Retail Revolution   /   September 21, 2021

‘They’re going to have to trade off margin for customer satisfaction’: Major retailers prepare for holiday stockouts

As supply chain woes continue, big retailers are trying to get ahead of holiday stockouts.

Supply chain disruptions are continuing throughout 2021, as issues ranging from rising shipping container prices to congested ports worsen. Analysts predict further breakdowns in U.S. supply chain logistics as the Delta variant shuts down overseas factories and holiday consumer demand threatens to overwhelm an already ailing supply chain. To get ahead and avoid holiday stockouts, major retailers are placing bigger product orders with vendors earlier. In the most extreme cases, some retailers are even chartering their own cargo ships.

Covid-19 exacerbated preexisting problems in the international supply chain and logistics spaces. In 2020, consumer spending tightened, workers were let go, product sales went digital and manufacturing halted. Then, in 2021, consumer spending resumed and U.S. imports skyrocketed.

The sudden rise in product demand combined with continued coronavirus-related global closures has led to a breakdown in supply chain processes, said Daniel Stanton, author and CEO of Mr. Supply Chain.

“While we’re starting to return to normal here in the U.S., there are still major outbreaks — particularly in Asia — that are causing shutdowns of ports, factories and transportation infrastructure,” said Stanton. “That means supply chains are imbalanced, and many parts of the supply chain are suffering from capacity shortages.”

For example, in Los Angeles and Long Beach ports, a record 56 cargo ships are stuck at anchor and waiting to dock and unload product. In airports like Chicago O’Hare, there are two-week cargo claim delays.

In concert, shipping rates have skyrocketed. One Bloomberg estimate said the cost of shipping a 40-foot container from Shanghai to Los Angeles was now a whopping $12,424 this week, or eight times pre-pandemic levels.

Over the holidays, these issues will only worsen, said Tyler Higgins, author and retail practice lead and managing director at global consulting firm AArete. “The holiday season already puts pressure on every retailer’s supply chain and this year is going to present an opportunity for some retailers to shine, and a challenge for other retailers to try to solve,” said Higgins.

To prepare, many of the largest U.S. retailers are already preparing for holiday stockouts and finding workarounds to continued supply chain issues.

Many are placing earlier orders with suppliers to get ahead. During Goldman Sachs’ retail conference last week, Lowe’s CEO David Denton said that the retailer was “pulling forward” Christmas products early and giving suppliers “bigger orders.” He further described product acquisition as a “hand-to-hand combat.”

Similarly, executives at Target, Nordstrom, Macy’s and Best Buy also announced early product orders in order to prep for increased demand in the fourth quarter.

Others are increasing frequency of product pickup and deliveries from port to store. Kohl’s CFO Jill Tim said the retailer was “managing the [inventory] situation aggressively” and “maintaining a high frequency of pickups at the ports and deliveries to our stores” in the retailer’s last earnings call.

“Replacing earlier ship dates, not only for holiday, but for the spring season, we’re adding in additional lead times into our planning, we’re confirming orders with vendors much earlier where contingency plans that we have on late receipts hit our distribution centers,” said Macy’s CEO Jeff Gannette at Goldman Sachs’ retail conference last week. “We’re continuing to find creative ways to mitigate the disruption as much as we can.”

Some retailers are even chartering their own cargo ships to get ahead. Home Depot announced its plans to contract its own container ship in June and Target, Walmart and Ikea subsequently chartered their own ships as well. Chartering a ship can cost $40,000 a day according to one NBC estimate and thus is often out of the price range of smaller retailers facing similar supply problems.

Despite retailers’ efforts to get ahead of supply problems, Suketu Gandhi, a partner and global leader for digital supply chain at consulting firm Kearney, predicted there will still be product stockouts. If faced with a product stockout, said Ghandi, retailers must find ways to promote equivalent product in house or — when all else fails — send consumers to competitors.

“The lifetime value of a consumer will always exceed the value of immediate sale… [If facing a stockout] it might even mean [retailers] sending [consumers] to a competitor’s location, because consumers will remember that [positively], said Ghandi. “They’re going to have to trade off margin for customer satisfaction when it comes to supply chain.”

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