Overstocked warehouses in Europe and the U.S. mean lower production and slower growth

Tough times for many American and European companies could last longer than expected as they try to sell off their large inventories in a business environment characterized by slowing demand.

High inventory levels are the result of stockpiling by retailers, wholesalers, and manufacturers of everything from beer to DIY tools, chemicals, and clothing, after pandemic-related lockdowns disrupted supply chains and closed factories.

Inventories were replenished even after the Russian invasion of Ukraine raised raw material prices, such as energy and grains.

Now, global demand is falling due to rising borrowing costs. Companies are beginning to reduce inventories, but the process is much slower than expected and could extend into next year. Overstocked warehouses, in turn, mean fewer orders for manufacturers, leading to lower levels of business activity and, ultimately, weaker growth.

Maersk CEO Vincent Clerc said that the company, one of the world’s largest container shipping companies, was surprised by how long it takes companies to reduce inventories.

– We expected customers to reduce inventories by mid-year, but so far we do not see any signs that this will happen. It could happen early next year – he said at a recent media briefing.

Maersk controls about one-sixth of global container trade, transporting goods for a multitude of large retailers and consumer goods companies.

A review of corporate statements and briefings shows that more than 30 American and European companies, including Hugo Boss, Heineken, Moller-Maersk, 3M Co, and Stanley Black & Decker, have complained that their inventory situation has hurt their business results in the second quarter.

Retailers are facing particular difficulties with clothing and footwear inventories, as consumers prefer to spend on vacations rather than goods, as they did earlier during the pandemic. Poor outlooks are indicated by weaker results in the second quarter, and China’s recovery after the pandemic is also slowing. Refinitiv data shows that American and European companies are expected to report the worst quarterly results in several years.

Inventory Piling

Companies that stockpiled inventories last year are now struggling to clear stored goods due to higher borrowing costs and increased inflation that reduces demand. In the eurozone, finished goods inventories reached record levels in August last year, and inventory reduction only began in May of this year, new data shows.

In the U.S., according to CFRA Research, business inventories rose by 20 percent in mid-2022, the largest recorded jump based on data collected since 1993.

Retailers are leading this trend – their inventories have increased by a quarter year-on-year. Some companies, including BASF, Levi Strauss, and Holcim, have announced that the worst period is behind them.

Stores are careful not to overstock again, but Arun Sundaram from CFRA Research expressed concern about demand ahead of the holiday season in the U.S. “The excess savings that consumers have built up since the start of the pandemic are disappearing, and we think that all that excess will be spent by the end of the year or early next year,” he said.

Parul Jain from Rutgers University believes that this problem in the U.S. could worsen. The inventory-to-sales ratio in the U.S. was 1.4 in May, compared to 1.33 a year ago, meaning that retailers, manufacturers, and wholesalers have more inventory than they can sell and at a higher rate than a year ago, she said.

The president and CEO of American ingredients company Ashland, Guillermo Novo, believes that hopes for inventory reduction to be completed by the end of June are overly optimistic. The chief economist of Hamburg Commercial Bank, Cyrus de la Rubia, does not expect inventory replenishment to begin before 2024. ‘Until then, lean times are ahead of us,’ he stated.