Listen: The Decisive | Episode 12 - Supply Chains Get Schooled

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Kristen Hallam   00:00:02

You are listening to The Decisive podcast: insights and analysis to empower confident decision making.

Kristen Hallam   00:00:06

Welcome back to another episode of The Decisive podcast brought to you by S&P Global Market Intelligence. I'm your host, Kristen Hallam. And today, we're diving into one of the most critical retail periods of the year, the back-to-school shopping season in the U.S. The back-to-school season is second only to the winter holidays in terms of importance for retailers and their suppliers. This year, S&P Global Market Intelligence projects that back-to-school retail sales will grow by 2.9%, topping the $1 trillion mark. This growth, while modest, is a positive sign as consumers begin to shake off their inflation fatigue. Joining me today are 2 experts from S&P Global Market Intelligence, who have been closely analyzing these trends. Michael Zdinak, Director of U.S. Consumer Markets; and Chris Rogers, Head of Supply Chain Research. Welcome, Michael and Chris. Let's start with a bit of an icebreaker. Michael, what does back-to-school mean to you?

Michael Zdinak   00:01:19

My core memory of back-to-school is khaki pants and a light blue polo shirt and the accessories I always wanted my parents to buy or what I think of with back-to-school shopping, your Trapper Keeper, your Starter jacket, your Nike shoes.

Kristen Hallam   00:01:31

All right. And what about you, Chris, what does back-to-school mean to you?

Chris Rogers   00:01:35

A sense of impending dread and uncomfortable leather shoes, -- It was more fun than that, you get new sports kit. So that was always fun. I'd like to say that's what attracted me to analyzing supply chains was the thrill of opening a pair of Dunlop green flash. It probably doesn't mean anything to you guys kind of British shoes. But yes, an opportunity for new starts, let's put it that way.

Kristen Hallam   00:01:55

Yes. And for me, I'll draw from both of your responses, a little bit of dread but also lots of excitement about seeing people that I hadn't had a chance to see over the summer. Michael, let's talk about this growth that we're expecting in the back-to-school season, 2.9%, that's still below the pre-pandemic average growth in back-to-school sales, which was 3.7%, and it's well below the inflated rates coming out of the pandemic. Should we be concerned about that? Would that count as a failing grade?

Michael Zdinak   00:02:28

Not quite. And for a couple of reasons. Yes, current dollar sales are expected to be below the pre-pandemic average for a second year in a row. That can really help explain a lot of the angst and uncertainty you may be hearing on earnings calls this last quarter. But in our view, the slowdown isn't quite as worrisome as it may first sound because lower retail inflation slows the growth of current dollar sales. When we look at real sales, which are current dollar sales adjusted for the change in retail prices, we actually see growth this year outpacing sales last year, growing around 3.5%, which is right at the pre-pandemic average. But it's looking a lot more normal this year than it has in the last couple of years.

Kristen Hallam   00:03:02

Michael, can you give us an overview of what's driving the growth in back-to-school sales this year?

Michael Zdinak   00:03:08

Look, let's be clear. Resurgent inflation has given consumers a lot to complain about, but steady job and wage gains and easing prices should be enough to keep sales growing. And for consumers to shake off their fatigue from inflation and to head out to stores. In recent months, our forecast for the economy has really stabilized, and it's been consistent that the U.S. is slowly transitioning to a period of below trend growth. But I want to be clear that below trend growth doesn't mean the economy is staring down the barrel of a recession. Slow growth is still growth. And it's this slow steady resilience in spending that has really put the U.S. on a path to a soft landing. And if that can be sustained, it will be good for consumers and retailers heading into the second half of this year.

Kristen Hallam   00:03:48

Now peak shopping seasons require peak shipping seasons. Chris, how does supply chain activity for this year compare with last year's back-to-school season in the U.S.

