Research From Consumer Retail Team

• 10 of 15 suppliers reported neutral outlook for FY2023 sales (more vs. August), as retail accounts remain more flattish yy, hindered by slow late September to October
• Orders for FY1H24 up yy for 9 of 14 suppliers, reflecting some retailers adding newness or brands, some suppliers opening new accounts; continued gains in off-price expected
• Area to Watch: Some suppliers anticipating heavier-than-planned promos and markdowns during FY4Q23 to help drive store traffic

Three of 15 suppliers (in HBA and home) said their outlooks for FY2023 [February-January] were positive helped by various factors like strong sell-through in low-cost cosmetics. (In OTR Global’s August note, six of 13 held a positive view.) Ten held neutral outlooks and two held negative outlooks. Although the retail sector has shown overall resilience that aligned with last year’s trends, growth has not materialized as anticipated for some. Larger accounts, such as Walmart Inc., have resorted to higher markdowns or reduced orders for some suppliers’ goods, resulting in a somewhat subdued outlook. Because of lackluster fall floor sets at some retail accounts, suppliers cited the need for more promotional events and markdowns to spur sales and anticipate higher promotions for holiday during FY4Q23.

Top Accounts: Nine of 14 suppliers expect order growth in FY1H24 (February–July) floor sets as buyers remarked to suppliers they had cut back too far in FY1H23. Also, several suppliers said smaller manufacturers are producing less or have gone out of business, opening more opportunities. Off-price retailers are expected to have significant order growth during FY1H24, led by The TJX Cos. Inc.’s T.J Maxx. In contrast, suppliers said they expect Walmart to place smaller-than-anticipated discretionary orders because the retailer is overstocked, especially in apparel.

Suppliers With Positive FY2023 Outlook
Two of four HBA suppliers primarily dealing in low-cost beauty products said sales were overall solid during FY3Q23 and anticipated robust holiday results, underpinned by the continued expansion of the low-cost beauty goods market. Both project a positive order trajectory in FY1H24, supported by heightened consumer interest in budget-friendly beauty. One said additional promotions were needed in some categories and planned heightened promotions in FY4Q23.

The third supplier (home goods) said current trends within accounts were mainly on plan and predicted strong sell-through trends would persist through the holidays. His most robust accounts were home improvement chains and ecommerce retail platforms. However, the supplier reported reduced FY1H24 orders yy because mass retailers were expected to scale back on order volumes. Additionally, the supplier said Walmart intended to postpone resets on his goods until May.

Suppliers With Mixed FY2023 Outlook
Ten of 15 suppliers across home, apparel, HBA and office supplies held a neutral view. with (Five — in apparel, HBA, home — of 13 held a neutral view in OTR Global’s August note.) Many indicated that sales trends in their accounts largely met expectations during FY3Q23. However, growth has been elusive as retailers limit in-store inventory, which resulted in uninspiring floor displays and customers holding out for deeper promotions or discounts. Additionally, suppliers believe customer spending during FY3Q23 shifted toward events, travel and other activities, which further limited sales. An office supplier said, “I don’t think back-to-school was particularly strong in any account. It didn’t decrease, just had limited growth.”

Home: Four of five home suppliers had a neutral perspective for the remainder of FY2023. Sell-through in their accounts was mainly flattish yy during FY3Q23, but most anticipated holidays would remain similar to slightly up yy, helped by holiday gift giving and enticing promotional events. “I think customers will show up for the holiday. Maybe not a ton better, but at least similar year to year. For most student loan repayments, those people were OK and could make it work or take it out of other budgets, like travel. Usually, holidays overall, even in the past during weak economies, trends flat as people don't want to give up on giving gifts but adjust budgets in other ways.”

Order trends for FY1H24 increased yy for two of four and remained flat for two, helped by new accounts and additional items at some retailers. Orders remained flattish for some retail accounts because of a reluctance for retailers to over-extend and better control inventory.

Apparel: Three of five apparel sources also offered a mixed perspective; all three said there was some slowdown in select fall seasonal apparel but that overall sell-through had remained similar yy in FY3Q23. One supplier reported strong branded apparel sell-through, while one said licensed wear with limited distribution sold well in select markets and at a higher-than-normal price. One said, “Customers will spend, but they have to have something that will perk their interest.”

All three highlighted off-price strength as customers sought lower-cost options to stretch budgets in some apparel categories. All three anticipated growth in FY1H24; two expect growth from new accounts because of fewer manufacturers.

All three expected retailers to seek out branded or unique products, which would aid growth during FY1H24. One noted Walmart had been more promotional recently and had decreased FY1H24 orders, signaling higher-than-expected apparel inventory levels.

HBA: Two of four HBA suppliers said they had a neutral perspective of the remainder of FY2023. One source reported robust sales, albeit with a noticeable deceleration in late September and early October in specific retail accounts, such as drug stores. The supplier said too many products are kept under lock and key, hindering sales. Another, specializing in low-cost beauty products, agreed and described the drug store channel as weaker than expected. The supplier said, “The lockdown of goods is creating a headwind for some accounts, so we are seeing a bigger shift to Amazon. Who will wait for a drugstore to unlock goods when they can order off Amazon and likely have the product that day in urban areas?”

The supplier said for low-cost beauty products, do-it-yourself (DIY) trends were somewhat weaker than expected in the early part of FY3Q23, and promotions had increased. However, he projected orders for FY1H24 would show an improvement yy as DIY activity has begun to rebound. “Some categories are expected to grow. We saw a shift in people returning to salons after everything opened. Still, with budgets under constraints, we are seeing some DIY categories improve, which will likely continue into next year.”

Suppliers With Negative FY2023 Outlook
Two of five apparel suppliers provided a pessimistic outlook. One highlighted the struggles major retailers such as Walmart and Costco Wholesale Corp. have faced; Walmart canceled orders in anticipation of weaker sales and Costco faced difficulties in discretionary items. The other supplier shared this sentiment and cited poor sell-through rates and a lack of appetite from retailers for new inventory. Both highlighted the apparel industry’s challenges as retailers try to maintain low levels and lack newness.

Pricing: Seven of 14 suppliers expected retail pricing to remain the same yy during FY2024. Two suppliers expect price increases across the board. Three more said the likelihood of price increases would vary depending on the specific category or brand; newly introduced products were likely to experience the most significant hikes. Two additional suppliers said price increases in FY2024 would hinge on whether the cost of goods rises and whether they can pass those increased costs onto retailers.

Shrink: Only four of 13 suppliers said they were aware that retail shrink had increased within their retail accounts, primarily in home and beauty; Walmart and the drug store channel were most frequently mentioned by suppliers. Some retailers have asked suppliers to adjust their packaging or sold products from locked cases to prevent theft. A home supplier said, “Maybe slightly higher, but I think many retailers use theft as an excuse for poor performance. Walmart basically forced us into the RFID across all new products going into the stores. Other retailers haven’t asked us for this, but it should be fairly easy now that we’ve done it.” A beauty supplier said, “Walmart has a big issue with theft, and Walmart Canada is thinking of doing more of a shop-in-shop for beauty because theft is so high. We discuss it with mass, grocer, and drug retailers but not so much at other accounts.”

Suppliers did not increase shrink allowances to retailers. An office goods supplier said, “We offer a volume allowance and build planogram costs. We ask for all fees before we price the products, and there is no more money after, even if the shrink is higher. We haven’t had any issues with retailers asking for extra support.”