Inventory Apocalypse 2.0
Retail is no stranger to uncertainty and the resulting volatility. Regularly adjusting to cyclical consumer demand and episodic shocks has long been the price of doing business within the context of a dynamic, global logistics network. However, “Liberation Day,” has taken this disruption to new heights. It is reshaping the industry’s operating environment affecting the entire spectrum, from the world’s largest brands and retailers to small mom & pop businesses.
Even major retailers who anticipated tariff-related volatility and took early action are feeling the impact of the shock. Their actions imply volatility and higher prices while emphasizing the importance of flexibility. Walmart had requested 10% price cuts from suppliers to protect margins almost a full month before April 2nd but still had to pull Q1 guidance for operating income. Target, which had actually successfully reduced its share of Chinese-produced private label production from ~60% in 2017 to ~30% today, has requested some suppliers pick up half the cost of tariffs while warning that tariffs would likely increase prices, particularly on fresh produce. Amazon moved swiftly to cancel inventory orders from China to reduce inventory exposure.
Off-price retailers have always benefited from the industry’s structural uncertainty, and as such, it is unsurprising that off-price retailers will benefit. Premium off-price darling TJ Maxx is insulated as almost all their inventory is sourced stateside (so tariff free), and CEO Ernie Herrman indicated that 2025 will be a “pretty much textbook situation coming up." Burlington CEO, Michael O’Sullivan also identifies tariff volatility explicitly as "a buying opportunity for off-price retailers.” Along with other value and consumer staple plays like WMT (+3% since 4/2), COST (0%), and KR (+8%), TJX (0%) remains one of the lone retail names that has remained unscathed in the public markets. In contrast, the SPSIRE is down 8% since Liberation Day. Even the luxury giant LVMH (-13%) has not escaped, citing soft Q1 sales and a growing base of aspirational consumers that will be more sensitive to inflation. Hermes, LVMH’s bitter rival that is notoriously famous for its brand and inventory protection, is minimally affected (-1%) despite announcing that they will fully pass on the price of the tariffs to their deeply loyal consumer base.
To be clear, these massive public companies will be mostly fine. They have the balance sheet and consumer equity to weather a few quarters of poor earnings and the means to reorient their supply chains. It is the SMBs who will feel the most acute pain. Per Helium 10, more than 20% of their Amazon merchant customers have raised prices. Another 50% plan to increase prices once tariffs fully kick in. Despite Amazon CEO Andy Jassy acknowledging that some sellers may end up passing the cost of tariffs onto consumers because sellers “don’t have 50% extra margin that [they] can play with,” some are already being penalized for raising prices.
Emerging brands are clever, and some are turning tariffs into a marketing moment: Burlap & Barrel executed a "Tariff Sale" to clear out inventory for cash flow and turned potential losses into record-breaking daily sales. However, it’s not all success stories as others noted blowback from suppliers as well as lower conversion rates due to the higher prices at check-out. Worst of all, there are even reports of SMBs who, caught between losing valuable inventory and having to be on the hook for massive tariff bills, have already sold themselves to their Chinese factories.
As we noted in our 2022 report, The Point of No Return, inventory is the lifeblood of any retail business. As Arielle Knutson, CEO of Oiselle, notes, "Ordering the right amount of product—and not being stuck with excess cash tied up in inventory—is key. It’s an almost impossible needle to thread." Regardless of how and when tariff deals are struck (or not), what is certain is that the cost of all inventory has no where to go but up. It’s just a question of how much. It will be increasingly important for brands, retailers, distributors, resellers, and anyone who touches inventory, to turn inventory into as much cash as possible.
In the short-term, inventory that’s already stateside and unaffected by tariffs will need to be funneled through the most profitable primary channels. As consumers increasingly seek value, brick & mortar can actually be a more effective channel than digital to maintain pricing power and avoid heavy discounting (as the ease of price comparison is lower). Per Equal portfolio company Leap, which is enabling brick & mortar stores for enterprise and growing brands, tactile, sensory experiences aided by experienced sales associates and the thrill of instant gratification can also lead to higher basket size through bundling and upsell. Brands can no longer afford to write-off deadstock inventory (like returns, damages, and excess). Equal portfolio companies Ghost (see Inventory Apocalypse 1.0) and Revive (see Apocalypse Returns) both offer specialized approaches that fold into brands’ and retailers’ existing operational workflows to recover as much MSRP from deadstock inventory as possible through strategic refurbishment and resale.
The new normal is a market environment where every unit of inventory carries an opportunity cost. The winners will be those who can squeeze even just one more dollar from their inventory. The operators who can maximize the value of inventory to accrue as much cash as possible are best positioned to weather the storm.
As always, for anyone interested in sharing notes, please reach out to sophia@equal.vc or chelsea@equal.vc!