Flexe Institute Market Watch: Economic and Logistics Difficulties Muddle Peak Season Forecasts

July 12, 2022

As peak season approaches, retailers and brands face shifting dynamics.

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Deteriorating economic conditions and consumer demand challenge peak season forecasts.

Key Takeaways

  • Consumer Price Index rose 9.1%—a four-decade high
  • Americans spent nearly $44 billion less on goods in May
  • Consumer sentiment fell to its all-time lowest point
  • Retailers report 20-30% fewer purchase orders from China

Brands and retailers plan for the busiest time of the year—peak season. Businesses struggle with supply and demand forecasting as market conditions shift expeditiously.

Consumption variance muddies peak season plans

After unprecedented consumption, demand softened. The Consumer Price Index (CPI) rose 9.1%—a 40-year high. Consumer sentiment slid to its all-time lowest point between May and June.

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Higher prices and pessimistic attitudes dampened consumption. In May, consumer spending rose by 0.2 percent, down from 0.9 percent growth a month earlier—a departure from years of robust growth.

eCommerce sputtered. Brick-and-mortar purchases outgrew online transactions for the fourth consecutive quarter, bucking the eCommerce explosion that forced brands and retailers to focus on the channel. Peak forecasts and plans that worked for 2020 and 2021 aren’t viable.

Additionally, consumers cut spend on discretionary items and reallocated their budgets to experiential purchases. Americans spent nearly $44 billion less on goods in May, but $76 billion more on services.

These forces resulted in lower retail sales. And companies with already-bloated inventories still have too much stock.

Pre-peak inventories grow, organizations react #

To prepare for peak and circumvent shipping delays, retailers and brands imported product earlier in 2021. That effort swelled inventories and brands held too much of the wrong product after uneven purchases. Those unpurchased items remain in current inventories.

Because of this, companies seek bifurcated solutions. Some retailers report sending 20-30% fewer manufacturing orders to China while others haven’t deviated from pandemic norms.

However, import volumes remain above pre-pandemic levels. And imports enter a historically tight warehousing market ahead of peak season.

“We’re handling a full 33 percent more containers through our terminals than we were in the same period in 2019.”
Bethann Rooney, port director at the Port Authority of New York and New Jersey

Current supply-side challenges

As import volumes continue above normal trajectories, supply chain bottlenecks haven't improved. Some sectors see better conditions, while others don’t.

Port congestion continues #

Port congestion has yet to ease. While once concentrated in California ports, it’s now dispersed throughout the county. Dwell times at the Port of Los Angeles and Long Beach dropped as companies rerouted vessels elsewhere to avoid congestion and a potential strike.

Shipping companies and West Coast dockworkers have not progressed their negotiations. The two sides remain at an impasse even after the deadline for a new deal, raising fears that a strike or slowdown is imminent. Any processing time slowdown could exacerbate congested conditions.

Organizations rerouted imports to East and Gulf Coast ports, causing similar issues to those previously on the West Coast.

“We’re handling a full 33 percent more containers through our terminals than we were in the same period in 2019,” Bethann Rooney, port director at the Port Authority of New York and New Jersey (PANYNJ), said during a July 1 media briefing. “That staggering increase in overall volume gives a picture of what all of the various nodes and links in the supply chain are trying to absorb.”

Previous maritime delays led to product arrival delays. Now, retailers hold unwanted items, which occupies valuable warehouse capacity. Longer lead times are the norm, making peak season planning even harder.

Logistics capacity and rates ease #

The Logistics Managers’ Index retracted for the third consecutive month—falling from 67.1 to 65, the lowest level since July 2020. Transportation capacity and rate reversals contributed to the drop.

Volumes fell significantly, and rates followed suit despite high fuel costs. The tender rejection rate is nearly 75% lower than last July, signaling a freight volume contraction.

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Decreased volumes stem from higher inventory levels that occupy warehousing capacity across the country, as well as decreased consumer demand. Despite a slight easement, warehouse space remains tight and rates high.

How retailers plan to circumvent peak challenges

In response to continued logistics challenges, brands and retailers enact new peak solutions. Three primary focus areas are aggregation, visibility and automation.

While long lead times are unavoidable, visibility allows for adaptive planning. Single-threaded service providers create single points of failure. Aggregators provide opportunities to hedge risk.

Labor remains constrained, and costs rise. But automation provides labor consistency and cost savings.

In addition to long-term solutions, brands and retailers plan immediate strategies.

Markdowns and liquidations to right-size inventories #

To eliminate product excess, some retailers discount items to liquidate stock. While this reduces inventory, it comes with additional risk this year. Logistics costs are higher than ever, and this strategy impacts margins.

Pack-and-hold to capture peak demand #

Retailers also enact pack-and-hold strategies to prevent selling products at lower margins.

However, holding stock can be risky. Demand for a specific item may not return. But more importantly, brands pay inventory holding costs in the process.

Multiple smaller peak seasons

Promotional events like Amazon’s Prime Day have grabbed attention recently. And now, other retailers followed their lead. Target created Deal Days to mimic a peak season-like promotion.

Despite generating more demand, these promotions can strain logistics 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 a monthly supply-side snapshot.

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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 tilted downward last month from its previous all-time high. However, it remains elevated far above pre-pandemic levels.

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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.

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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 fell to its lowest level since 2020.

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