Flexe Institute Market Watch: Factors to Consider for Peak Season

June 14, 2022

Supply chain and economic challenges mount as peak season approaches.

Market Watch Collage June2022

Uncertain inventory availability, logistics capacity and macroeconomic forces make peak planning harder than ever.

Key Takeaways

  • 246% increase in lead times for imports from Asia
  • The national average price of diesel rose 50% per gallon since January
  • Consumer sentiment fell to its lowest point in over a decade
  • Retailers’ inventory levels increased as much as 43% over Q1

Peak season planning is hard. Now, continuous supply and demand challenges threaten retailers and brands. Add in current macroeconomic uncertainty, and the 2022 peak season stands to be more disruptive than ever.

2022 peak season logistics challenges #

The current landscape is difficult for retailers and brands. Supply- and demand-side disruptions challenge forecasters and inventory managers like never before.

This peak enterprises face.

Supply-side disruptions #

Fifty-six percent of retailers say supply chain disruptions now occur more frequently. This reality stems from global factors that strain the industry. Everything from container shipping to over-the-road transportation feels the effects of market imbalance.

Lead times remain unpredictable

Port congestion was a widely recognized global supply chain crisis symptom. After two years, volatile lead times persist. Lead times ticked up again in Q2 as it took 111 days for vessels to arrive at West Coast ports—a 246% increase from pre-pandemic transits.

Graph 1 1

China lockdowns snag production

China made headlines for its stringent lockdown measures in response to recent Covid outbreaks. In addition to domestic impacts, the actions ripple throughout global supply chains.

The impact will mean longer lead times for production-critical materials and maritime transits. The effects are likely to last six to 12 months for retailers and brands across industries, which will pose procuring challenges for businesses this peak season.

Transportation rates climb as capacity loosens

Diesel prices don’t just affect consumers. They add significant over-the-road transportation costs for shippers. The national average diesel price rose $2 per gallon since January, an increase of 50%.

Despite a looser freight market, shippers still pay more to procure transportation as rising fuel costs offset downward rates. Surcharges are at least 50% higher than last quarter’s and may climb more as inflation continues to send fuel costs higher.

Truckload and LTL rates typically increase even more during peak season. Shippers and retailers may not struggle to find capacity as much as they did in 2021, but costs won’t retreat, adding margin pressure this peak season.

Port labor challenges

The U.S. port situation remains a bottleneck, and it's about to get more complex as longshore laborers' contracts expire on July 1.

The union and officials from 70 employers began deal negotiations this spring. The labor talks cover about 22,400 workers at 29 Southern California ports, including Los Angeles and Long Beach, that process 42% of all trade with East Asia.

Despite the head start, the two sides made little progress. Contract talks resumed June 1, after a lengthy hiatus, and according to reports, the union appears to be in no rush to secure a deal before the expiration.

Previously, the union engaged in work slowdowns to gain leverage. Any new processing slowdowns will exacerbate congestion delays.

Demand-side disruptions #

Retailers and brands face demand-side challenges, too.

Consumer sentiment data continues to slide

After years of positive sentiment, consumers feel worse about the economy than they have in over a decade. The University of Michigan’s composite consumer sentiment decreased to 59.1, down from 65.2 in April. As a result, consumer spending could slow or return to pre-pandemic levels.

Graph 2 1

Shoppers still spend in-store and online

Despite declining consumer sentiment and record inflation, consumers continue to spend. In April, the real personal consumption of durable goods hit an all-time high.

Furthermore, April's total U.S. retail sales grew 7.2% from the prior year. eCommerce transactions dropped by 1.8% from March's numbers, while in-store sales rose 10%. However, online sales remain elevated by 92% compared to pre-pandemic figures.

Even though inflation is weighing on consumers, they continue to buy at a similar pace through both online and in-person channels. The mismatch between sentiment and consumption creates difficulty for businesses as peak approaches.

With an economic downturn looming larger, elevated spending is unlikely to continue. However, retailers and brands wary of last peak season's stockout issue may still choose to hold product in case spending remains on par with current trends and previous peak seasons.

