Inflation and overstocking are inevitable! Holiday season consumption is still difficult to predict

The global retail market has been extremely volatile over the past 18 months. In 2021 and the first quarter of 2022, inventory shortages hampered strong consumer demand due to supply chain issues. However, purchases of non-essential items stagnated as inflation took its toll on consumers.

Now, as supply chain issues are resolved, retailers are sitting on large inventories amid a drop in consumer demand. Merchants and logistics companies are scrambling to find warehouse space for the upcoming holiday season.

Consumption trends change amid inflation

Adobe data shows that so far in 2022, the U.S. inflation rate has exceeded 8%, but the price increases have mainly affected necessities such as food and fuel, while the prices of non-essential items have fallen.

According to Adobe DPI, global consumers spent $73.7 billion online in July, up 20.9% year-over-year, but down $400 million from the previous month, largely due to Prime Day sales. So far in 2022, retail e-commerce consumers have spent $525.4 billion online, according to Adobe.

Consumers are buying more essential items, and consumer use of BNPL has shifted from large purchases to recurring spending.

According to data analytics firm GlobalData, food (including restaurant orders) accounted for about 6% of the $45.9 billion in online BNPL spending in 2021. BNPL provider Klarna reports that more than half of the top 100 items its users buy are now groceries or household items.

Apparel sales have experienced a dramatic reversal over the past three months. According to Adobe Analytics, global apparel prices fell 1% year-on-year in July, compared with a 6.3% drop in June. This comes after 14 consecutive months of sharp price increases. E-commerce sales prices for electronics fell sharply in July, falling 9.3% year-on-year due to sluggish sales.

The problem of excess inventory remains unsolved, and holiday season demand is difficult to predict

Matching supply and demand is increasingly unpredictable. Retailers have been ordering products in advance to ensure adequate inventory due to supply chain instability. But when consumers cut back on buying non-essential items, inventories will surge further.

Retailers are looking to add storage capacity, both for holiday merchandise arriving at distribution centers now and to prevent holiday stockouts. However, they are also being saddled with out-of-season apparel and high-ticket items that consumers have stopped buying.

Brick-and-mortar retailers, DTC merchants and online marketplaces must decide whether to deeply discount merchandise or sell it to liquidation businesses, often for pennies on the dollar. Liquidity Services, a liquidation firm founded in 1999, has benefited from excess inventory.

Prologis, the global warehouse leader by square footage, said in a recent market analysis that it expects an additional 800 million square feet of warehouse space will be needed to handle excess inventory.

In short, both physical stores and online merchants will face high uncertainty for the rest of the year. In addition, the Federal Reserve's interest rate hikes may make consumers reluctant to go on debt during the holidays.

Editor✎ Ashley/

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