Why Retail Will Struggle To Keep Up With Its Record Sales Numbers
Historically low inventories to sales ratio, falling trucking ton-miles, and massive cargo delays will play spoilsport in the forthcoming holiday shopping season
A hearty welcome to the 24th edition of The Logistics Rundown, a weekly digest that aims to put some perspective on what’s brewing within the logistics industry. This is a space where we religiously dissect market trends, chat with industry thought leaders, highlight supply chain innovation, celebrate startups, and share news nuggets.
Everything about what’s happening today in the world of supply chains is straight out of a horror flick. The ‘new normal’ frequently witnesses reliable industry forecasts tilting towards conjecture, as they lack historical data to play with. In August, the US retail sales turned up unexpected figures, up 0.7% when economists expected it to fall by 0.8%.
Retail sales figures aren’t just looking good compared to 2020 but are also 17.7% above its pre-pandemic level. From a logistics POV, this might sound surprising. Considering the number of vessels queuing up on the West Coast (it’s 65 now, and by the time of the newsletter going out, it might be even higher), it is interesting to see this not impacting sales numbers. Surely, cargo caught up at the port does exert downward pressure on inventory stock replenishment?
The answer is yes, but not right away. Port congestion is a bellwether of what is in store for inventory levels, ultimately impacting retail sales. The delay we have at the ports today will hit retailers when it hurts them the most—peak holiday shopping season.
Port congestion is a bellwether of what is in store for inventory levels, ultimately impacting retail sales.
Jason Miller, an associate professor of supply chain at Michigan State University, put out a great chart on the for-hire trucking ton-mile index, which points in the same direction.
While the 2021 graph tails very close to the 2018 and 2019 curves, there are extraordinary headwinds for the figure to jump higher over the following month. To begin with, the vessels stranded off the coast of San Pedro Bay aren’t the only ones to blame for the port chaos. The nightmare playing out across intermodal networks and hubs—in the likes of Joliet—is strangling the port from the landside. With a massive number of containers stuck floating near the shore and an equally sizable number of them stuck waiting across intermodal hubs, it will be little surprise when the trucking ton-miles moved over August and September see a slide.
With a massive number of containers stuck floating near the shore and an equally sizable number of them stuck waiting across intermodal hubs, it will be little surprise when the trucking ton-miles moved over August and September see a slide.
The next chart of interest is FRED’s inventories to sales ratio, which is plumbing to historical lows. After peaking to 1.67 in April ‘20 at the height of the pandemic, the ratio quickly plummeted as ecommerce sales picked up—even as logistics networks and global trade stakeholders struggled to meet consumer demand.
The ratio has been falling ever since and now sits at 1.11 in July ‘21. While August numbers haven’t come in, the high retail sales numbers coupled with the issues seen at the ports would force this ratio to remain low.
While overall retail sales continue to see an uptick, the impact of port congestion is inordinately high on retailers that import goods or manufacturers that globally source raw materials for production. The US automotive industry is a net contributor to imports, and unsurprisingly enough, it has been one of the hardest-hit ecosystems in the context of freight delays.
The auto market clocked lower sales figures, not due to a lack of consumer demand but due to a supply shortage of auto parts. Many of these parts are sourced from outside the country, with issues like semiconductor chip shortage leading auto firms to shut production down for weeks. This eventually caught up to vehicle supply, leading to a shortage of new vehicles and a surge in the price of used vehicles.
While the auto industry is under considerable pressure, the situation can worsen for other markets, especially if the freight bottleneck situation persists in the run-up to the peak shopping season. Retailers can only be pushed so far. If logistics costs eat up their already thin profit margins, businesses could shut shop or cut down their product offerings. Inevitably, consumers would face the brunt via fewer offers and shrunken aisles this holiday season.
The Weekly Roundup
There are 65 vessels currently stuck in the San Pedro Bay, with 23 forced to drift away as anchorages were full. While this is historically the largest ever vessel queue off the ports of Los Angeles and Long Beach, the numbers could get progressively worse. Right now, the average wait time to get a berth in the port of LA stands at an all-time high of 8.7 days. Capacity crunch across intermodal transport and warehouses also add to the issue.
The COVID-19 surge in Southeast Asia comes at the cost of supply chains, as countries in the region have announced quarantines—shutting down logistics networks and operations across plantations and processing plants. With countries like Malaysia and Vietnam being major exporters of products like tin, palm oil, and coffee, the restriction measures are expected to impact prices and availability in the short term.
Fleet management platform Ryder is partnering with self-driving trucking startup Embark to launch a nationwide network of 100 transfer points. Freight will be loaded and unloaded off driverless trucks to driver-operated trucks at these transfer points, both for first- and last-mile delivery. Ryder will provide yard operations, maintenance, and fleet management for these transfer points.
Container shipping major Maersk revised its earnings expectations for 2021, expecting an EBITDA of $22-23 billion for the year. This is a sizable increase since their initial estimates earlier in the year, where they expected close to a mere $8.5-10.5 billion in annual EBITDA. The earnings over the next quarter would be historically high, considering Maersk will renew long-term contracts over the following months at much higher rates.
...said who?
“Sometimes the ocean freight now is actually more expensive than the cost of the product.”
- Wade Miquelon, the CEO of fabric and crafts retailer Jo-Ann Stores, while commenting on how they spent ten times more than its historical logistics costs for some products
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