Uncertainty about consumer demand, capacity may take the peak out of the peak season.
By Chris Dupin
With unemployment during the past year at its highest levels since the early 1980s, and the economy sputtering through late summer, the outlook for holiday retail sales this year was cloudy around Labor Day.
Logistics companies said shipments by retailers have been fairly strong this year, but there was uncertainty about whether that strength would last into the fall.
Some logistics companies also believe the traditional 'peak season' for container shipping is becoming elongated.
'Instead of a two-month-long spike where air freight goes through the roof and ocean freight congestion and containers being 'slotted-out' from ships is a big problem, I think we are going to have a longer period that is less critical,' said Patrick Ahern, vice president of international at National Retail Systems, a Hasbrouck Heights, N.J.-based logistics company that caters to retailers.
Strategies vary depending on company and product, he said.
'One of the strategies was to get as much on the water as soon as you could. That works great with some commodities and with some companies. Other commodities and other companies, they could not do that.' Ahern said. 'And there is still another layer of companies and commodities that are last-minute buyers who don't buy a product, but buy factory time. They are pushing their product out the door at Halloween and that is hitting here in mid-November to get those last-minute rush things.
'So you will still be able to get on a boat, but you are just going to have to pay a higher premium, and I think that period is going to last over a few months, probably right up until October-November, as opposed to a huge peak in September-October,' he said.
Many stores 'have very specific events that take place immediately after Christmas, winter merchandise, winter apparel, winter home goods. There are events that typically happen right after Christmas that softens the back end of peak season,' Ahern added.
'Logisticians hate variability, and they dislike unplanned events,' said Casey Chroust, executive vice president of retail operations at the Retail Industry Leaders Assocation (RILA). 'To counteract those scenarios they have to increase lead time to smooth out the supply chain.
'With some of the shipping capacity issues that occurred, there has been a lot more variability and turmoil in moving cargo across the water into the U.S. That variability definitely has an impact on how people move goods and plan their supply chains,' Chroust said.
Some shippers moved cargo earlier this year than in 2009, because of the need to rebuild inventories, and out of caution because of problems earlier in the year with capacity and container shortages.
Retailers have marketing plans and promotional advertising tied to goods arriving at stores on particular days, Chroust said. 'The last thing you want to do is to have to expedite shipments to make sure that cargo arrives.'
'Space has been at a premium,' said Tom Wyville, a vice president with Toll Global Forwarding. 'With the carriers controlling capacity, I think a lot of the big importers hedged their volumes.'
In February Australia's Toll Group acquired Summit Logistics International and its FMI brand as part of a major expansion into North America. Toll said Summit, with annual revenue of about $273 million, was one of the top five providers of ocean freight services between China and North America.
Because of tight capacity, Wyville said retailers that had previously booked directly with steamship lines, turned to third-party logistics companies and forwarders to find capacity.
Hackett Associates and the National Retail Federation (NRF), in their monthly PortTracker report in early August, noted that large double-digit increases in container volumes in June and July 'appear to be the result of backlogs built up due to the lack of shipping capacity earlier in the year, after ship owners took vessels out of service during the recession and were slow to return them as the economy began to pick up.
'With many retailers appearing to bring merchandise in early to avoid any further bottlenecks, July is likely to be the peak shipping month for 2010 rather than the traditional rush of holiday season merchandise in October,' they said.
'The months going forward are relatively strong, but may not be as strong as they were in terms of growth in June,' Ben Hackett, principal of Hackett Associates, said in August.
Jimmy Crabbe, vice president of global ocean services at UPS, said his company has seen strong increases in volumes from retailers this year, in part because of weakness in 2009 and 'faster buildup in inventory' this year.
Paula Rosenblum, managing partner of Retail Systems Research, said retailers were cautious in late 2009 and avoided building inventory levels too high because of the weak economy. As a result they sold down stock more deeply than has been typical in past years.
But there were few reports that merchandise was out-of-stock in 2009, she added. That, combined with the mixed outlook for the holiday season, are hard to reconcile with the reports of very strong import levels this summer.
Crabbe said retailers, who a year ago pared down inventory by reducing the number of television models they carried, may this year broaden product offerings once again.
Another change that has shifted the movement of retail goods, Rosenblum said, is that many schools are now starting classes in mid-August, moving 'back-to-school' goods to earlier in the summer.
The National Retail Federation forecast in July that retail container traffic in 2010 was 15 percent higher than in 2009.
'I think this hypothesis of an early peak is entirely plausible, because of the weakness in household and business markets that is continuing,' said Paul Bingham, an economist with Wilbur Smith Associates. 'We had a burst of inventory rebuilding, but we have never had tremendous strength in household purchasing or business investment.
'Retailers are being a little cautious because they are not sure how much the consumers are going to spend,' he said.
'I think there is one other factor at work, which is retailers are trying to capture wallet and market share as early as they can, fearing that households will play themselves out. So it is a little bit of a competitiveness issue.'
But it's a mixed bag. After speaking with many retailers in August, Jonathan Gold, vice president of supply chain and customs policy at the NRF, said a number of retailers claim their biggest shipments are still to come in September and October.
Maersk Line, the world's largest container carrier, said the end of September and early October are considered the peak and this year would not be different.
