its very nature, the supply chain eludes the control of retailers and brands, compared to a world where companies owned their own factories, when brands themselves produced the goods that bore their name. Not only do companies lack control over the external pieces of their supply chain, often they lack information and knowledge about their partners and their operations. 

Gellert said that amid pandemic disruption, some companies struggled to manage risks in their supply chains because of communication issues. In some cases, companies that were less prepared in supply chain risk management were even scrambling to figure out contact information for people at suppliers offices. 

With less control, and all the risk that brings, agility has become the byword. But how do companies actually get that?

Jess Dankert, vice president for supply chain at the Retail Industry Leaders Association, said large retailers are working toward building more "close collaborative relationships" with suppliers and other supply chain service providers, with open lines of communication and fluid information exchange. 

"A big piece to agility is visibility, knowing what's happening out there in your supply chain, to know not just where there's a bottleneck or obstacle, but also where there might be," Dankert said. 

Visibility is so important Dankert calls it the "holy grail" of supply chain and an area where retailers are investing. It takes talent, technology, data analytics, system interoperability among partners, and technological and strategic "control towers" to manage it all.     

Many expect the bottlenecks, backups and freight price spikes to continue through 2022, if not further out. 

Hedging against future crises is going to take a kitchen sink full of tools for companies, along with infrastructure investments in ports, transportation, warehouses and other areas bottlenecks occurred. All of which will take years to build out. 

It could also take a broad rethink of supply chains and their importance inside retail organizations, which historically have prioritized marketing and merchandising.

"One thing I think we will see is supply chain having a bigger seat at the table," FTI's Garfield said.  

Companies that provide "on-demand" warehousing in the form of short-term contracts have experienced an uptick in demand as a result of the pandemic, which industry analysts say is explained by supply chains looking for agility and flexibility in their operations. Still, some question the value and say traditional 3PLs provide better long-term partners.

Figures provided by Flexe show its enterprise users — the retailers and companies that use the warehouse network — grew 128% YoY in 2020. Its operator network grew 50% YoY to reach more than 1,500 locations across North America.

Flexe Chief Technology Officer Dave Glick said retailers have gotten a front-row seat to supply chain volatility over the last year. One way they've sought resiliency is to increase the amount of inventory on hand, Glick said.

"What that means is you have to set up new warehousing and new transportation hubs as you go," Glick said. And since companies don't know how long the pandemic-driven consumer spending will last, they "don't want to sign five- or 10-year leases for warehouse space."

That's why retailers view interim warehouse capacity as helpful to their supply chain strategies, according to Abe Eshkenazi, CEO of the Association for Supply Chain Management.

"I think this is a short-term strategy that enables an organization to amass a large financial investment," Eshkenazi said.

Amazon prompts an on-demand wave

Flowspace, another on-demand warehouse provider, has also seen increased interest in its product during the pandemic, CEO Ben Eachus said.

A decision by retail giant Amazon resulted in one of these waves of interest, Eachus said. In the middle of March 2020, as the world was still trying to wrap its head around the pandemic, Amazon said it was suspending the intake of most products at its fulfillment centers used by sellers in its Fulfillment by Amazon service. Amazon said it was prioritizing the intake of essential inventory to be able to provide those goods to its consumers.

Sellers that relied on the service were left scrambling.

"That left thousands of merchants who were essentially stranded with no other fulfillment options," Eachus said.

Amazon announced in April 2020 that it would begin to accept more products into its fulfillment centers. It's not clear what impact this had on Amazon's fulfillment business long term. But some retailers kept looking for alternatives over the course of the year, citing slower speeds from Amazon.

"Hi, guys what you recommend since FBA is delaying everything," a Reddit user asked on a Fulfillment by Amazon forum. The user pointed to Shipbob, Deliverr and ShipMonk as options they were considering.

Glick said Flexe similarly saw increased interest from brands that realized they needed to try something other than "bet our whole strategy on Amazon."

Other users of the spaces saw their e-commerce demand surge to levels they did not expect in near-term forecasts. They had capacity being built, but it wouldn't be ready to meet current demand, Glick said.

"Sometimes, they said, 'We've got a building that we're building right now and it's not just ready yet, so we need your help temporarily,'" he said as an example.

Flexe has touted the fact that Walmart uses its service. But the majority of the companies using on-demand warehouse solutions are small- to medium-sized businesses, according to James Breeze, the head of industrial research at CBRE.

"They're looking essentially for short-term solutions where they can stock some inventory just in case to ... see what happens long term and then make some long-term decisions," Breeze said.

Another driver here is the industrial real estate market, which has pushed up the cost of renting a warehouse "significantly," Breeze said. Markets such as Atlanta and Savannah, Georgia, have declining vacancies and rising rental rates, and they might be pricing out small- to mid-sized businesses interested in adding another facility. With a facility to call their own out of the question, on-demand options might be more appealing, he said.

On-demand warehouse providers do have ambitions beyond acting as a short-term solution, and they say many companies already use them as a longer-term solution rather than a Band-Aid.

"When we started the company in 2017, we were a temporary solution where we help people with seasonal peaks and different spikes in their supply chain. That's very much what we started as," Eachus said. "As of today, 90% of our customers are using us as a long-term solution to enable direct-to-consumer fulfillment."

3PL or the middleman

Matt Hertz, co-founder of e-commerce consultancy Second Marathon, said on-demand warehousing companies don't really offer anything to long-term tenants that can't be found in traditional 3PLs that have more experience in warehouse management and operations.

"I've found with this space is that they're really good at ... SEO and content and websites and saying the right things, and they'll put together a pretty PowerPoint," Hertz said. "But when it comes to operations, there tends to be a mismatch."

Hertz underscored that firms come to him when they're struggling, so there is some adverse selection at play. But he's seen companies struggle operationally using on-demand warehouse providers. The issue, he said, is the on-demand provider acts as a middleman between the company selling the product and the company that has the warehouse space, which can be difficult in terms of communication.

"When it comes to physical operations and logistics, typically you as the brand, as the shipper, you want to talk to the person who's actually dealing with physical fulfillment," Hertz said, adding that he's seen companies struggle with communication using Flexe. "With Flexe, every conversation is a three-way conversation: it's the brand, it's Flexe and it's the 3PL."

Hertz said he would prefer if the on-demand companies had a model more like Kayak or Expedia, where they act as a platform for making connections, but all communications are handled between just two parties. He advises companies expecting long-term growth to work directly with warehouse providers.

"In some cases, Flexe doesn't explicitly know this, but we've worked with Flexe clients and have actually referred them into the 3PL that's actually doing the work for them," he said, noting that logistics managers are often happy with the service they're getting in terms of delivery but don't see the value in the Flexe price tag. "If you like the service that you're getting from the 3PL, why don't we just go directly to the 3PL."

But on-demand warehousing companies argue this isn't always possible. Glick notes that if a company wants to build a 12-node network across the country, a 3PL will have a hard time providing 12 different locations. Flexe allows a user to get an aggregated network from multiple 3PLs with space from DHL, Geodis, XPO and other locations.

Glick argues that Flexe actually simplifies the process for the users, so they just look at one Flexe product rather than multiple companies with multiple warehouse management systems. Eachus similarly said Flowspace provides an integrated look at a company's visibility.

Onlookers expect on-demand providers to continue to see demand as warehouse availability is tight across the country, rents are rising and e-commerce sales are not expected to dip dramatically.

"Drivers that are creating a demand for on-demand are going to be there for the foreseeable future," Breeze said.