Supply chain: The Scrooge that almost stole Christmas
For the first time in recent memory “supply chain” – the normally well-coordinated and somewhat boring segment of the American business landscape – fast became one of the most unpredictable and gripping sectors in Q4 of 2021, creating blizzard-like conditions for retailers and mall operators as they tried to navigate through a challenging holiday season they had hoped would save their year.
As the COVID-19 crisis appeared to be in the rear-view mirror, a rebound in anticipated consumer spending led to the global scarcity of shipping containers and backed up ports in Los Angeles and Long Beach, where almost 40% of all goods enter into the United States. Exacerbating the problem even further was a considerable shortage of truck drivers, warehouse employees, and equipment. Even if a company was fortunate enough to have received its orders in California, the goods would often remain in the port, accumulating storage charges as supply chain professionals scrambled to find workers to move the product to its final destination. So whether your goods were floating around on a large ship in the ocean or sitting on the dock, they couldn’t be transported to a truck because no one was there to physically do it, and/or no trucker was there to deliver the goods.
Halloween, the second biggest spending holiday in the United States, certainly provided us with clues as to what to possibly expect in December with empty shelves plaguing the industry and costumes, accessories, and decorations all in short supply.
And even before the shopping season officially started, two major retailers issued ominous earnings announcements. The CEO of one of the retailers cited supply chain challenges as the reason why the company could lose over half a billion in sales this season, as well as incur an additional half a billion in freight costs to help ensure products would end up in stores on time. The retailer presented a frightening scenario where, not only will there be a large revenue miss in the quarter, but its expenses will also significantly increase. As expected, the stock was swiftly punished and plummeted.
While some companies were able to shelter from the storm by commissioning their own vessels, most retailers did not have the financial muscle to contract and manage their own cargo ships and, as a result, the impact on revenue and income for some was clearly seen as they published their December metrics.
The timing for these supply chain snafus literally could not have been worse. Mall-based stores bore much of the brunt of the pandemic in its earliest stages and some of them were running on fumes, with PPP loans and other government programs allowing them to keep the doors open until demand returned. But now with orders from consumers not being an issue anymore, some retailers were unable to fully seize on this golden opportunity to compensate for past seasonal misses. And the property owners, especially those in the B and C category, desperately needed their occupants to turn the corner as the economic volatility for commercial property owners continues to worry their lenders.
Supply chain problems were not the only obstacles seen this holiday season. Staffing problems continued to ravage retailers, with stores finding it much more difficult to adequately hire, train and maintain employees at acceptable service levels. The scarcity in quality personnel in the industry sometimes led to a feeding frenzy of hiring, which caused an increase in hourly wages since employees were jumping from place to place as competitors would dangle significant increases in pay to steal workers. As a result, overall store wages, like freight costs, significantly increased this season. In an already challenged industry wrecked by a once in a lifetime pandemic, retailers could ill afford having two material line items on their income statement skyrocket without a significant corresponding increase in sales and margins.
Furthermore, with reports indicating a 2021 holiday sales increase of 8.5% versus 2020, no one knows for sure how much more consumers would have increased their spending as Omicron fears and inflation likely forced some families to tighten their belts as they watched more and more reports of the new COVID-19 variant spreading, and more and more of their disposable income being spent on gas, heating costs, and food. Additionally, that increase is in part higher due to inflationary pressures.
The 2021 holiday season may have spotlighted the resiliency of the American consumer, but it also highlighted the frustrating thought of how much better the season could have been. And the problems we witnessed in 2021 look like they will continue into the 2022 season as well, with no material improvement expected quickly. All retailers – even those that were able to navigate through the treacherous supply chain, inflation, labor and Omicron waters – need to immediately perform a top to bottom detailed analysis on their entire cost structure, as there will be no wiggle room in the future for inefficiencies. Every aspect of their business should be given a root canal. It isn’t simply a matter of hitting your numbers anymore. It is a matter of survival.
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