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  • OTVI.USA
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  • TLT.USA
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BusinessFinanceInsightsNewsNewslettersPoint of SaleSupply Chains

‘Serious angst’ among retailers from port congestion tying up inventories

This is an excerpt from Thursday’s (3/25) Point of Sale retail supply chain newsletter sponsored by ArcBest.

Add Nike (NYSE: NKE) to the growing list of retailers being severely hampered by port congestion and supply chain bottlenecks. The congestion at West Coast ports in particular strained Nike’s supply chain and negatively impacted revenue, which declined 11% yoy in the quarter ending Feb. 28. 

Nike CFO Matt Friend said during the company’s earnings call last week, “Disruption in the global supply chain due to container shortages, transportation delays and port congestion has interrupted the flow of inventory supply.” The company’s North American inventory was delayed by three weeks, which it said affected the timing of its wholesale shipments.

Friend continued, “We were anticipating having more available supply in the third quarter than ultimately what we were able to have to satisfy demand across both the direct side of the business and across our wholesale partners.”

It seems Nike chose to push inventory through its higher margin Nike Direct channel over wholesale during the quarter when inventories were scarce. Nike has been moving away from the wholesale model for several quarters now, but it reaffirms the strategy when Nikes stick with it when product is difficult to source. 

It’s not that product isn’t being manufactured; the supply chain issues don’t originate from the factories. In fact, Nike’s North American inventory was up 31% yoy at the end of February, but the vast majority of this inventory is in-transit. Contratrily, Nike’s inventory at its distribution centers was down 20% yoy. Supply Chain Dive reported data from Panjiva that indicated Nike’s imports to North America dropped 39% yoy in February

Nike’s far from alone in this struggle. The truth is there hasn’t been a single retailer unaffected by the congestion at our nation’s ports. Even if a retailer sources 100% of its inventory from domestically, its suppliers do not. 

In its Q4 earnings call, Foot Locker reported its inventory was down nearly 25% yoy at the end 2020. CEO Dick Johnson said port delays reached two to three weeks in some cases and affected the company’s ability to get product stateside. 

Rick Helfenbein, former president of the American Apparel & Footwear Association, told me via email, “This situation creates serious angst among retailers who are trying to turn inventory in order to raise cash (to purchase goods) for what is expected to be a strong third- and fourth-quarter selling period.”

What can retailers do? Air cargo is simply not an answer for the vast majority of retailers seeking to avoid port congestion; the unit economics don’t work in apparel shippers’ favor. So retailers have begun to work with their vendors and transportation partners to look for alternative routing. 

“We’re continually monitoring our supply chain, particularly the West Coast shipping ports. Both Long Beach and Los Angeles are clogged,” Overstock.com CEO Jonathan Johnson said on the company’s earnings call last month. “Shippers have been finding alternatives in Oakland and Seattle.”

SONAR: IOTI.USLAX (Blue); IOTI.USOAK (Purple)
To learn more about FreightWaves SONAR, click here.

Ocean shipping data available in SONAR confirms Johnson’s statement on alternative routes through other West Coast ports. FreightWaves Inbound Ocean TEUs Volume Index for Oakland is up nearly 250% YTD, while Los Angeles is up 86%. 

How long will this last? The duration of this massive port pileup is the subject of an energetic debate, and neither side has full conviction. In recent weeks, there have been some signs of positive development on the capacity front. The Container Availability Index produced by Container xChange shows a marked improvement in container-equipment availability in Shanghai. An industry source confirmed to American Shipper that box availability has improved. 

Retailers are optimistic that the worst is behind us. Nike President and CEO John Donahoe said during the earnings call, “We do expect a more consistent flow of inventory in the fourth quarter, recognizing that transit times are elevated versus the prior year.”

Foot Locker’s Johnson said he believes inventory will “start to normalize over the next quarter.” 

The number of container ships at anchor off California is down from the all-time high, but that doesn’t necessarily mean the U.S. import boom is winding down.

“If you think the worst is over, be cautious,” warned Michael Braun, vice president of customer solutions at Norway-based Xeneta, a company that tracks container contract rates. “In some cases, it could stay as difficult or get worse — especially in the U.S.,” said Braun during an online presentation Tuesday. 

Braun believes the current peak situation is “going to last throughout the whole summer, without any kind of [letup before] the peak season we usually see in the summer.” According to Braun, “What we’re seeing now is that demand from the shipper side is going to last. We are still seeing a number of shippers who have twice their regular monthly demand as they’re stocking up warehouses or coping with additional demand.”

The few retailers that are capable of stocking up are doing so, but it is rare. Costco CFO Richard Galanti told investors on a March 3 earnings call that as a means to mitigate the port delays, “we were front-loading and not everything came in short. So we front-loaded items that are not seasonal items and front-loaded extra inventory of basics.”  

Final Thoughts. Retailers are in a very difficult position and must weigh their options carefully, but the decisions stem from how flexible their distribution center footprint is. For instance, having one major warehouse in Ontario, California, is much different than having DCs near many major population centers in the U.S. 

It is their distribution footprint that enables retailers to bypass port congestion. But right now, even major East Coast ports are fairly congested. So the fastest and most effective way to route freight is through the air, but again, air cargo unit economics don’t work for the vast majority of consumer products. 

For example, if a retailer has an inland destination like Chicago, then there are a few options. Retailers could send freight on an alternate route through Prince Rupert / Vancouver / Seattle / Tacoma, which could potentially help bypass the major congestion in SoCal while still getting it on the rails as a more cost-effective option to trucking it from the West Coast to Chicago.

That said, with ocean schedule reliability at what is soon to be an all-time low at most major ports in the U.S., finding a port with less congestion and trucking it from there to its final destination is about the only viable alternative to sending your freight into the already existing traffic jams.

Want to keep up with port congestion’s impact on retailers? Try Point of Sale, my twice-weekly retail supply chain newsletter: https://freightwaves.com/POS

Andrew Cox

Andrew is a Senior Retail and Market Analyst and a graduate of the University of Tennessee at Chattanooga, where he studied economics and entrepreneurship. Andrew started as an intern with FreightWaves in October 2018 and joined full-time upon graduation. He leads the Retail Community where he pens a twice-weekly retail supply chain newsletter, Point of Sale, and hosts a show bearing the same name. He is also the host of the freight finance podcast "Great Quarter, Guys" on Tuesdays at 2 p.m. EST.

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