Chris Rogers   00:04:01

You're absolutely right that seasonality comes together. And one of the things we've noted throughout this year is this concern that the shape of seasonality during the year would shift. So when we talk about the peak shipping season, there's actually 3 peak shipping seasons. The first one is very much linked to this back-to-school season, particularly around apparel. The second one is around leisure goods, so that's toys and Halloween and Christmas decorations and all that kind of stuff. And then the third one is electronics when we get all of the whizzy new gadgets that are being announced over the next month or so. When we look at that first peak season, we are seeing an increase in imports of those back-to-school products to the U.S. in the April to July period, which is where we really see that ramp up -- and what we're seeing there really is 2 things. Firstly, there's a cluster of demand factors. Michael has talked a bit about that on the sales side. I think I'd also just note that this time last year, retail generally was going through a period of destocking, so reducing inventories, and that really suppressed the need for the shipping of goods. So we saw a slowdown on that. What we've also seen is quite a significant degree of early shipping. So it's effectively, if you're concerned about what's going to happen to your supply chain structurally as you go through the peak season, if everything is relying on these couple of months of sales, then perhaps you're going to take a more conservative approach and try and ship early.

Kristen Hallam   00:05:30

Chris, have you seen any supply chain issues or disruptions that have impacted back-to-school shipping compared to previous years? For example, have we seen any impact from the ongoing disruptions in the Red Sea or from weather-related events like hurricanes or tropical storms...

Chris Rogers   00:05:51

Yes. Absolutely, we have. In fact, I think at some stage, we need to make like a supply chain disruption bingo card for what's going to come up each year. We've talked before on this podcast about all of the challenges that supply chain networks face, and you touched on a couple there. I think the Red Sea shipping disruptions are a particular challenge. So effectively having to sail the long way around, if you're shipping into the U.S. East Coast, having to go around the Cape of Good Hope rather than through the Suez Canal adds about 10 days. Now the good news is we know it's 10 days, right? So you can build that into your schedule. The bad news is, a, it costs more because you are shipping for longer. Second, it reduces your flexibility because your ability to respond to changes in demand suddenly takes 2 weeks longer than it would otherwise have done. And so if you want to change what you're shipping during the season, your ability to do that is reduced. Second, potential East Coast labor strikes, those start September 30 potentially. So that's when the current contract between the unions and the ports ends. Now that's not necessarily an issue for the back-to-school season because we'll all be back to school by then. But it is an issue potentially for shipping leisure goods and consumer electronics into the holiday season. So I think that's why you've seen a pull forward. And the thing is if you're shipping early -- if you're a retailer when you're shipping early to avoid the strikes, that means you're probably also going to ship early on your back-to-school as well, so you don't end up trying to cram everything into the warehouse at the same time. So I think we've seen a degree of that. The one that's not really picked yet is the hurricane season. typical hurricane season gets started in August, runs through about October. I've been on holiday to Florida a couple of times and got up close and personal with the hurricane season. So I can see just how disruptive that can be. Now NASA has said that this hurricane season is going to be the strongest in a decade. But so far, we've not seen a lot of evidence of that. We've had Hurricane Beryl, which is a real kind of tragedy for life and was quite disruptive to supply chains down in the Southeast and the Gulf Coast. We haven't yet seen more of those come through. You'd normally expect to see hurricanes get started in August and September. So we'll keep a close eye on that. But we are very much getting this kind of confluence of events coming up going into the peak season. So I think the rush to get in the door for the back-to-school season was very much driven by wanting to make sure there was a door to get through later on for the rest of the peak season.

Kristen Hallam   00:08:25

Yes. We'll have to see how the hurricane season shapes up, as you said, it hasn't been too bad just yet, but September is usually when it really gets cranking and it's almost September. Chris, are there specific categories of products that have experienced a surge in demand this back-to-school season or specific categories of products that have seen a drop in demand?

