Even before the COVID-19 pandemic, global supply chains had become fragile and susceptible to disruption. Manufacturers, shippers and retailers have optimized supply chains for efficiency and specialization, enabling them to run at low cost with minimum stock. The resulting supply chains became increasingly long and interconnected, which made them particularly prone to interruptions that cascade across industries.
Microchip production is concentrated among three companies in Asia that together represent 80% of global supply. Prior to the pandemic, the companies maximized efficiency by keeping production capacity close to the level of ongoing demand. Pandemic-related shutdowns created backlogs, and when chip manufacturers resumed production their lean models provided insufficient capacity to satisfy pent-up demand. The resulting chip shortage dealt a particularly strong blow to the auto industry, and lead times for new cars increased substantially.
That was just the beginning. As automakers consumed the majority of chip production, makers of consumer electronics—robotic vacuum cleaners, gaming consoles, digital toys and the like—were forced to wait. Low stock led to price increases and delays. Toy store owners found themselves trying to unpack the cause and effect of global supply chain tangles for frazzled customers who just wanted to buy a talking doll in time for Christmas.
As recent years have demonstrated, a variety of events, from a once-in-a-lifetime worldwide health crisis like a pandemic to a regional conflict like the Russian invasion of Ukraine to long-planned political changes such as Brexit, can easily interrupt global supply chains. These recent events resulted in three phases of supply chain disruptions.
Too Little
As pandemic lockdowns went into effect consumers shifted dramatically to online shopping purchasing creature comforts in lieu of spending on experiences and activities. Those same lockdowns also disrupted manufacturing and shipping, the effects of which were compounded by the shift in consumer demand. Factories in Asia were first to go dark, followed by facilities in Europe and then North America and other regions. After factories began to reopen the restart took time to ramp up, and there was limited product in the pipeline due to order cancellations that occurred in the pandemic’s early days. The ultimate result was too little retail inventory to meet consumer needs.
Too Late
Delays in the delivery of seasonal inventory caused many goods to miss their selling season, as Christmas items made their way to retailers in February and Valentine’s Day goods showed up in May. Shipments heading to Australia were still delayed as late as the fourth quarter of 2021, and many retailers received summer inventory after winter had already arrived.
Too Much
Retailers receiving seasonal goods well after they were needed lacked space to store them. Likewise, many retailers failed to anticipate changes in consumer habits as the pandemic wore on, leaving them with excess inventory as people began to book vacations and return to the office and shifted their spending accordingly.[1]
FROM TOO LITTLE TO TOO LATE
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The widespread problem of “too little” was largely resolved by the end of 2021, though some pandemic-related closures have continued throughout Asia. Sectors such as automotive manufacturing continue to experience disruptions with lead times of six months or more for some new cars.
In sectors that still lack inventory, some manufacturers are making major changes. Cookware, appliance and electronics factories have expanded their manufacturing capabilities in Mexico to diversify their manufacturing base. Other firms are working to move production out of Asia and into other parts of the world, including the U.S. Meanwhile, retailers with less inventory on hand are doing less discounting.
Halfway through 2022, “too late” continues to be an issue for a variety of reasons. Ongoing waves of COVID-19 infections and resulting lockdowns in Asia continue to affect global labor shortages in manufacturing, logistics and front-end retail. Additionally, these lockdowns have caused port delays and closures that may have ripple effects for months to come.
As of May 2022, 344 ships were waiting to berth in the Port of Shanghai, which was a 34% increase over the month before. The Port of Long Beach reported nearly 437,000 loaded inbound 20-foot-equivalent units in May, which was a 40% increase from May 2020.[2]
As the shipping window for holiday inventory opens, retailers face additional inventory challenges. To arrive in time for holiday shopping, inventory must get to ports by the end of the third quarter, and it’s currently unclear whether ships and containers are optimally located for the season.
