Flexe Institute Market Watch: Retailers and Brands Face Logistics Hurdles to Start Peak Season

September 13, 2022

Brands encountered substantial supply chain disruption last peak season—more is ahead.

Market Watch Collage September 22

After years of disruptions, conditions aren’t getting easier for consumer brands.

Key Takeaways

  • CPG supply chain disruptions persist as peak season starts
  • 25% more Q2 retail inventory on hand compared to last year
  • $1.5B big-box retailer excess inventory
  • 40% SKU reduction for some brands cutting inventory costs

Inventories are at all-time highs while warehouse capacity hit all-time lows. This supply and demand mismatch creates capacity and cost challenges as the final quarter draws near.

Potential peak season slowdown #

Shippers likely face weaker holiday sales, stemming from higher prices and economic malaise. Retailers warned investors they will experience sluggish numbers.

Consumers say they plan to spend slightly less this holiday season than a year ago. And, shoppers offset inflation with cheaper alternatives and discount retailers.

Contradicting metrics make forecasts difficult #

However, some signs contradict recession predictions. The Consumer Sentiment Index rose to its highest point in three months, outdoing its expected level by three points. This month marks the second consecutive jump in consumers’ feelings about economic conditions.

Graph 1

Additionally, employment data remains healthy as average wages rise with inflation.

The differences between spending and economic data complicate peak season plans.

“The tumultuous environment is unlike what retailers have encountered in previous economic slumps and inflationary periods,” said David Bassuk to the Wall Street Journal, a co-leader of the retail practice at the consulting firm AlixPartners. “While the 2008 financial crisis was a clear downturn, this one has pockets of real strength.”

Increased demand caused pervasive issues last peak season. Consumers experienced 169% more stockouts in 2021 than in 2020. Despite dampened sentiment, this level of demand may be part of peak season 2022.

Leading brands accommodate supply chain demands without misallocating capital. Structural supply chain flexibility allows them to react to changes.

Retailers and brands have inventory glut #

Elevated inventories plague many businesses as peak season starts. Some of the country’s largest retailers have 25% more inventory than in Q2 2021.

Many discounted items and “canceled billions of dollars to help align inventory levels with expected demand.” China’s U.S. exports fell 3.8% in August—the first reduction since 2020.

Graph 2

However, fewer imports don’t eliminate existing inventories. Walmart noted in its most recent earnings call it holds $1.5B of inventory it wishes a “magic wand” could make disappear. The company cited consumer behavior as difficult to predict, resulting in larger-than-ever stockpiles.

Warehouse space tighter than ever #

Because of inventory surpluses, warehouse capacity contracted in August, reaching its lowest recorded level. CBRE’s data shows the industrial vacancy rate dipped to 2.9% and costs jumped to $9.40 per square foot.

Brands struggle finding storage, especially around ports which have some of the lowest vacancy rates in the country. Retailers and brands seek lower logistics costs without sacrificing delivery promises.

Businesses tackle peak and beyond #

As peak season commences, businesses take alternative measures bolstering their supply chain strategies.

Many find capacity and offset increased costs through secondary and tertiary markets. Some reduce SKU counts to rightsize inventories.

Stanley Black & Decker shrunk its product portfolio by 40%, curtailing inventory levels and $1.5B in costs. Similarly, Hanes eliminated 30% of SKUs and temporarily reduced production.

Other brands invest in their supply chain visibility to reduce costs. Clorox will implement a “streamlined” model to boost efficiency and improve planning. The move enhances end-to-end visibility by moving “decision-making closer to consumers and customers to better anticipate and meet their needs.”

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

Logistics Managers’ Index (LMI) #

The LMI provides a monthly supply-side snapshot. Last month, the index fell again in all categories aside from warehouse capacity. The metrics suggest the industry continues to expand, albeit slower than in previous months.

Chart 1

Disposable Income vs. Durable Goods Spend #

Durable goods consumption and disposable income are intertwined. Their intersection tells the demand narrative during a given period, predicting the need for logistics services. This month’s data shows that personal consumption rose even as disposable income dropped.

Graph 3

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 an all-time low of 2.9%.

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, the index remained level, meaning industrial spending is still low. Resultantly, fewer of these goods will enter the supply chain.

Graph 5