Chris Rogers   00:08:48

Yes. So where we have seen a pickup has been in kids apparel, it's difficult to resolve sometimes within the international trade data sets, what's kids clothes and isn't, what's for school and what isn't -- it sounds like Michael had his Nike trainers for school, you can't differentiate when people and why people are buying those. But we have seen an increase in shipments of apparel of around 7% in the April to July peak shipping season for kids apparel. Again, that's comparing to a period a year ago when there was a degree of destocking by a lot of the apparel firms. We have seen slower growth elsewhere in some of the other categories, areas like backpacks and school stationery. I don't even know if anyone buys stationery anymore, actually, new iPads, but that's actually where we have seen a slowdown is on some of the consumer electronics side. So we've been mapping out in our research, just slow recovery in consumer electronics and specifically around laptop computers and tablets. The tablet side has done quite well, but basic laptops have not yet picked up. The industry generally has geared up its supply chain for the delivery of AI-enabled laptop computers, but those tend to be at the higher end, not at the school end. So we're still seeing quite slow development on the consumer electronics side. The differentiation there is a lot more clothing coming in, fewer computers coming in for now.

Kristen Hallam   00:10:11

Yes. And I will say on the stationery front, I did have to go out and buy multiple composition notebooks. And then it was told by my child that they were boring because they were black and white. But that was what that was what was available on the shelves at the store...

Chris Rogers   00:10:26

Aw, come on, Mom, get the colorful ones.

Kristen Hallam   00:10:28

The supply chain next year needs to ship more of the colored ones...

Michael Zdinak   00:10:32

We had actually a very specific request for our folders this year. They were not only color coated, but indicated which had prongs in which didn't have prongs. And we are now a week into school, and we still don't know what these folders are for. And it's a great mystery. Every day, our son comes on and says, Mom, you're going to be upset. They didn't tell me what the folders are for yet.

Kristen Hallam   00:10:53

I hope you saw that mystery soon, Michael -- Michael, while you're on the hot seat there: Can you tell us where people are going to buy these goods that Chris was just talking about? Are they going to brick-and-mortar retailers like I did for some things or to e-tailers like I did for other things.

Michael Zdinak   00:11:12

Absolutely, absolutely. The traditional image you have is mom throwing all the kids in now a shopping cart and going to the big box store, just to shop for back to school. But in our analysis, we find people are increasingly turning to online shopping, not only for its convenience, but for the ease of ability of comparing prices. People are -- aren't as likely to go to 5 stores as the ore before the pandemic, but they may be more likely to go to 5 different websites. And sales growth this year is really led by that nonstore category. The share of online shopping for back-to-school is going to be over 35% this year, and that's up from 20% a decade ago. With my child's school supply list this year came a link where I could click and buy those all at one store.

Kristen Hallam   00:11:50

That's very interesting.

Michael Zdinak   00:11:52

And it was, of course, online, but it simplified the shopping process to an instant. Now that takes away the whole experience. But for parents who are crunched for time or money, it made it pretty painless. And as far as growth in the retail sector in general, you can tell a couple of different stories. Online has returned to a steady growth rate like we saw before the pandemic general merchandise is plugging along also at a steady rate, soft but steady. And the dark spots this year or a lot of the uncertainty has been around the volatility that we've seen in motor vehicle sales up and down, part of that related to most recently, the outages at dealerships for their software in June and this rebound we saw in July. It's looking like we're going to get some drag in August because of that shift in timing of vehicle sales -- and one of the other bright spots this year that we've seen, a ray of sunshine is in the apparel market, like Chris was talking about earlier. This has been a sector that's lagged coming out of the pandemic as people have traded in their khakis and polo shirts for sweatpants. -- but we're starting to see sales growth year-over-year in this category of retail this year. And so things are just starting to look up. It's not a trend yet, but I think those retailers are optimistic that it might just turn into it. And then the last story you can tell is the sector of retail that's adjacent to housing and because of the fact that the housing market has yet to recover from the interest rate rises we've seen the last couple of years, sales in those sectors are still habitually depressed.

Kristen Hallam   00:13:07

Michael, can you tell us a little bit more about how economic factors influence household purchasing decisions for school supplies? And what does that say about the state of the U.S. economy as a whole?

Michael Zdinak   00:13:21

Yes, absolutely.

