When Vice President Kamala Harris toured the Far East while the crisis in Kabul raged, she declared to Americans at a press conference in Singapore: “If you want to have Christmas toys for your children, now might be the time to start buying them, because the delay may be many, many months.”
She was referring to the supply chain disruptions that have resulted in empty store shelves and higher prices in the United States, and which experts believe will persist well into next year.
As this was written, the most prominent problem was port congestion both here and abroad, with the resurgence of Covid 19 creating a devastating impact on overseas ports, where many workers are too ill to attend to their duties.
According to a forecast from the Insider Intelligence research service, total U.S. holiday retail sales in 2021 should rise 2.7% to $1.093 trillion. The season’s ecommerce sales are projected to rise by 11.3% to $206.88 billion and ecommerce is expected to account for a record 18.9% of total holiday season retail sales.
As we have seen since the Coronavirus pandemic began, intervening events could change these numbers, including skyrocketing inflation driven by a number of factors ranging from pressures exerted by rising logistics costs, increasing prices due to the scarcity of certain goods, and proliferating federal government programs flooding the economy with freshly printed dollars measured in the trillions.
The port situation in Asia remains dire. A Covid 19 surge has slowed and in some cases halted the handling of freight at China’s Port of Yantian, the largest container port in the world, resulting in delays to what was estimated to amount to no less than 5% of the total global freight flow.
At the same time, U.S. West Coast ports also continue to be under pressure from congestion and the lack of road transport, some of it stemming from an ongoing shortage of truck chassis and container equipment.
Containerized cargo volumes at West Coast ports rose 40% in the first half of this year when compared to the same period last year.
The port situation drew the attention of President Biden, who responded by appointing veteran transportation official John D. Porcari to be port envoy to the administration’s Supply Chain Disruptions Task Force, which was created in June.
Porcari served a deputy secretary and chief operating officer of the Obama Department of Transportation. He joins fellow members Transportation Secretary Pete Buttigieg, who leads the Task Force, Agriculture Secretary Tom Vilsack and Commerce Secretary Gina Raimondo. What the task force ultimately can achieve is anyone’s guess.
Another source of rising logistics costs is the shortage of licensed professional drivers in the U.S. It has gotten so bad that there are serious problems getting students to and from newly reopened public schools due to a lack of bus drivers. When it comes to the shortage of truck drivers, an already tough situation has steadily gone from bad to worse.
The spread of Covid 19 also has led to factory shutdowns in Vietnam and Bangladesh, primarily impacting U.S. imports of clothing. As a result, many retailers are searching far and wide for alternative sources to produce the merchandise they need to sell to American consumers.
This is situation has not been made any easier by the U.S. government’s crackdown on textiles and other products sourced in parts of China where the Communist regime is known to be producing goods using slave labor. (See article on page 4).
Logistics cost rises add significantly to the price pressure for imported goods. Salesforce predicts U.S. companies will spend $163 billion more on ocean freight in the second half of 2021 than they did in the second half of 2020, roughly tripling their costs from the same period last year.
“Shipping rates have gone past ‘skyrocketing’ and hit the cosmos,” says Abe Eshkenazis, chief executive officer of the Association for Supply Chain Management.
He points out that the daily spot rate to ship a 40-foot container from China to the U.S. West Coast was $18,346 in early August, compared with $2,680 in July 2020 and $1,550 in July 2019. As a result, it’s not surprising that reports have surfaced about some retail shippers – including toy sellers – who have been turning to air freight as a transportation alternative to ocean shipping.
“Seemingly unending supply chain complications have both manufacturers and retailers fearing toys won’t make it to store shelves in time,” Eshkenazis says. “And those that do are likely to take up a bigger portion of gift-givers’ holiday budgets.”
Noting that material and labor costs have been climbing at earlier stages in the supply chain, when combined with other cost pressures, this has given manufacturers no choice but to raise their prices, sometimes by 20% or more, he observes.
“Many toy companies are in the process of renegotiating their holiday prices with retailers, which usually are set 6-12 months in advance.”
Other logistics costs piling on arise from some surprising sources. Returns of purchases by consumers to retailers, especially those in ecommerce marketplace helped to fuel a burgeoning business in warehoused-based reverse logistics.
Consumers returned an estimated $428 billion in merchandise to retailers last year, representing about 10.6% of total U.S. retail sales in 2020, according to the National Retail Federation. It’s been reported that shoppers return 5 to 10% of what they purchase in stores, and between 15 to 40% of what they buy online
Now it appears that consumers’ comfort with returning purchases is growing. Worries have been expressed that their increasing ease with returning products has grown to the point where it is adds substantially to overall retail logistics costs.
The business systems provider Salesforce predicts that current logistics challenges will force retailers to pay suppliers $12 billion more than they did over the same period in 2020.
Salesforce analyzed recent consumer data and concludes that, most simply put, consumers are spending more on fewer items.
“As retailers fight for wallet share among experiential categories such as travel,
entertainment and dining, the value of the dollar is becoming even more strained,” explains Caila Schwartz, Salesforce senior manager of consumer strategy & insights.
According to Salesforce’s Shopping Index data, the average selling price for merchandise in what are considered discretionary categories – such as apparel, footwear and furniture – spiked by 11% in the second quarter over the same quarter in 2020. “This is by far the largest increase we have seen in our data,” she says.
“In total, we predict that the retail industry will see an additional $223 billion in the cost of goods sold this holiday season,” Schwartz adds.
“While we forecast that year-over-year consumer prices will continue to rise by an additional 8% to 10% each quarter, suppliers and retailers should plan for incremental margin hits with inflationary pressures.”