Global supply chain chaos ahead of year-end shopping season

Global trade remains a mess, with shipping costs continuing to rise as the Christmas shopping season approaches.

The beginning of October is the time when the world retail industry enters the peak season. But the industry has been in various states of panic that typically only occurs a few weeks before Christmas.

In early 2020, businesses hope that the bottlenecks in the global supply chain will soon be cleared. But so far, they've only gotten much worse, putting the year-end shopping season at risk.

Across Europe, retailers like H&M were unable to meet demand because of slow delivery of orders. In the US, Nike cut its sales forecast after Covid-19 halted production in Vietnam. Shares of Bed Bath & Beyond fell amid shipping difficulties. The company's CEO Mark Tritton warned that the disruption would extend into next year. "There's pressure all over, and you'll hear about that from other people," he claimed.

The wave of outbreaks has caused ports to affect capacity. To date, there are still not enough containers globally, causing shipping prices to increase 10 times compared to a year ago. Labor shortages have stalled trucking and pushed US job postings to an all-time high. That was before UPS, Walmart, and others jumped in to hire hundreds of thousands of seasonal workers to relieve peak stock pressure.

Isaac Larian, Founder and CEO of MGA Entertainment, one of the world's largest bread makers, said he has never seen a situation this bad in his 43 years of work. "Things that could go wrong are now wrong at the same time," he commented.

S&P Retail Industry Index. Graphics: Bloomberg

The S&P Retail Industry Index, which includes 108 US companies including Amazon, Macy's and Best Buy, is up about 40% this year and has nearly doubled since early 2020. The group's combined market capitalization $3.3 trillion, just slightly below the record set earlier this year.

That jubilation conflicts with what's going on behind the scenes. Steve Azarbad, Co-Founder and Chief Investment Officer of hedge fund Maglan Capital, said retailers are having a hard time filling shelves. "I talk to a lot of suppliers and they say they can't fulfill all orders," he said.

Jay Foreman has outsourced toys with partners in China for more than three decades. He had never seen anything like the present. His mid-sized toy company, Basic Fun, is on track for its best growth ever - possibly hitting $170 million in sales.

The market demand is not lacking, but the shortage of containers has caused thousands of Lite Brites and TinkerToys to wait to be shipped. Just one factory in Shenzhen, about 8 million USD worth of finished goods from them can fill 140 containers. "The supply chain is a disaster and it's only getting worse," he said.

MGA's Isaac Larian is willing to pay more than $20,000 per shipping container - an increase of about $2,000 from a year ago. He considers himself lucky because he runs a private company that doesn't need to pay dividends to shareholders.

MGA recently had over 600 containers filled with toys like their best-selling LOL. These are dolls, waiting to be unloaded for more than six weeks. "There will be a shortage of toys this fall. It's going to be a tough year for retailers," Larian said.

Inventory of US retailers. Graphics: Bloomberg

As the pandemic slammed the global economy in early 2020, manufacturing plants slowed or closed. But as it turns out, stopping the activity is still much easier than restarting it. According to Lee Klaskow, logistics analyst at Bloomberg Intelligence, the supply chain has been strangled by many events, such as Suez Canal congestion, labor shortages and skyrocketing transportation costs. "The supply chain has not had a chance to return to normal," he said.

One of the better scenarios for the fourth quarter is for major retailers to ramp up spending on logistics - including using more expensive air freight services, or chartering an entire freighter. That hurts margins, but it can also help them capture market share from smaller competitors who can't afford to play like that.

Michael Mathias, chief financial officer of apparel chain American Eagle Outfitters, is pleased that most of the merchandise will arrive in time for the holiday sale. "There will be some units that may not even receive their product," he said.

Ken Hicks, CEO of Academy Sports and Outdoors is counting on that advantage to improve efficiency. This chain based in Katy (Texas), has used its strength to prepare for this peak shopping season. Over the past several months, they have imported goods earlier, moving shipments from the busy west coast to ports like Galveston (Texas) and pre-ordering goods from the beginning of the year.

But even with all that effort for a company that had $4 billion in revenue last fiscal year, Hicks says inventory is "just right." There is stock to meet his business goals, but he estimates sales will be about 10% below expectations.

By shifting about half of her production to Mexico and Brazil, and reducing orders from Vietnam, Janine Stichter can receive goods twice as fast as competitors. Thanks to this decision, the company's stock has been upgraded from "hold" to "buy" by Janine Stichter, an analyst at Jeffries.

"Supply chain problems are getting worse and worse. For the rest of the year, the key success factor will be the ability to deliver products on time or relatively on time," the expert said. analyst Janine Stichter said.

Meanwhile, Bank of America last week downgraded its Kohl's stock rating from "buy" to "sell" and cut its price target on the stock by about a third, due to increased logistics costs.

The big risk, which is more systemic and can harm every retailer, is that Americans spend less than expected because they don't have enough inventory. Available merchandise may not be attractive enough either. Explosions in shipping prices have forced manufacturers to make tough decisions about what to ship. From there, consumers do not have many good choices.

Shipping large and low-value items will not be of interest at this time. iPhones are small and expensive, making them ideal for shipping, or shipping by air. But low-end furniture or large stuffed animals are not.

At Whom Home in Los Angeles, CEO Jon Bass said he's removed about 70 percent of the company's products — thousands of items in total, including wall decor and furniture — from the websites of retail partners like Walmart and Wayfair for lack of supply. Or in some cases, rising material and shipping costs make an item more expensive than a retailer can accept. "Consumers suffer because their options are limited. It's not normal at this time to lack stability," he said.

Rising costs in the supply chain, such as cotton prices hitting a nine-year high and labor shortages are also likely to make it more expensive to get products into the hands of consumers, causing them to reduce spending. Or it can cause a change in consumer behavior, from buying goods to experiencing services such as travel or dining. The retail industry may also be less promotional than before because of scarce inventory. This will displease bargain hunters.

"Supply chain affects everything. It's almost impossible to meet customer expectations in an environment where everything is not working," said Jennifer Bartashus, an analyst at Bloomberg Intelligence. .

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