Challenging Times: Bet the Warehouse?

It's the 4th Qtr in 2022. EkaLore has been analyzing big trends in the Retail business. This post makes a few observations about Inventory in North America.

Walmart, Amazon, Home Depot, Kroger, and Target have now released their 3Q 2022-period (calendar) results and forecasts for 4Q2022. The financial results are striking for their common themes even as individual enterprise results vary at a colossal scale (Target is the smallest at USD$100B+ a year):

1) Consumer buying behavior has changed post-Covid-19 and in Challenging Times – even with in-store buying and strong promotions -- “house brands” and swings to “essentials” are driving consumer spend

2) Uncertainty around consumer-affecting fuel pricing is difficult for retailers to project behavior other than noting lower consumer discretionary available spend (wage gains not covering rapid price changes affecting spend)

3) Inventories are growing (above the rate of inflation) in reaction to the 4Q 2021 holiday season supply and logistics issues while reductions in some categories (electronics, furnishing, durables) are apparent (at retail and enterprise sales) and velocity affects total turns

4) Investment is being carefully considered with long-term trends (online/digital/app purchases, delivery/fulfillment consumer choice, talent investment) and sustainable financial results communicated to stakeholders

5) Managements are signaling cautious approaches to administrative and overhead costs anticipating Challenging Times affecting top-line growth (net of inflation) and margin reductions

These predictions of management assumptions emerge looking at these trends of more than USD$1.5T (4Q run rate) of revenue:

A) Global logistics will be complex for 2023 with pricing and performance varying in categories from energy transport and bulk goods to TEU freight (less predictability and availability)

B) Inventory changes in major economic sectors will feedback thru the production supply chains to reduce demands all the way back to raw materials (highlight changes in semiconductors, metals, energy investments, and specific consumer goods) and service providers

C) Investment/capital spend will see “pauses” as decision-makers look to macro-economics and megatrends affecting actual returns on investments

D) Administrative and overhead costs will see a renewed emphasis on just plain cuts – fewer heads, fewer projects, and a ruthless search for efficiencies

E) Simultaneous perceived inflationary expectations in primary “engines of growth” – North America, China, EU, Japan/South Asia – will reduce speculative investments in capacity and marketspaces

From these management assumptions actions for managers emerge:

I. Investments (capital, talent, business process) must-see even shorter rewards and paybacks (emphasis on benefits right now!)

II. Improvements for efficiency and effectiveness (talent, assets, financial) must focus on fundamentals and clear rewards for agility, resilience, and enterprise sustainability (bets have to be better than cuts to go ahead)

III. Strategies driving tactics will see the short term aligning with the long term for revenues, structures, and talent (brand value versus short-term competition, structure for long-term margins versus short-term share, talent for business-build versus short-term marketspace position)

EkaLore will be release more analysis and notes in line with these management assumptions. You can read other blog posts at www.ekalore.com/blog-1