Will something you want to sell (or buy) during the 2021 holiday season be out of stock because it’s stuck in a container ship languishing off the coast of California?
Inventory shortages caused by a broken global supply chain will plague the 2021 holiday season. As the crisis drags on, retailers, government officials and other experts agree the global trade system tangles will continue well into 2022—and possibly longer. This means large, national retailers with the best logistical infrastructures—and the most clout with suppliers—could be poised to end the holiday season as big winners.
But not everything is grim for smaller e-retailers. In late July, Donald Tydeman, principal at The Salt Cellar, told Digital Commerce 360 that supply chain problems had him feeling worried and sleepless. Tydeman says he’s sleeping better now, after securing enough inventory—including the hard-to-find glass jars Salt Cellar needed for packaging its products.
Usually, Salt Cellar gets its jars from Taiwan. This year, because of shipping delays, the retailer cast a wider net for the supplies.
“We went through multiple U.S. distributors buying up the last of their inventories,” Tydeman said. “We finally were able to secure enough product to see us through the holiday season and, hopefully, things will loosen up in the spring. Because we are hoarding inventory, our big problem now is warehouse space. But too much inventory is a better problem than too little.”
Salt Cellar sells gourmet sea salts, bath and spa products online and at two stores—one each in Portland, Maine and Portsmouth, New Hampshire.
So far, he adds, the 2021 holiday sales have been good, Tydeman says. “Sales have been strong even though we have increased prices. People are definitely shopping earlier, both online and in stores,” he says.
Tydeman says that in-store sales are up nearly 30% year over year, even though stores are closed two days per week this year due to staffing issues. In 2020, the stores were open seven days per week. Because of these reduced labor costs, its margins are better, he says. “Unfortunately, the two owners are doing the work of six open positions,” he added.
Outlook for holidays favors large retailers
Despite the chaos in supply chains, projections for holiday retail—especially online sales—are far from catastrophic.
After an unprecedented surge in digital holiday sales in 2020, U.S. consumer spending online is set to grow 12.1% year over year this 2021 holiday season, Digital Commerce 360 projects. Limited inventory, rising costs passed onto shoppers, and earlier holiday marketing in September and October will all work to temper gains during retail’s busiest time of year.
Despite continuing supply-chain disruptions, NRF says total consumer holiday spending per household (online and offline) will be “on par with consumer spending last year.”
However, even if the holiday retail sales meet or exceed expectations, the wealth is unlikely to be distributed evenly. Large retailers had an edge in 2020, as online sales surged due to the COVID-19 pandemic. That was mainly due to the ability of giants like Amazon.com Inc. (No. 1 in the 2021 Digital Commerce 360 Top 1000) and Walmart Inc. (No. 2) to have inventory in stock when consumers needed it. The current supply chain debacle amplifies that advantage, says Brendan Witcher, vice president and principal analyst, digital business strategy at Forrester Research.
“Large retailers are coming into the season already at an advantage since many consumers shifted to shopping with the ‘aggregators’ of retail Amazon, Walmart, Target, etc.—over the last 18 months,” Witcher says. “Supply chain issues compound the advantage since larger retailers can utilize multiple sources for products to fill demand gaps and retain consumers’ business through the end of the year.”
Problems like the massive backups at U.S. ports, a global semiconductor chip shortage and a nationwide scarcity of truck drivers are negatively affecting many retailers and brands. A good example is Turtle Beach Corp. (No. 445), a consumer brand manufacturer of gaming accessories and audio equipment.
On a conference call with analysts to discuss Q3 earnings, Turtle Beach CEO Juergen Stark said the semiconductor shortages and shipping delays would constrain its revenue by $25 million to $30 million this year.
Despite that, the company reported net revenue of $85.3 million. That, Turtle Beach says, was its second-best third quarter ever, and actually a decrease compared with its best-quarter ever in Q3 2020, when revenue grew 141% year over year to reach a record $112.5 million.
“We expect the supply chain headwinds to abate during 2022, particularly as we complete several additional programs to engineer away from highly constrained semiconductors to semiconductors with better supply,” Stark said during the conference call, according to a Seeking Alpha transcript. A company spokesman declined to provide further comment.
Top retailers aren’t immune to the supply chain crisis
While giant retailers are in a better position than smaller competitors to minimize supply-chain pain, their holiday season so far has not been free of inventory hiccups, says Brandon Newquist, industry manager of CPG and home at digital analytics firm SimilarWeb. According to the firm’s data:
- Target Corp. (No. 6) has seen a large uptick in visits to luggage product pages (up 58% year over year) as concerns over COVID-19 wane and consumers act on pent up travel demand. However, lack of raw materials and truck drivers have made it difficult for Target to keep luggage in stock, indicated by a 46% drop in year over year in the conversion rate for the category.
