Some retailers are dealing with bloated inventories going into the holiday season, a post-pandemic trend that industry experts say could result in more sales for shoppers.

In the midst of the COVID-19 pandemic, supply chain issues and surging demand for certain products from bicycles to furniture left many retailers struggling to get popular items on shelves. Now, companies have product on hand, sometimes more than needed, just as demand may be waning.

"During COVID, demand surged for certain categories and we also had supply chain issues, so retailers were not able to meet demand," Mark Satov, a business strategy expert and president of Satov Consultants, said in an interview.

"So retailers bulked up on inventory... Now sales are dropping because inflation is crazy and supply chain problems are somewhat regulating. The pendulum is really swinging wildly."

Wells Fargo analysts wrote in a research note that inventory levels are up 36 per cent year-over-year across the retail industry.

"2022 has seen elevated inventory levels alongside deteriorating top lines, leading to the worst inventory-to-sales spreads we have ever seen," the analysts wrote in the note released last week.

"To clear inventory, many retailers have begun discounting and promoting... Looking forward to the holiday season, our discussions with industry experts lead us to believe the industry-wide inventory overhang will lead to elevated promotions this holiday season—perhaps the most intense promotional period in 10 years."

The analysts noted that even those retailers that are light on inventory may feel competitive pressure to put more items on sale, particularly leading into the holiday season.

"The expected level of promotion across the space throughout the holiday period could drive consumers to opt for deals and value, and thus drag those who are inventory-light into promoting alongside inventory-heavy participants in order to drive traffic and compete for gift sales," the analysts wrote, adding that inventory-heavy categories include activewear and women's casual.

While Satov says it remains to be seen which categories will see higher promotion levels through the holiday season, he expects that consumers will shop around more and be on the hunt for deals.

"We're going to see more people buying less stuff overall, so that means more price promotion, in part because of inventory... and more trading down to lower-priced items in the same categories," Satov said.

There are many different strategies available for retailers grappling with bloated inventories.

"Retailers with excess inventory may look to move out excess products with in-store or online promotions, rather than more dramatic store-wide clearance campaigns," Retail Council Canada spokesperson Michelle Wasylyshen said in a statement, adding that most retailers in Canada are "not overly concerned" with inventory levels.

"Alternatively, many retailers will look to warehouse excess inventory until the next season."

Retail analyst Bruce Winder says he expects retailers selling discretionary items will face the biggest challenge as inflation continues to weigh on Canadians. Retail sales in Canada fell 0.5 per cent in September to $61.1 billion, Statistics Canada said on Tuesday, with seven of 11 categories posting decreases.

"It's not just a U.S. issue," Winder said.

"People are spending more of their disposable income on food, gas and housing, and with more spending being chewed up on basics, there's a softening on the demand stuff for non-essentials... that's where the glut is going to happen."

At the same time, Satov says it could be a particularly challenging period for manufacturers, since retailers are trying to reduce their inventory levels in the wake of shrinking sales, making it difficult to predict demand going forward.

"Manufacturers are likely seeing some wild swings in terms of their orders," Satov said.

"And because different retailers may take different inventory strategies, it's going to be hard for manufacturers to predict what their sales are going to be."

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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