Michael Zdinak   00:13:22

And we talked earlier about how consumers don't like the high prices that they're seeing in the last couple of years, and they've made it very clear that they like neither inflation nor the interest rates that have been used to combat it. So sentiment, if you're a vibes economy-type person is at a level that's about halfway between its peak pre-pandemic and it's low during the pandemic. So people are not afraid to tell you that they don't like the way things are right now. But the economy isn't just about vibes. It's about wage growth and job growth, and that's been pretty steady this year. And we expect that to be enough to keep the U.S. on track for a soft landing. We expect that even though consumers are more worried about the level of high prices, they're less concerned about inflation going forward. We see that in the data and that they are optimistic that while they don't like the current situation, their expectations for the future, which do matter a lot for spending are starting to look up. So in that sort of environment, where we like to see small out-of-pocket items like back-to-school sales, they do pretty well, but it's still the big ticket items that drive the headline retail numbers, your autos, your large appliances, your homes. Those are going to continue to lag for a while.

Kristen Hallam   00:14:21

I know I won't be purchasing any homes or cars anytime in the near future. So Chris, how should retailers think about these trends when they're reviewing their supply chains or setting up their supply chains for the peak seasons.

Chris Rogers   00:14:36

So we've learned a couple of things over the past 5 years or so when it comes to the peak season. The first thing is that the shape of peak season doesn't seem to have normalized. There's just so many areas of variability in there, not just on the demand side, so the issues that Michael has been talking about in terms of the drivers of the inflation expectations and interest rates and so on, not just the retail routes available. Are you buying online or are you going to the store? I like the idea of trying to buy your kids shoes online, by the way, that's, I think you gain to have a whole bunch of boxes even a whole bunch of boxes go back anyway, putting it on the side, where we have seen, I think, a real change is the sensitivity towards supply-side shocks or supply-side worries. -- knowing whether or not you're going to be able to ship through the Red Sea, whether there's going to be a strike, whether it is in the U.S. East Coast or the very short-lived Canadian rail strike, for example. All of those uncertainties that we see in logistics networks are leading companies to have to think more about where and how they position their inventory. I think in a world where we had 0 interest rates, you could play free and easy with inventory, put it where you want, when you want it doesn't really matter, doesn't really cost you anything. That calculus has changed. Even if interest rates are coming down, they're not going to come down to 0, right, or at least not in the reasonable planning horizon unless Michael has got some different forecasts that say. I don't. Michael, do you think they're ever going to come back down to 0 or we're in a 2% world or what?

Michael Zdinak   00:16:08

I hope not 0. That means things are pretty bad typically.

Chris Rogers   00:16:12

Good. Okay. Well, we’ll not aim at that. But from an inventory perspective, you now have to allow for that cost of money. That's leading more firms to think about producing in market for market or in adjacencies. Are you going to start making more stuff in Mexico for the U.S.? You're going to make more stuff in Turkey for Europe, these kind of decisions, I think, are becoming more important from a planning perspective. I think one thing to be careful of though is we've all become so aware now of supply chain risks that it's very easy to overreact. The companies that have had to strike that balance between being reactive, but then losing the ability to be more strategic in their supply chain thinking. Of course, keep watching all the supply chain issues out there. I'm bound to say that, I'm a supply chain analyst. But sometimes a bit of perspective, logistics networks get the job done, even if there's a delay and even if there's some inconvenience along the way.

Kristen Hallam   00:17:04

That's certainly been our experience with the last few years. Supply chains are resilient.

Michael Zdinak   00:17:11

And thank you for that point, Chris. I alluded to consumer expectations, how I tell us a lot about where they think the economy is going and the same can be said for retailers and firms. Their expectations not only around future price raises have been a big driver of inflation over the last couple of years, but also their expectations for what demand is going to look like for the rest of the year tells us a lot about what they're thinking and what they're positioning. And it's a big part of our report.

Kristen Hallam   00:17:33

All right. While we're looking into the future, back-to-school season is almost behind us, as we alluded to earlier. Curious about what research topics you all are looking at or what current events you're analyzing? How about we start with you, Michael?

