Walk into the closest grocery store and look around…
What do you see?
If it’s anything like the store by my house, your answer is likely “a lot of empty shelves.”
The frozen pizza selection is about half the size it used to be. That would be shocking if I were a frozen pizza connoisseur. Fortunately, I’m not. But it still irks me…
Everything isn’t gone. Inventories just seem perpetually low.
Now, I’m sure you’re ready with a seemingly logical explanation. After all, the COVID-19 pandemic and its aftermath really gummed up the supply chain.
That’s part of it, sure. But something bigger is going on…
Put simply, the way businesses run their operations has changed dramatically over the past 30 years. And it’s quantifiable with a single statistic.
The Federal Reserve Bank of St. Louis is tracking the change. And frankly, it’s a bit of a head-scratcher.
These days, “efficiency” for businesses doesn’t necessarily translate to “abundance” for consumers. In fact, efficiency can, does, and will continue to produce scarcity in our stores.
And unless something dramatic changes, this is our new normal…
The St. Louis Fed hosts our friend “FRED.” It stands for “Federal Reserve Economic Data.”
As the full name implies, it’s an online data source. And it’s free to the general public.
FRED tracks all kinds of things. Today, we’re looking at one specific piece of data…
It’s called the “Total Business: Inventories to Sales Ratio.”
This metric simply compares business inventories to business sales. The higher the number, the more inventory businesses are carrying compared to their sales.
And as you can see in the following chart, the data can get pretty volatile. Take a look…
First, notice the big spikes around the housing bust in 2008 and 2009 and the pandemic in 2020. Those examples show what happens when sales drop rapidly and dramatically.
Next, I want you to focus on the long-term trend…
The inventories in the 1990s were dramatically higher than they are today. It was an era of abundance. But it was also an era of rapid modernization and efficiency…
Businesses used computers to model and project inventories. And suddenly, the world went from, “Let’s have enough goods in stock for a surprise rush,” to, “Our model says this specific amount of inventory will cover 95% of expected demand.”
These types of inventory models rule the world nowadays. But that point comes with a big caveat…
Any unexpected surge in demand messes up the system.
That’s exactly what happened after the COVID-19 pandemic…
Carmakers are the perfect example. They run their business using a “just in time” model.
The idea is that they’ll carry next to zero inventory. Every part they order will arrive “just in time” for it to enter the manufacturing process.
That’s why they ran into big trouble when the pandemic hit…
Carmakers predicted that sales would decline due to all the COVID-19 restrictions. And they did briefly… but not anywhere near as much as the carmakers expected.
In turn, their highly efficient process based on low inventories turned into a scarcity model.
Now, outrageous scarcity-driven stories have flooded the industry. One Ford dealer in Florida, for example, allegedly tacked a $69,000 markup on to a new F-150 Lightning all-electric pickup truck.
It seems crazy. But this is about more than just the pandemic…
It’s the result of low inventories. It dates back to the era of rapid modernization and efficiency in the 1990s.
And now, as long as businesses use this “highly efficient” model… we’ll see empty shelves in stores and empty parking lots at car dealerships.
It’s our new normal any time an unexpected surge in demand happens.
Good investing,
Marc Gerstein