- Amazon is not immune to supply chain disruptions, as conversion rate dropped in multiple categories in Q3 2021. Categories with significant conversion rate declines include office electronics (down 31%), wall art (down 30%), and building toys (down 27%). Newquist says those issues are likely the result of raw-material shortages impacting the production of computer chips, paint and plastic.
- Wayfair Inc (No. 7), a furniture and home goods e-retailer, is struggling to keep appliances in stock. Wayfair’s conversion rate for appliances fell from 4.5% in April to 2.4% in June while visits remained steady. That suggests consumers were leaving the site to find desired products elsewhere, Newquist says.
Retailers act to optimize inventories
While Turtle Beach changes the way it sources semiconductors, other merchants also are taking action to address supply chain disruptions. According to a Digital Commerce 360 survey of 100 online retailers conducted July through September 2021, 40% said they ordered more inventory from existing suppliers and 37% said they had maintained constant communications with their suppliers. In addition. 34% of the retailers surveyed said they ordered products from new suppliers and 30% reported “aggressively monitoring deliveries from suppliers.”
Asked to name their biggest obstacles as the holidays approached, nearly half (47%) of the retailers surveyed cited increasing costs, 44% chose timely delivery and 41% chose “securing sufficient inventory to support demand.”
“The most significant problem [in global supply chains] is shortages–shortages of raw materials, labor, shipping capacity etc.,” says Martin Dixon, director and head of research products for U.K.-based Drewry Shipping Consultants. “The latter is being driven by disruption and congestion throughout the container supply chain—ports in particular—but also across inland transport networks, logistics hubs and distribution centers. Shortages are driving up inflation—as seen in very high shipping costs,” he says.
When it comes to acquiring inventory, retailers of all kinds are in the same boat, says Mike Connors, CEO at lighting supplies and fixtures Bulbs.com. He says he has heard the same complaints from retailers in other sectors, including the food processing business.
“We’re no different than any other company that sells anything,” Connors says. Keeping inventory in stock is a challenge, he says, but the retailer has done well by leaning on its extensive network of suppliers.
Connors says Bulbs.com now sources inventory from about 120 suppliers, a 15% to 20% increase since the pandemic started. That broad network has been a significant advantage because it gives Bulbs.com better odds of having the inventory customers want, Connors says.
One helpful side-effect of the current environment is that customers are less brand-loyal and more willing to try new products than they used to be, Connors says. And, in most cases, the performance of lighting products made by lesser-known manufacturers perform as well as better-known brands, he says.
The bulk of the retailer’s sales come from B2B buyers, but the retailer also sells to consumers. In 2020, sales to consumers represented 27% of total sales, up from 15% in 2019. In 2021, as shutdowns and other restrictions eased and business buying recovered, consumer sales dropped back to 15%, Connors says.
Like many retailers, Bulbs.com experiences higher sales and more web traffic during the holidays, but for reasons different than other merchants. The retailer experiences a surge in traffic during the two ‘cyber’ weeks following Black Friday due simply to more people being online,” Connors says.
Connors says that while Bulbs.com sources the bulk of its stock from U.S.-based suppliers, 90% of its inventory originates from China. In the past, the retailer ordered some products directly from China; but given the current sky-high prices for shipping containers full of goods across the Pacific Ocean, buying from domestic suppliers makes more sense, he adds.
Constantly rising prices for inventory create a different kind of challenge, Connors says. When Bulbs.com quotes a price for a potential order, the retailer cannot guarantee the price for as long as it could before the pandemic, he says. Currently, quotes usually remain good for about two weeks, and never more than the 30-days. Before the pandemic, 30-day guarantees were the norm, and Bulbs.com would sometimes allow more time because price increases were more predictable, he says.
In late October, Paul Gaffney, chief technology and supply chain officer at apparel chain Kohl’s Corp. (No. 18), told Bloomberg News that clothes and shoes could be among the hardest gifts to find this holiday season. Gaffney said his company is well-stocked for the holidays and doesn’t foresee a problem but added that countries with the most recent factory closures and disruptions are also the largest apparel and footwear manufacturers.
“While the whole supply chain is disrupted, those are the two consumer categories that have had the longest and deepest disruptions,” Gafney said at the time. “We feel good about those categories, but those are the riskiest ones.”
The state of container shipping
Shipping products across the Pacific Ocean on container ships from Asia to the United States has been unpredictable all year, according to data from Sea-Intelligence ApS, a Danish provider of global supply chain data and analysis.
Schedule reliability for major containership lines—defined as the percentage of arrivals and departures that arrived or departed as scheduled without delays, cancellations, diversions or turning back—was a meager 34.0% in September, Sea-Intelligence reported Oct. 28. For the same month in 2020, reliability was 56.0%. In September 2019, it was 77.4%, while schedule reliability in September 2018 was 67.0%, Sea-Intelligence reports. At some points during the summer of 2019, schedule reliability topped 80%.