Michael Zdinak   00:17:51

So on the data front this year, we had 2 large developments for the U.S. economy. We got the preliminary benchmark revisions for the payroll survey, which is where we track job gains annually. And those revisions showed that from March 2003 to March of 2024, there were about 800,000 less jobs that have been created. And that's a big number. That's a concern for a lot of people. But what I'd like to remind people about is that for practical purposes and if we look at how demand has been steady this year and how sales have been slow but steady this year, those jobs effectively never existed in the first place. This is just a revision that ties the short-term surveys that are taken every month to more accurate data sources that are produced every year. They actually go back to unemployment insurance data. And so this is the actual job numbers. Now there are some indications that when we add up all the county level jobs, that revision might end up being a little bit higher, maybe between 900,000 and 1 million less jobs that were created, but that still means in the last couple of years coming out of the pandemic, we've created around 2 million jobs. And that's a big driver of not only spending growth this year, but this puzzle that the Fed is trying to deal with of what happens next. If you believe that we've conquered inflation, and I got a news alert as we were recording this podcast that says Jay Powell has signaled that the Fed is more likely than not to consider dropping interest rates at the upcoming meeting here in September, but you have to ask yourself what comes next and how quickly rates will come down and what that means for things like mortgage rates, which we've seen starting to drop already and then the interest rates consumers are paying on their credit cards, car loans, but on the other side of that coin, the interest that they're earning on their CDs and high-yield savings accounts.

Kristen Hallam   00:19:25

That sort of touches on the vibes economics that you mentioned earlier. We didn't have that class offered when I was in college, but I would take it now if it were available. Vibes economics. All right. How about you Chris, any particular research topics or current events that you're focused on at the moment?

Chris Rogers   00:19:45

Yes, I'd love to say that we're taking deep dives into the future of American trade policy driven by the outcome of the elections, talk about the fundamental need to build economic resilience, the need to encourage economic growth through the manufacturing industrialization of emerging markets. In reality, on my desktop at the moment, I'm working on imports of Halloween products. Spoiler: up by nearly 60% year-over-year in July. It's going to be...

Chris Rogers   00:20:14

Big Halloween...

Chris Rogers   00:20:15

Yes. So all the candy and addressing up stuff and all the craziness that you all get to in the U.S., yes, we'll be writing about that soon. So watch this space.

Michael Zdinak   00:20:26

I think Kristen will be excited about that. She's a big fan of the candy tracker we write every year, which is one of our most popular pieces with the media, and I enjoy writing it because I get to get all my bad puns for the year out in one single piece...

Kristen Hallam   00:20:37

100%. I'm looking forward to that, and we'll have to have you both back on the podcast talking about, if not Halloween sales, then maybe holiday sales in a broader sense, looking forward to that. All right. So any final thoughts before we wrap up?

Michael Zdinak   00:20:56

Yes. Going into the second half of this year, we're still on track for a soft landing. The odds are good if demand remains strong. And so the Fed's job is to land the plane now. And the question will be how successful they are in doing that at what rate interest rates are going to normalize?

Chris Rogers   00:21:12

And I think from my side, it is just that public service announcement slash reminder that logistics does find a way no matter the disruptions that are thrown at it, but there are going to be plenty of things to keep an eye on. And whilst everything will be okay at a macro level to specific products or specific companies, there's always challenges out there. So keep your eyes peeled...

Michael Zdinak   00:21:34

And can I just say thank you so much for that, Chris. You read so much about supply chain that is doom and gloom these days that it's refreshing and honest to hear that because as a member of the U.S. macro economics team, we get a lot of questions about you know, current events, and is this a macro event for the U.S. economy? And the answer is often, No, because people underestimate the sheer size of the U.S. economy, and that would have to be a really large shock for it to have national implications. It doesn't mean that the story regionally or in your local labor market or in your neighborhood is going to be the same as what we're seeing on average. But it often helps explain why those vibes may not always jive.

Kristen Hallam   00:22:09

Thank you both for sharing your valuable insights with us today. I'll drop a link to the blog post that we did on back-to-school sales in the description of the episode. Until next time. Thank you for listening to The Decisive podcast from S&P Global. Please subscribe and join us for next week's episode. Until then, stay curious and stay informed.