Retail giant Target has announced plans to reduce an excess stock of inventory. At the end of April, the company had $15.1 billion in inventory, which is 43% higher than a year earlier. The increase in inventory is a result of a combination of easing supply chain backups and changes in consumer preferences. Other retailers, such as Walmart, and clothing stores, such as The Gap and Abercrombie & Fitch are seeing similar increases in inventories. As the world recovers from the pandemic and people begin leaving their homes again, the items they are purchasing are changing. Rather than purchasing fleece hoodies and pajamas, consumers are purchasing sundresses and swimsuits. Instead of board games and televisions, consumers are opting to seek entertainment outside of their homes by going to restaurants and traveling. Additionally, rising inflation has forced households to reallocate budget items to make sure they can cover their necessities.
In order to reduce their inventories, Target is planning to cut prices on many of the items they wish to get rid of. For example, they recently held a Memorial Day Sale to get rid of large items like patio furniture. This allowed them to make room for future seasonal items like back-to-school supplies. Some of the excess inventory will not be sold off, however. Certain items will be stored away to be sold at full price in the future. These items include seasonal products that, due to supply chain issues, arrived either too early or too late.
Discussion Questions:
- Explain why it might make sense for Target to sell off its excess inventory at a price below their cost.
- Use supply and demand models to illustrate the change in equilibrium due to a change in tastes and preferences from pajamas to business attire when a business’s employees transition back to working in the office after working from home the last two years.
- If Target takes an item off all of its store shelves and stores it in their warehouse to sell next spring, is it still considered as part of supply? Why or why not?
Sources| CNBC: Target expects squeezed profits from aggressive plan to get rid of unwanted inventory