The classic stockbuilding cycle is showing signs of a revival
Save time by listening to our audio articles as you multitaskon the way up and on the way down , is showing signs of a revival. Some big American retailers, notably Walmart, have reported large increases in stocks. In part this is the result of errors in forecasting demand. But it also reflects an increase in the desired level of inventories.
The result, inevitably, has been an overcorrection. Having lagged behind spending, inventories got ahead of it. The share prices of Walmart and Target fell sharply in mid-May when the two retailers revealed they had been left with large stocks of unsold goods, after misjudging the strength of demand. Even the mighty Amazon has been blindsided, as the e-commerce share of retail sales, which exploded in the pandemic, has fallen back towards its pre-covid trend.
The cyclical effects of all this will have to be reckoned with. Some retailers may be holding the wrong stock for the time of year. They will either have to store it, mark down prices to clear it quickly, or move it on to discount retailers that specialise in selling out-of-season stock. Inflation will be lower than it would otherwise have been. Some companies that have over-ordered will cut back on purchases to allow stock levels to adjust to the trend in spending.
Yet there is something more profound at play. Just-in-time production assumes a largely frictionless world—of open borders, predictable demand and low transport costs. This can no longer be relied upon. Inventory is a form of insurance against unexpected delays. And though insurance is costly, company bosses seem willing to pay for more of it. The trade-off between efficiency and self-insurance, between just-in-time and just-in-case, has shifted markedly towards the latter.
There is a paradox here. The more companies seek to self-insure by holding more stocks, the more volatile is likely to become over time. American retailing might thus be offering a preview of a particular future—of jumpier revenues and more frequent profit warnings. The Great Moderation is going into reverse.
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