Dive Brief:

• For months, retailers have been forced to slice margins in order to work through bloated inventories. Macy’s, for one, is closing stores and brands like Ralph Lauren have cut back on production. But inventory levels are now at their healthiest height since the fourth quarter of 2013, the Wall Street Journal reports.

• Shedding excess supply has helped improve reports, especially from department stores and specialty stores dependent on apparel sales, and that should set the stage for healthy inventory levels going into the holidays. 

• But retailers will still be left to the whims of shoppers’ expectations for getting deals, which have been set by price competition.

Dive Insight:

Excess inventory and pricing has posed a tricky dilemma for retailers — especially in an era when consumers are always hunting for a good deal. Nordstrom, American Eagle and others earlier this year have noted the way glut inventory forces discounts, but that working through that inventory can help margins recover.

By the same token, Target, H&M and other retailers have worked to fuel consumer frenzy with limited-edition designer releases that swiftly sell out. But that approach is not a catchall strategy.

Nikki Baird, managing partner at RSR Research and an author of a 2015 pricing study, told Retail Dive in an email that scarcity only works when retailers have items that consumers can't get elsewhere.

“It does no good for Macy’s to be tight on its Uggs inventory if Dillards and Amazon have a ton. And unless people absolutely have to have Gap khakis, it does no good for Gap to be careful about inventory if people are more than happy to get Dockers instead," Baird said. "Scarcity does help — if you have something everyone wants that no one else has. That’s why Lilly [Pulitzer] worked for Target. And frankly, they would’ve stocked more, but Lilly couldn’t do more than what they did.”

Meanwhile, piled up merchandise may be a problem for department stores, but it can be a boon for the likes of TJ Maxx or Nordstrom’s off-price Rack stores. It’s a balancing act that in many ways requires a retailer to get it just right. Otherwise, price becomes the great differentiator. 

That sets up a difficult task. As Nomura analyst Simeon Siegel put it to the Wall Street Journal, at the end of the day, “All a retailer can try to do is put out the right amount of perfect product.”