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Retailers to face continued pandemic-induced supply chain pain well into 2021

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Retailers to face continued pandemic-induced supply chain pain well into 2021

Major global retailers including Costco Wholesale Corp., Walmart Inc. and Inc., along with their logistics partners, are likely to face continued supply chain disruptions and delivery delays caused by the coronavirus pandemic well into 2021, experts say.

The combination of stockpiling activity ahead of the holidays, a continued surge in goods ranging from electronics to appliances and a lack of air freight capacity has led to heavy congestion at U.S. ports, said Chris Rogers, supply chain analyst for Panjiva, a business line of S&P Global Market Intelligence.

Also problematic is the shortage of empty containers and other equipment needed to haul products away from port facilities, Rogers said.

"There is still a lot of product that is backed up in the system," Rogers said in an interview. "You've got this situation where I think demand for products has increased but the availability of air freight capacity has not and will not for quite a while until passenger air travel gets back to normal."

Amazon, Walmart and Costco declined to comment for this story. Ongoing volatility is likely to continue in the coming months, leading those companies and other retailers to further leverage relationships with suppliers overseas, deploy technology to help predict future demand, and boost inventory levels of sought-after items such as cleaning products and dry grocery goods, experts say. The retailers will be working to gain a competitive advantage as COVID-19 uncertainty remains high along with congestion outside large U.S. ports.

Meanwhile, consumers are likely to wait longer for deliveries and face higher costs for in-demand items as container shipping rates jump and eat into corporate profitability, Rogers said. "It's not like retailers have fat profit margins to start with, so we may see that passed through to consumers as well," Rogers said.

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Seaborne imports surge

The backlogs can be largely traced to an 18.4% surge in U.S. imports during the fourth quarter as consumers redirected spending from services to goods, including new desks to work from home, televisions to watch more Netflix Inc. shows and more casual wardrobe options, Rogers said.

SNL Image

Imports of household appliances spiked 73.1% in the fourth quarter versus the year-ago period while household personal items such as toothpaste, soap and cleaning products jumped 58%, according to Panjiva. Home furnishings grew 46.6%.

The increased demand has caused backlogs in the system, leading to weeks of delays for products, especially custom-made orders and larger bulky items like furniture, home appliances and big-screen TVs shipped by sea, Rogers said.

As of late January, a total of 34 container ships mostly from Asia are now anchored off the ports of both Los Angeles and Long Beach, Calif., waiting to unload cargo including furniture, auto parts, apparel and electronics, said Phillip Sanfield, spokesperson for the Port of Los Angeles. "The system is definitely strained," Sanfield said in an interview. "Under normal conditions, it's rare to have container ships waiting to get into the complex."

The backlogs have especially impacted retailers with global supply chains like Costco. CFO Richard Galanti said during a Dec. 10, 2020, conference call that congestion at ports in the U.S. has led to supply chain constraints. Galanti said he does not expect relief from the bottlenecks until March. Meanwhile, items such as paper goods, surface cleaning wipes and sanitizing sprays remain in short supply, he said.

John Furner, president and CEO of Walmart U.S., said in a third-quarter conference call Nov. 17, 2020, that parts of the supply chain remain "stressed," leading to shortages of products that need aluminum cans and packaging as well as bath tissue and cleaning supplies.

Amazon faced product demand that forced the company to halt delivery of non-essential goods during the early days of the pandemic, leading to delays for one and two-day Prime orders by weeks in many cases, said Mark Shmulik, vice president and senior analyst with AB Bernstein, in an interview. The high demand for essential goods also backed up Amazon’s logistics network, which also led to delays, he said.

The e-commerce company absorbed much of that demand by scaling its shipping and last-mile delivery networks in 2020. Amazon also announced plans Jan. 5 to boost air freight capacity with 11 newly purchased planes for its Amazon Air cargo fleet.

Shmulik said purchasing the new aircraft gives Amazon more control over its delivery network and will help the company fulfill unique items in categories such as apparel and furniture that don't necessarily fit in the back of an Amazon truck.

SNL ImageAmazon scaled its shipping capacity in 2020 to help absorb unprecedented demand for sought-after goods during the pandemic.
Source: Amazon

Taking stock

Given the slow rollout of the vaccine and concerns about the new variant of the virus, companies are likely to continue leveraging sourcing relationships with suppliers overseas to negotiate prices down on essential items and stay-at-home goods, said Jim Barnes, CEO of supply chain software and consulting firm enVista.

"Walmart has buying power, Amazon has buying power," Barnes said in an interview. "The big boys are going to win in this race because of the leverage they have and their ability to suck up that capacity across the globe."

Barnes said the companies will also continue to stockpile items like car parts and other do-it-yourself products that have fueled sales. For example, Barnes' client Inc. is seeing momentum as consumers shop for auto parts online and look to save money by repairing cars themselves. "People say, 'My Ford F-150 has got a dent on the left-hand bumper fascia, I'm going to repair it,'" Barnes said.

Retailers will also use data analytics and machine learning to help forecast future demand, Barnes said. "You can really start to look at different what-if scenarios with bigger sets of data, better science to make those decisions," he said.

That said, forecasting will still be difficult given the unpredictability of COVID-19, said Michael Hicks, an economist with Ball State University, in an interview.

"Is June going to be a month where two-thirds of us have still not be vaccinated and aren't able to go to indoor restaurants?" Hicks said. "Uncertainty about what demand will be is part of what fuels this congestion."