Authored by RSM US LLP
In our four-part blog series, RSM’s senior industry analysts explore back-to-school shopping trends and the impact on consumer businesses.
Retailers will continue discounting through the back-to-school shopping season and beyond. Here’s why.
Beginning the summer of 2022, both companies and investors began expressing concern about higher-than-average inventory levels. At the same time, consumers began pulling back from consumption trends seen in the first year of the pandemic. Spending began shifting toward travel and entertainment. In response, many retailers undertook an aggressive inventory strategy to limit overexposure across a variety of product categories, including aggressive discounting and/or limiting supplier reorders. These strategies have largely paid off as both general merchandise and clothing and apparel retailers’ inventory-to-sales ratios (a key metric in determining inventory levels can meet sales demands) are closer to the five-year pre-COVID average.
For wholesalers, however, inventory levels remain high especially for electronic and apparel wholesalers whose inventory-to-sales ratios are 23.9% and 53.6% higher than the five-year pre-COVID average. Additionally, based on the latest survey data from the RSM US Middle Market Business Index, 60% of middle market executives expect to increase inventory levels in the next six months. While the survey recipients are not limited to consumer products companies, these results point to an expectation that pricing power for wholesalers is likely to remain under pressure if these ratios remain or continue to grow.
Both in response to elevated inventory levels and in an effort to drive foot traffic, this summer has already seen aggressive discounting across a variety of consumer brands. Mid-July saw a number of retailers and online brands offer deep discounts in an effort to compete directly with Amazon’s Prime Day. While retail sales results have not yet been released by the U.S. Census Bureau (retail sales results will be released on Aug. 15), early indications are July sales events were successful at least in driving higher consumer traffic and sales volumes. We expect this strategy to continue for the remainder of back-to-school season and into the coming months as companies turn to promotional events to replicate demands last seen during the pandemic. Companies will need to evaluate the appropriate level of discounting in order to drive sales volumes high enough to offset the impact of product discounts.
Discounting is the main strategy consumer products companies have to drive product interest and we expect discounting to continue to be a focus of both consumer products companies and consumers for the remainder of back-to-school season. Companies will need to determine the appropriate level of discounts to drive volumes to a level that will offset the earnings impact of lower pricing.
This article was written by Mike Graziano and originally appeared on 2023-08-09.
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