“The only ‘positive,’ if one should call it that, is that schedule reliability is not plummeting further,” the firm said in a statement. However, September’s reliability was down 22 percentage points compared with a year earlier.
The average delay for late vessel arrivals was 7.3 days, the highest-ever figure for that month, the Sea-Intelligence statement says. A year earlier, the average delay in September was 4.8 days. In September 2019, it was 4.4 days.
Container shipping isn’t just unreliable this year. It remains much more expensive than a year ago and should remain abnormally high throughout 2022, says Drewry Shipping Consultants’ Dixon.
“Drewry believes that spot container freight rates have peaked. We expect some weakening in spot rates but for pricing to remain well above pre-pandemic levels throughout 2022,” Dixon says. Drewry expects the higher-than-normal shipping rates will persist because the firm does not expect the ongoing disruption to container supply chains to ease until some point in 2023.
Spot rates reflect the real-time rate to ship cargo. They compare to contract rates, which are negotiated ahead of time and apply to shipments made during an agreed-to period.
“But while spot rates may be softening, longer-term contract rates are expected to strengthen further through 2022. This is because they tend to lag spot rates and there is currently a wide differential between the two,” Dixon added.
Congested ports burden the supply chain
The current state of the global supply chain is evident at the important dual ports of Los Angeles and Long Beach in California. According to data compiled by Bloomberg News, at least 79 vessels were waiting off the coast as of Nov. 1. By Nov. 8, the number of waiting ships grew to 102, including 77 container ships, according to the Marine Exchange of Southern California.
Because the many anchored or “loitering” ships represent a safety and pollution hazard, the Marine Exchange, Pacific Maritime Association and Pacific Merchant Shipping Association developed a new queuing process for ships parked off the ports of Los Angeles and Long Beach.
Effective Nov. 16, each vessel will get an assigned place in the queue based on its departure time from its last port of call, according to a joint statement issued by the three groups. Under the current system, ships enter the queue based on crossing a line 20 miles from the San Pedro Bay Port Complex. The new protocol also requires eastbound vessels waiting for a berth to remain 150 miles west of California. Northbound and southbound vessels must remain 50 miles off the coasts of California or Mexico.
The problem of congestion is not limited to U.S. ports. Near Singapore, the backlog was 22% above average on Nov. 1, with 53 container ships anchored offshore, the highest count since Bloomberg News started tracking the data in April. On the same date, the Greek port of Piraeus had 18 anchored ships waiting, also the highest number since April.
A win for warehouse landlords
The COVID-19 pandemic exposed numerous weaknesses in global supply chains. Now, a combination of factors—such as labor shortages, antiquated infrastructure, containers in the wrong places and an import surge spurred by free-spending U.S. shoppers—have combined to disrupt the flow of global trade.
Among the effects has been a shortage of warehouse space as importers seek homes for inventory coming out of backed-up U.S. ports.
“I think it’s going to get worse,” Hamid Moghadam, CEO of industrial landlord Prologis Inc. said during a company presentation last month. “The short-term problem, I think, is going to be with us through 2023.”
His company and other major warehouse owners like Blackstone Inc. are the winners in this logistical logjam. Rents for warehouse space are skyrocketing more than 30% in some of the hottest U.S. markets, such as Los Angeles, Long Island, northern New Jersey, and Miami. Vacancies of 1% or less aren’t unheard of in gateways such as Southern California.
This has been good news for firms like Blackstone. Since September, the firm has cashed out almost $1.3 billion by refinancing two mortgages on industrial properties, according to reports by Moody’s Investor Service and Fitch Ratings. And one of the firm’s portfolio companies, Link Logistics, is spending $5 billion to build 30 million square feet of new space.
Developers can’t build fast enough. Every $1 billion increase in online sales equates to a need for an additional 1 million square feet of warehouse space, according to an estimate by CBRE Group Inc., a commercial real estate services and investment firm. And U.S. suppliers will need 800 million square feet more to store backup inventory in case critical parts for autos and other products run short, according to Prologis.
No end in sight
In an interview with Bloomberg News held Nov. 8, U.S. Secretary of Commerce Gina Raimondo said it would take “some number of months” for supply chains to normalize next year. That’s in line with a projection from the National Retail Federation (NRF).
Drewry Shipping Consultants’ Dixon is more pessimistic about when supply chains might improve.
“We do not expect current disruption to ease noticeably until 2023,” Dixon says. “This is due to the extent and complexity of current congestion, together with latent cargo demand, both of which are not expected to unwind anytime soon. ”
Also, risks of further disruption in critical logistics hubs will remain until most of the world’s population gets vaccinated against COVID-19, Dixon says. New outbreaks could push back any easing of supply chain congestion, he says.
Bloomberg News contributed to this report.