Overland transport also faces challenges that are delaying the arrival of inventory. The American Trucking Association estimates the 2021 driver shortage capped at 80,000 drivers, and at current trends, the shortage could surpass 160,000 in 2030.[3] Meanwhile, the salary for some drivers has nearly doubled due to demand, which has increased costs throughout the supply chain.
Shifting consumer and economic trends have also contributed to the “too late” problem. Clothing orders for corporate return-to-office plans early in the year may no longer match demand as these plans have shifted. Additionally, the rapid onset of the highest rates of inflation in decades may cause consumers to prioritize essentials. This may pose a challenge for retailers who receive delayed shipments of home décor, consumer electronics and other discretionary items.
THE PERSISTENT PROBLEM OF TOO MUCH
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At the same time, many large retailers are contending with significant excess inventory after they continued ordering based on pandemic trends that eventually ran their course. Macy’s has too many casual clothes, active wear, home textiles and tableware, while Walmart said in early June 20% of its inventory consists of items the company wishes it didn’t have.[4]
Complicating the “too much” situation, consumers have returned to brick-and-mortar shopping[5] after doing much of their purchasing online at the height of the pandemic leaving e-commerce companies overstocked. This shift, combined with the impact of high inflation, has led Amazon to pull back on warehouse space[6] following a softening in the growth of its ecommerce business.[7]
Additionally, online retailers must manage increases in both last-mile delivery costs, a result of high fuel prices, and the overall cost of goods. At the same time, consumers’ pivot back to brick-and-mortar has reduced basket sizes. Some online sellers are now reevaluating their pricing strategies accordingly.
Companies in some sectors have boosted their safety stocks, filling warehouses with products and components as insurance against future disruption. This evolution from “just in time” to “just in case” inventory management increases buying, storing and handling costs. With consumer demand both volatile and difficult to forecast, companies are facing greater risk of buying the wrong stock and being stuck with obsolete inventory.
These shifts have powerful implications for retailers and their financing partners. Retailers dealing with too little or too much inventory may face cash crunches or even existential financial challenges. To that end, retailers should consider monetizing excess inventory as soon as they can. Meanwhile, retailers that are low on appropriate stock may need to seek out new stock at prices that work for their needs.
Further, retailers may need prolonged inventory financing as port delays continue to lengthen time in transit. Appropriate inventory and equipment valuation are more complex and important than they were previously. Banks and other lenders may need to increase the frequency at which they run valuation models, since inventory movement can change their risk exposure.
ADJUSTING TO THE NEW NORMAL
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We expect the “too little, too late and too much” cycle to continue for the foreseeable future and into 2024. Auto, apparel and fashion products are most likely to be affected, as are specific seasonal products.
With changing consumer habits and evolving technology, the retail industry is one of the most dynamic and demanding aspects of our economy. Gordon Brothers thrives in this space, in part because it’s where we got our start. For more than a century, we’ve honed our understanding of values across multiple sectors and industries to offer our clients the insight and hands-on support they need at all points of the business lifecycle. Our global team of experts can partner with retailers in right sizing their inventory and with banks and other lenders to navigate asset values amid ongoing inventory movement.
Endnotes:
[1] https://www.wsj.com/articles/macys-gap-and-other-clothing-stores-are-stuck-with-the-wrong-items-11654421401
[2] https://polb.com/business/port-statistics/#teus-archive-1995-to-present
[3] ATA Driver Shortage Report 2021 Executive Summary.FINAL_.pdf (trucking.org)
[4] https://www.wsj.com/articles/macys-gap-and-other-clothing-stores-are-stuck-with-the-wrong-items-11654421401
[5] https://investor.mastercard.com/investor-news/investor-news-details/2022/Mastercard-SpendingPulse-April-U.S.-Retail-Sales-Remain-Steady-Up-7.2-Year-Over-Year/default.aspx
[6] https://www.wsj.com/articles/amazon-slowdown-sends-shivers-through-red-hot-warehouse-sector-11653998400
[7] https://www.wsj.com/articles/amazons-flagship-online-shopping-business-stalls-after-decades-of-dominance-11651232316?mod=article_inline
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