Retailers hold inventory in preparation for peak

Recently, retailers built inventory levels both to circumvent long-standing shipping challenges and match record consumer spending. Consequently, some saw their inventory levels balloon as much as 43%.

Despite modest sales growth targets, companies hold more inventory than they have in decades, which could further strain warehouse capacity and drive up rates.

As decreasing demand meets higher inventory levels and record low industrial vacancy rates, shippers face a daunting logistics marketplace this peak season.

Macroeconomic factors jeopardize demand forecasts

Forecasting consumer behavior during peak season is challenging. After years of unprecedented demand, this year will be tougher.

Consumers spent $894B during the holidays in 2021. An 8.5% annual increase, the largest jump in 17 years. Last year, eCommerce sales grew 11% compared to 2020 and 64.1% over 2019.

But as inflation and recession warnings set in, shoppers may be less inclined to spend. Inflation reached its highest level in four decades this spring.

As a result, peak season forecasting has been exceedingly challenging. With 100+ day lead times from Asia, goods are arriving just as demand appears to be softening.

This convergence resulted in larger inventories, seen in the record-tight industrial space market or heard during earning calls for America's top retailers.

If consumer demand softens, excess inventories will create ongoing margin pressure and dictate price cuts or even liquidations—signs of a recession.

Solutions to peak season logistics disruption #

As peak quickly approaches, successful shippers strategize ways to mitigate disruptions and offset market volatility.

Early peak season promotions #

Shipping delays dominated pre-peak season headlines causing shoppers to rethink their holiday plans. As many as 70% of consumers began buying in October to avoid stockouts.

In 2021, Walmart’s inventory was up 20% YoY at the end of Q2, Target’s was up 26%, and Home Depot’s was up 40%. These inventory pull-forwards offset shipping difficulties.

With elevated on-hand inventory levels, expect earlier promotions to clear out excess stock ahead of the holiday season, especially if economic conditions deteriorate.

Retailers may view Q4 as an opportunity to right-size their inventories, given carrying costs, margin pressure and peak season consumer demand.

Network diversification and configuration drives efficiency

As disruption looms, network diversification is critical to a successful supply chain. Inventories ballooned to their largest levels in years and industrial vacancy shrunk resultantly.

Successful shippers look to secondary and tertiary markets like Las Vegas, NV and Greenville, SC, to find reliable warehousing. These offer access to lower labor and space costs while still servicing critical regions.

Similarly, leading enterprises identify additional parcel carriers to offset capacity and rate difficulties. And they place high-velocity SKUs closer to customers to decrease mileage and increase efficiency.

Increased access to partners across the country allows businesses to access capacity where and when it’s needed. That will be crucial this year as warehouse capacity absorbs larger inventories and transportation rates continue their ascent.

While diversification strategies typically focus on transportation providers and raw material or finished goods sourcing, leading organizations apply the same strategy to warehousing networks.

Market watch: The logistics industry month-over-month #

The Flexe Institute reviews key industry data points every month.

Logistics Managers’ Index (LMI) #

This index compiles the responses from more than 100 supply chain professionals on the movement and direction of eight key logistics metrics, aggregated into a single index. The LMI provides an effective supply-side monthly snapshot. Warehousing capacity continues to contract, and rates rise while transportation capacity loosens.

Table 3

FRED | Real Personal Consumption: Durable Goods #

Durable goods consumption tells the demand narrative during a given period, predicting the need for logistics services. This month’s data shows that personal consumption continues to rise, contradicting consumer sentiment stats and inflation data. The most recent data hit an all-time high.

Graph 4 1

Industrial Real Estate Vacancy Rate #

This composite vacancy rate effectively indicates warehousing capacity in the country at a given time. It acts as a barometer for facility rates and availability. The lower the rate, the more difficult it is to find space for warehousing, distribution and fulfillment. The market currently operates at all-time lows.

Graph 4

U.S. Manufacturing Purchasing Managers’ Index #

The index captures industrial output in the country during a given period. Like durable goods consumption, it provides context for demand forces: The higher the manufacturing index, the more volume will spill into the logistics market. This month marks the first jump in output since February.

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