Amid gloomy holiday forecasts and reduced spending, one big difficulty facing retailers is excess inventory.

It’s a stark contrast to the beginning of the pandemic, when supply chain disruptions caused empty shelves for retailers in all sectors. In 2021​’s holiday shopping season, stockouts were up 250% compared to 2019, with electronics being the category with the highest levels of stockouts.

Desperate to get product onto shelves, many retailers reacted by over-purchasing, only to have months of orders held up on container ships arrive all at once at the end of Q2. This has created ​“bullwhip” effect for those who have gone from bare shelves to inventory surpluses, with no easy way to clear the excess inventory.

“It’s a retail armageddon,” Burt Flickinger, Managing Director for Strategic Resource Group, told CBS News, adding that some stores are overstocked by more than 30% with no place to put everything. ​“You have too many goods and too many stores chasing too few shoppers with too few dollars.”

High inventory levels have driven increased discounting as retailers try to clear out old inventory, which has put further downward pressure on profits. By Q2 of this year, retail inventories were up 31% over the same period last year. And an early October research note from Cowen analysts said that retail inventory had hit ​“record” levels. Unfortunately, all the available measures for clearing the inventory backlog have significant costs for retailers.

How retailers plan to address the backlog

Retailer expectations for their post-holiday inventory levels are low; in a September KPMG survey, 56% of retail executives said that they expect a post-holiday inventory hangover. So how are retailers planning to manage that hangover? Of those expecting post-holiday inventory surpluses:

• 52% planned to use clearance sales to manage overstocks
• 48% planned to cut receipts and manage inventory down
• 41% planned to return items to vendors or use sell-downs
• 24% planned to sell inventory to liquidators and discount retailers

These additional inventory clearance costs also come with increased promotional costs. An October Accenture survey of 150 retail executives showed that 99% reported increasing promotional activity as part of their holiday plans.

The threat to telecom retailers

So how severe is the double-threat of skewed inventory volumes and decreased spending?

According to S&P Global Markets, the one-year default probability for publicly traded retail companies was 3.9% in mid-August 2022 — more than double the 1.9% default probability in December of 2021. Smaller retailers are also feeling the heat; rent delinquency for U.S. SMBs jumped 7% from September to October, surging to 37%. One of the major reasons cited: ​“the cumulative, negative impact of more than a year of high inflation, which has absorbed most sales gains”.

Meanwhile, economic conditions have driven down sales of smartphones to their lowest level in eight years. How much of a reduction has their been? Analyst reports are mixed. A report by Counterpoint Research released in October shows global smartphone shipments down 12% year-over-year. However, preliminary figures from the IDC’s (International Data Corporation) Worldwide Quarterly Mobile Phone Tracker shows that global smartphone shipments fell 9.7% year-over-year in Q3, while analyst firm Omdia put the decline at 7.6%.

Commenting on the difficulties facing telecom retailers today, Jason Raymer — Vice President of Enterprise Client Experience at iQmetrix — said, ​“While it’s true that many retailers are suffering from excess inventory as pent-up supply shipments finally arrive, in the telecom sector, many device manufacturers are releasing their flagship devices that early adopters demand. Either way, rightsizing inventory is a challenge across the board, and using an intelligent inventory management solution will be essential to tackling these hurdles.”

With much of holiday shopping still yet to occur and supply chain disruptions set to continue into 2023, it’s impossible to say how all of this will shake out. But it’s clear that investment in inventory management solutions may be a make-or-break for retailers wanting to stay afloat.