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Retailers have too much clothing and no ability to sell it all.
The t-shirts, jackets, sneakers and jeans they were gearing up to push out for the spring shopping season now sit sitting in darkened stores and warehouses during the coronavirus crisis. Demand for discretionary items has come to a screeching halt as customers focus on stocking up on the basics they need to survive.
"This is going to be an unprecedented level of inventory that's available," said Jamie Merriman, retail analyst at Bernstein. "We haven't seen demand on a global basis take this sharp a hit in my lifetime."
Retailers made decisions months ago about what to buy from their suppliers, when the economy was strong and consumer spending was projected to be robust. They could not have imagined that they would be grossly overestimating demand.
"This is an event that there is no systemic capacity to predict or respond to," said Mark Cohen, director of retail studies at the Columbia Business School. "Everybody is trapped."
There is an "enormous volume of goods already sitting on retailers' shelves or sitting in the pipeline. It's going to have to be flushed out," Cohen said.
As the United States economy crashes into a recession, retailers and brands will have to use a variety of tactics to unload excess inventory. They will try to sell some of it through their online channels. And they'll push it through their outlet and factory stores where they can.
But retailers can't easily replace store sales. In 2019, only one-quarter of apparel and footwear sales came from online, according to Euromonitor.
And during a pandemic and an economic downturn, consumers are not splurging on new shoes or clothes.
"People aren't interested in buying anything but the things they need to stay alive," said Cohen. "There's almost no one ... forced to walk around naked."
Retailers will need to promote heavily to move their clothing off store shelves as quickly as possible to prepare for summer and fall, experts say. This will dent their profits -- assuming they have any.
"The only option will become pretty steep discounts," said Merriman from Bernstein. "There's really nothing the retailers can do about it."
"While you'll start to see some discounting now, you'll see it to a greater extent once stores re-open," she said.
Some big retailers are already signalling that this will be their strategy.
"This reduced demand may lead to lower sales, higher markdowns and an overly promotional environment," Nordstrom (JWN)warned in a filing Friday.
Ironically, some stores may benefit from the excess supply of clothing.
Discount chains such as TJX (TJX), the parent of TJMaxx and Marshalls, and Ross (ROST) are taking a hit now because stores are closed and they don't sell online. But traditionally, when there is a glut of merchandise available in the market, these chains have more options to step in and scoop it up at lower prices to sell at theirstores.
"Eventually, this will be very good for off-price," said Merriman.
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