'My expectation is that we are not going to see a significant jump in the next couple of months, but I don't see enough data to support the notion that the peak has already occurred,' said Josh Green, chief executive of economics research firm Panjiva, in late July. 'If anything, I think retailers have been trying to put off making the call on how much to order so that they can get a little more insight as to where the economy in general and consumers specifically are headed.
'I don't think the shipping industry should expect significant jumps in the months ahead, but I don't think it is all doom-and-gloom either. Our data points to a trade economy that is essentially treading water right now,' Green said.
'For every company that is shipping early, there is another firm that does not want to tie up its cash by getting inventory early and companies that want to put off ordering to the last possible second so they have as much visibility as possible into what consumer sentiment is likely to be during the holiday season,' he added.
Logistics Opportunities. The economic downturn has resulted in many retailers taking a close look at their supply chains.
'Moving boxes is moving boxes. But retailers are always trying to continuously improve the processes by which they undertake their supply chain functions,' Chroust said. 'Without a doubt there has been a more urgent necessity to take costs out of the supply chain because of the current economic environment.
'A lot of retailers have struggled to grow the top line in the past couple of years, and so you are forced to look at the bottom line and control costs to still hit your profit margins for the organization,' he said.
'This year forced retailers to look at strategies they didn't have to look at in the past,' Ahern said. 'I know that there are a number of companies that have made punishing advances in their supply chains since 2008.'
Companies took 'a more holistic look at how they manage the supply chain,' he said. 'They looked at all the connection points. Most major companies have done that analysis and they really understand the levers that they have and how to use those levers to keep their inventory low and still keep the right stuff on the right shelves at the right time at the right price.'
Crabbe said the reduction of capacity by carriers last year, which has since ramped up during 2010, created opportunities for logistics companies like UPS.
He agreed shippers have leaned more heavily on firms like UPS to help them obtain lift. UPS anticipated this demand and added capacity, including from two steamship lines that it had not previously done business.
In 2009, UPS also saw high-tech and pharmaceutical companies that had traditionally relied on air transport, show 'much more appetite for alternative or different ways for routing,' including all-water shipment if goods had the shelf life to sustain longer transit times, he said.
Tough times made retailers more open to alternatives, and UPS has seen greater demand for its supply chain management services at the point of origin and load optimization ' using larger or high-cube containers to reduce transport costs and pack containers, and shipping goods straight to the store or to distribution centers closer to their ultimate destination to reduce handling and transit times.
However, even as Toll performs more work in Asia for shippers of retail goods, Wyville said the company's West Coast transload facilities remain critical for making a variety of last-minute adjustments ' rerouting cargo rushed to a ship at the last minute, or if a container is rolled from one sailing to another.
Ahern of National Retail Systems said while in the past companies may have purchased goods 'FOB Shanghai,' taken the goods and arranged transportation from China, today more are doing what he calls 'advance allocation' and in some cases asking for delivery in the United States on short notice.
'Retailers are saying to companies in China, 'I'm going to give you store-level allocation when I give you my purchase order 35-40 days before it sails. I want the box packed for the store,' ' the NRS executive explained. 'So a container will have goods packed for a store or a group of nearby stores, sometimes with several different products in the same carton.'
This kind of store-level allocation 'adds a level of complexity. It requires a lot of forecasting and a lot awareness by the retailer of what is happening at your point of sale. But companies that can do that can save a ton of money from having to markdown' unsold merchandise at the end of the season, he said.
Another trend that NRS has observed is that some retailers are 'changing the terms of sale, asking Chinese companies, for example, to now deliver goods in the U.S three days after receiving an order,' Ahern said. This is largely for goods that need to be replenished. That forces a Chinese exporter to open a terminal or warehouse someplace in the United States.
Ahern said those companies 'may not want to open a facility here, hire U.S. workers, and have to pay taxes. But now you have to find a way to get goods on shelves in three days and meet all the requirements in the vendor guides of various
Vendor guides are documents, sometimes running up to 30 pages long, specifying how a seller must prepare and ship merchandise, down to the size of cartons and position of labels. If not done as specified, a vendor may be charged a penalty.
For a Chinese company to come to the United States, open a warehouse, and find personnel who can get his business to comply with vendor guides from perhaps 25 different companies is a daunting task, especially for a small to medium-size business, Ahern said.
In 2007, NRS formed a joint venture with Sinotrans to provide integrated logistics service in China. Now it is Chinese firms that need to establish warehouse and distribution centers in the United States, and the company in January launched its Vendor Direct Logistics service in January to address this trend.
Retailers' growing demands and the soft economy have resulted in increased pressures on Chinese firms, Ahern said.
For example, in the past a manager of a Chinese zipper factory might decide to leave his employer and start up his own company. As long as he could make a good product at the same or lower price, it was likely he could succeed in a booming economy. It is not unusual to see clusters of businesses making the same products in China.
But because of the downturn in the economy, businesses are having new logistics responsibilities thrust upon them that they need to meet if they are to be successful.
Another growing area of concern by retailers and their suppliers is theft. Consumer electronics and apparel used to be the focus of thieves, but now pharmaceuticals have become a big target.
That's a major concern of retailers because so many Americans now have their prescriptions filled at discount stores like Wal-Mart and Target or grocery stores. Ahern said this has resulted in increased attention to how goods are shipped, with trucks being routed to avoid high crime areas and companies like NRS relying more heavily on their own employee drivers rather than independent owner operators.