You’ve heard Dan Avila addressing retail trends here on the Go!Go!Go! Blog a few times over the past year. Today, Tompkins Associates’ “global retail guru” discusses the challenges and outlook for the 2010 peak season. 

Jim 

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As the peak retail season for 2010 rolls around, we’re already seeing some challenges resulting from the supply chain improvements that were made during the 2009 season. 

As you recall, in peak season 2008, many retailers brought in a lot of inventory, stocking their shelves with scores of items in the hope that they would sell. Well, they didn’t, and these retailers were left with product that had to be either discounted heavily or liquidated. This led to a complete and total change in strategy for peak season 2009. Retailers did not want to repeat peak season 2008, so they made some significant changes in merchandising, forecasting, and inventory levels. 

In 2009, retailers reduced the number of items they offered customers, relying on previous top-selling items and not bringing in items if they were unsure that they would sell. 

Retailers also forecasted demand more conservatively. The majority of retailers stocked their shelves in 2009 with items that were sure to sell and at inventory levels that would meet the lower demand that was forecasted, thus avoiding the deep discounts and inventory liquidations of 2008. 

For the most part, retailers in 2009 have succeeded with lower inventory, fewer product offerings, fewer markdowns, and much less inventory liquidation. 

Shortage of shipping capacity and containers impact 2010 peak season 

Since retailers reduced the amount of inventory in 2009 – and with the general reductions in inventory due to the economic slowdown – the steamship companies, who transport much of the product from Asia into the U.S. -- reduced their capacity to meet the decreased demand levels. Now, as peak season shipping from Asia to the U.S. begins, there is a serious shortage of shipping capacity from Asia to the U.S. 

In the last few years, to meet lower demand, many of the steamship companies took ships off-line or went to “slow steaming” – the practice of reducing the speed of steamships to save on fuel which, in turn, adds to the amount of time a steamship takes to get from point A to point B. It is estimated that as much of 11% of steamship capacity has been pulled to offset the reduced shipping volume. 

Another issue affecting capacity is the number of actual containers available to move freight. There are few companies that manufacture ocean freight containers. So when demand dropped, these companies all but stopped manufacturing. 

Now that demand has increased, there is a significant shortage of containers. To further complicate matters, exports from Russia and India have increased, causing further strain on capacity of the steamship lines and consumption of containers. This situation makes it even harder to secure freight for U.S. retailers. 

This problem began to show itself earlier this year when retailers such as Cost Plus World Market and The Container Store were unable to get product into the U.S. for Father’s Day and summer catalog sales, resulting in lost sales and rain checks. 

With the shortage of cargo space on ships, retailers are fighting for space and often outbid each other for freight. Ocean freight from Asia to Los Angeles has increased by as much as 2 to 3 times what it was in 2009. For example, the spot rate for a 40-foot container from Hong Kong to Los Angeles in July 2009 was $871, a five-year low; today the spot rate is up to $2,624, which is a five-year high. 

So to ensure that product is on shelves for the holiday season, some retailers have moved away from the solid supply chain practices implemented in 2009. 

For instance, retailers are beginning to bring product in early – as early as 3 months before normal. They are taking on additional warehouse space to make sure product is in the stores by the holiday selling season. This, of course, is a painful and costly solution to the problem and can be avoided by working closely with and forming strategic relationships with steamship companies. Some retailers have had success in keeping their products moving by paying surcharges and signing up for longer term deals.

I would be interested in knowing what strategies your company is employing to keep freight moving? What are your contingencies?

Thanks,

Dan

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