Real reason for Kmart's empty shelves revealed

Many Australians have been annoyed at the lack of Kmart stock. But this was all part of the plan, reveal Wesfarmers executives.

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Wesfarmers Ltd (ASX: WES) has admitted that the empty shelves seen in Kmart this year occurred from a deliberate decision to cut supply.

As the first wave of COVID-19 hit in Australia, news and social media reported annoyed customers at Kmart stores staring at rows of cleared out shelves.

Many of us would have personally visited a Kmart this year to see a desired item not in stock. The retail chain even apologised for the phenomenon on Facebook back in June.

Parent company Wesfarmers, during its results briefing on Thursday, revealed that the lack of Kmart stock actually arose from a deliberate move.

"What we know in our business is too much inventory is a difficult problem for us to manage. And it lasts for a long period of time," said Kmart managing director Ian Bailey.

"We made a call when COVID-19 hit, we looked around the world at particularly like-retailers… We could see issues with inventory and too much of it."

The department store thus immediately decided to reduce supply "in anticipation of lower demand" during the pandemic.

And while sales did drop off in April, Kmart was unprepared for shoppers coming back in massive numbers in May.

"We didn't anticipate the speed of improvement in Australia," Bailey said.

"[Customers] shopped with a vengeance during that period and cleaned our shelves out."

Would Australian-made products have solved the problem?

Bailey made the comments in response to accusations that Kmart might have a supply chain problem.

At the height of the low-stock period, shoppers criticised the store on social media for relying too much on overseas manufacturing.

But retailers and economists know those people want their cake and eat it too – because they will not dare pay $100 for a baby onesie.

Founder of Australian confectionery maker Poppy's Chocolate, Lynda Pedder, explains this perfectly.

"I feel that in Australia, we have a double standard. We want Australian quality but we want it at Chinese prices," she said on her blog.

"Australia has the highest wages in the world. That means that if you want something that is Australian made, that is handmade, it will take a lot of that 'expensive' labour to make it. We don't pay people a minimum of $2 a day in Australia, we pay them closer to $200 per day."

Wesfarmers reported a 5.4% lift in revenue at Kmart, hitting $6,068 million for the 2020 financial year.

The share price for Wesfarmers dipped 0.2% on Thursday, to rest at $48.78 at market close.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Facebook. The Motley Fool Australia owns shares of Wesfarmers Limited. The Motley Fool Australia has recommended Facebook. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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