A pleasant surprise may be in store for consumers this Christmas
By Peter Simmonds, EVP Global Ocean Freight at Toll Group
Here is some good news – the supply chain crunch that haunted the global economy for the better part of the past 12 months has started to ease. The reason is mainly a fall in demand for shipping, so there’s less volume moving around in containers.
Warehouses, meanwhile, are pretty busy and packed. As we approach this year’s shopping season, we think consumers can prepare for a pleasant surprise as retailers will likely clear part of their abundant inventory at a discount.
The overstocking of many products we now notice in markets worldwide has created a lot of pressure on warehousing businesses. Those find it hard to provide enough space to store all the goods ordered over the past 6 to 12 months.
The gridlock is easing. But slowly
Since the second half of 2020, a considerable amount of buying, primarily driven by the North American consumer, first caused bottlenecks in ports on the US West Coast. COVID-related factors, above all the resulting labour shortages, led to delays around the globe, casting doubt on the resilience of our traditional supply chain models.
Congestions are slowly unwinding, and shipping capacity is re-entering the market. In the container ports of Los Angeles and Long Beach, which handle around 60% of the US traffic, the waiting time for a berthing window dropped back to pre-COVID times, or less than 24 hours – it was 14 up to 30 days in 2021. However, there is still a shortage of drivers. Fortunately, the risk of further trucking and rail capacity disruptions as unions progressed through renegotiations was largely averted.
In Europe, labour disputes are hindering a return to normality. In September/October, dock workers at the UK ports of Felixstowe and Liverpool are holding strikes lasting between 1-2 weeks. Felixstowe is the entry point for just under half of the country’s freight, and there’s the risk of the situation escalating. The port of Hamburg, the third busiest in Europe, saw walkouts in June and July, putting pressure on the throughput of vessels before reaching an agreement in late August. Berthing delays of up to three weeks have eased to less than 7 days and improving.
Building resilience with larger inventories
Nothing is perfect in the supply chain business, but we are seeing marginal improvement in global schedule reliability. According to reports, schedule reliability is moving back to 40-45% from the low to mid 30% seen earlier in the pandemic. It’s a small improvement and still far from the long-term average of 70% on-time reliability.
Larger retailers are not taking any chances and have ordered early this year – we’ve seen firms placing orders up to three months ahead. They would rather pay to hold the goods in warehouses than have them sitting outside the port on a vessel. It’s one way to boost supply chain resilience.
Another one is alternative sourcing. Buying goods that are produced closer to home, or nearshoring, reduces the lead time for the needed commodities and products, especially in the chip and auto sectors. Until we see sustained shipping reliability, businesses will continue to steer away from overly ambitious just-in-time freight models.
But first and foremost, customers expect flexibility and agility from their logistics partners to be able to deal with the ongoing obstructions and uncertainties. A combination of ocean and air freight – let’s say via a gateway in the Middle East – will get you around the disruptions in the European ports. Customers require a full range of services: from ocean freight to air, rail, and trucking to transparency on price and CO2 implications and prompt alerts on exceptions, all of which contribute to their ability to work around unfavourable situations.
What can we expect from the consumer?
Meanwhile, as travel restrictions ease, consumers have shifted their spending towards travel and leisure rather than purchasing another washing machine, toaster, or piece of furniture. Bigger and bulkier items have reduced in volume, which might be related to the high freight rates. Some retailers have started pushing new orders back simply because the demand has dropped. Furthermore, consumer sentiment has weakened on the back of higher energy costs and interest rates, coupled with concerns about inflation as household expenses are surging.
There's always going to be a Christmas. But as far as shipping is concerned, given the painful recent experience, clients have stocked up early and built longer lead times into their supply chains. We, therefore, anticipate relatively flat shipping volumes through the next three to four months. Are we going to see a significant spike in volume? The answer to that is no.
What we can expect, though, are aggressive sales campaigns and lots of discounting over the next three to six months. We are coming to the time of the year when retailers are more willing to sell down inventories and get some return on their capital, even if this return is lower than they may have liked.