Bulging warehouses mean lean times for US, European firms

Bulging warehouses mean lean times for US, European firms

Inventory

Lean Times Ahead for Companies as Inventory Overflows

The current economic climate has presented many challenges for businesses, especially those in the United States and Europe. Companies are facing the difficult task of selling off their surplus inventories in a market where demand is stagnating. This surplus of goods has led to a decrease in orders for manufacturers, resulting in reduced business activity and slower growth. Despite initial expectations that the inventory reduction process would occur sooner, it is now predicted that this challenge may persist well into the next year.

The accumulation of excess stock began during the COVID-19 pandemic, when supply chains were disrupted and factories were forced to shut down. Companies across various industries, from retailers to wholesalers to manufacturers, stockpiled goods such as beer, DIY tools, chemicals, and clothing. This hoarding behavior intensified further due to the increase in raw material prices caused by Russia’s invasion of Ukraine.

Currently, global demand is declining as borrowing costs begin to rise, prompting companies to start depleting their inventories. However, this process is taking longer than expected. Maersk, one of the world’s largest container shippers, expressed surprise at the prolonged timeline for inventory reduction. The CEO of Maersk, Vincent Clerc, stated in a recent media briefing that there are no signs of customers reducing their inventories yet and that this may only occur at the beginning of next year. Maersk’s extensive global reach allows them firsthand insight into the trends of major retailers and consumer goods companies.

A review of corporate statements and briefings reveals that more than 30 U.S. and European companies, including prominent brands such as Hugo Boss, Heineken, and 3M, reported a negative impact on their second-quarter performance due to inventory destocking. Retailers, in particular, have struggled with excessive clothing and footwear stocks as consumers prioritize spending on experiences, such as holidays, rather than material goods during the post-pandemic recovery.

The low expectations for second-quarter results are further compounded by China’s slower-than-anticipated economic recovery. Refinitiv I/B/E/S data indicates that U.S. and European companies are expected to report their worst quarterly results in years. This combination of factors has created a challenging environment for companies looking to reduce their surplus inventories.

The Record-Breaking Challenge of Destocking

Companies that stockpiled goods in the previous year are now encountering difficulties in destocking as higher borrowing costs and inflation hinder consumer demand. In the eurozone, finished product stocks reached record levels in August last year, and destocking efforts only began in May of this year. Analysis of U.S. Bureau of Labor Statistics by CFRA Research suggests a significant surge in business inventories by 20% in mid-2022, the largest increase on record since 1993. Retailers have been at the forefront of this trend, with inventories rising by a quarter compared to the previous year.

While some companies like BASF, Levi Strauss, and Holcim have expressed optimism that the worst is behind them, others have found destocking to be more profound and enduring than usual. London-listed Coats Group, which specializes in thread and yarn production, expects an improvement in business conditions but cannot predict the timing and scale of recovery until the fourth quarter.

Shops are being cautious about restocking, signaling potential concerns about demand leading into the U.S. holiday season. Arun Sundaram, Vice President of Equity Research at CFRA Research, anticipates the depletion of consumers’ excess savings accumulated during the pandemic by the end of this year or early next year. This further adds to the uncertainty surrounding future demand.

Parul Jain, a finance and economics professor at Rutgers University, suggests that the inventory problem may have worsened in the United States rather than improved. The U.S. inventory-to-sales ratio has risen, indicating that retailers, manufacturers, and wholesalers have more inventory than they can sell compared to the previous year. Guillermo Novo, the Chairman and CEO of U.S. ingredients company Ashland, believes that the expectation that destocking would be completed by the end of June was overly optimistic. He states that it will remain challenging to assess the current end-market demand until customers have successfully reduced their inventories.

Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, does not expect restocking to commence until 2024. With lean times ahead, companies must carefully navigate the inventory reduction process to overcome the current economic challenges.