Analysis: Bulging warehouses mean lean times for longer for US, European companies
10/08/2023 07:00
By Siddharth Cavale and Josephine Mason
NEW YORK/LONDON, Aug 10 (Reuters) - Lean times faced by
many U.S. and European companies may last longer than expected
as they try to sell off their bulging inventories in an economic
climate where demand is stalling.
Full-to-bursting warehouses means fewer orders for
manufacturers, which translates into lower levels of business
activity and, ultimately, weaker growth.
The high stock levels are the result of retailers,
wholesalers and manufacturers stockpiling everything from beer
to DIY tools, chemicals and clothes as COVID-19 lockdowns
snarled supply chains and shut factories.
They stocked up again after Russia's invasion of Ukraine
pushed up the price of raw materials such as energy and wheat.
Now, global demand is falling as borrowing costs have risen,
so companies have started running down stocks. But the process
has been much slower than expected and may drag into next year.
Maersk CEO Vincent Clerc said the company, one of the
world's biggest container shippers, was caught off-guard by how
long it was taking businesses to cut inventory.
"We had expected customers to draw down inventories around
the middle of the year, but so far we see no signs of that
happening. It may happen at the beginning of next year," he said
at a recent media briefing.
Maersk controls about one-sixth of global container trade,
transporting goods for a host of major retailers and consumer
goods companies.
A review of corporate statements and briefings shows more
than 30 U.S. and European companies, including Hugo Boss
BOSSn.DE , Heineken HEIO.AS and A.P. Moller-Maersk
MAERSKb.CO , 3M Co MMM.N and Stanley Black & Decker SWK.N
complained that destocking hurt their second-quarter
performance.
Retailers particularly have struggled with stocks of
clothing and footwear as consumers splurge on holidays rather
than goods as they did during pandemic lockdowns.
The downbeat outlook comes amid low expectations for
second-quarter results as China's post-pandemic recovery slows.
Refinitiv I/B/E/S data shows U.S. and European companies are
expected to report their worst quarterly results in years.
RECORD HOARDING
Companies which stockpiled last year are finding it harder
to shed inventories when higher borrowing costs and inflation
crimp consumer demand, corporate executives and analysts said.
In the euro zone, stocks of finished products hit records in
August last year and destocking only started in May, based on
latest euro-zone manufacturing data.
In the U.S., an analysis of U.S. Bureau of Labor Statistics
by CFRA Research showed business inventories soared by 20% in
mid-2022, the biggest jump on record based on data that goes
back to 1993.
Retailers led the trend - raising inventories by a quarter
from a year earlier.
Some companies, including BASF BASFn.DE , Levi Strauss
LEVI.N and Holcim HOLN.S , have said the worst is behind
them, based on recent comments from executives.
For London-listed Coats Group COA.L , which makes thread
and yarn, things are improving, but the destocking has been
deeper and lasted longer than usual.
CEO Rajiv Sharma was looking forward to a burst in orders
once customers emptied their warehouses, but he said during an
analyst call on Aug. 1 he couldn't predict the timing and scale
of that recovery until the fourth quarter.
Shops are being careful not to load up again, but Arun
Sundaram, vice president of equity research at CFRA Research,
said he is worried about demand heading into the U.S. holiday
season.
"Excess savings that consumers have built since the pandemic
began are draining, and we think all of these excess savings
could be depleted by year-end or early next year."
Parul Jain, finance and economics professor at Rutgers
University, reckons the problem might have got worse in the
United States, not better.
The U.S. inventory-to-sales ratio was 1.4 in May, up from
1.33 a year ago, which means retailers, manufacturers and
wholesalers have more inventory than they can sell at a higher
rate than a year ago, she said.
Guillermo Novo, chair and CEO of U.S. ingredients company
Ashland ASH.N , said hopes destocking would be over by end-June
was overly optimistic.
"Until the inventory-control actions taken by our customers
have subsided, it will remain difficult for us to gauge current
near-term end-market demand," he said in a statement on July 25.
Cyrus de la Rubia, chief economist at Hamburg Commercial
Bank, doesn't expect restocking to start until 2024.
"Until then, there are some lean times ahead."
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Two measures of corporate health flash red urn:newsml:reuters.com:*:nL1N39L0HH
Trend showing total U.S. Retail Inventories vs. total U.S.
Business inventories in dollar value https://tmsnrt.rs/3s3XkYU
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(Reporting by Siddharth Cavale and David Gaffen in New York,
Josephine Mason, Mark John, Jonathan Cable and Helen Reid in
London. Editing by Jane Merriman)
((Josephine.Mason@thomsonreuters.com; +44 207 542 7695; Reuters
Messaging: josephine.mason.reuters.com@reuters.net))