Cargo ships dock at a container terminal in Lianyungang port, east China’s Jiangsu province, 7 December 2022.
CFOTO | Future Publishing | Getty Images
The Covid inventory hangover continues to be a major headache for retailers and logistics companies that make money from moving their products. With the peak of the retail order season approaching — July is the official start of back-to-school and vacation order inventory that runs through October — executives in the shipping industry are keeping a close eye on order activity.
Holiday orders are traditionally imported starting in August, with retailers placing production orders for these items up to six months in advance. During this time frame this year, the US consumer faced record inflation and retail spending behavior was defined by more discerning shoppers.
Inflation is falling, partly because the Federal Reserve’s rate hikes are cooling the economy, but there is concern within the logistics industry that interest rate policy is killing too much demand. IN notes from the last Fed meeting On Wednesday published, there was a dispute between central bank officials on whether the pause in the increase was justified on its decision in June, but there was a tendency in the minutes to suspend.
“If the Fed moves forward with two more rate hikes, despite the progress we’re seeing on disinflation and cooling inflation, that could have a real negative impact on demand,” said James Gagne, CEO of SEKO Logistics.
However, the level of demand varies from category to category. Gagne said that cosmetics, for example, look in much better shape than home improvement.
“I think it’s really hard to envision that in the near term given how much work the American people have done on what we call home improvement projects over the last 24 to 36 months, and then potentially given where interest rates could go still to climb, we are seeing a resurgence in the home improvement category,” he said.
Home Depot’s recent quarterly release last week showed its first profit miss since May 2020 and its biggest revenue miss since November 2002, with the company citing “broad-based pressures across the business” as well as “further softening in demand compared to our expectations, and continued uncertainty about consumer demand.”
SEKO management said they are seeing consumers trading the product down, but it’s too early to know as to which categories will be the big winners this peak season.
“The pig in the python has yet to come through in terms of inventory,” said Hans Hickler, president of the Americas for SEKO Logistics.
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Wall Street CEOs don’t expect inflation to drop dramatically, even though the Fed now has it under control. JP Morgan Chase CEO Jamie Dimon said in recent comments that he expects the Fed to raise rates reach up to 6% to 7% and Goldman Sachs CEO David Solomon said that ehe expects inflation to be “stickier and more resilient.”
“If we anticipate that inflation will remain high and we will have uncertainties, people will spend less and that will affect the overall absolute numbers and it will probably be a lower peak season,” said Tim Scharwath, CEO of DHL Global Forwarding. However, he added that while the peak season is down this year, there is still a chance it could be better than 2022, although that is not a very high bar to clear.
“It would be good if this year’s season peak could be a little better than ’22, considering there was no peak last year,” Scharwath said. “So when the second half of the year comparisons come in and the numbers go up a little bit more and cross that line in 2022, I think we’ll all be happy.”
A rebound in the peak season would boost logistics companies’ profits.
Both DHL and SEKO Logistics told CNBC that they did not see “peak season” bookings in June or July data, but were cautiously optimistic for the second half of the year. Although the traditional high season starts in August, holiday orders can start coming in in June and July.
“The first half of the year was subdued,” Gagne said. “Every industry will see a different restocking action. Some companies burn inventory, some don’t. It all comes down to commodities. Consumers spend on experiences.”
Hickler said SEKO is keeping a close eye on the timing of the orders.
“We’re paying attention to whether there’s a situation where everyone is waiting until the last minute to get their products on the shelves for the holidays, and that could be another challenge,” Hickler said. “But we don’t see that yet. But it’s definitely something we’re looking at.”
If orders start arriving later and in groups, this could cause container growth and supply chain delays.
Positive signals from back-to-school orders
Alan Baer, CEO of OL USA, says that while the market and the logistics industry want a return to normality in the supply chain, the traditional peak season may be skipped this year and will not return until the third quarter of 2024.
“The compounding effect of economic uncertainty, tightening credit standards and overstocking will lead to a subdued, if any, season in the trans-Pacific eastern trade,” Baer said. “Volumes are up for now, but until companies see stronger consumer engagement, the future order pattern will remain below trend for the balance of 2023.”
Everyone is banking to revive trade later this year, according to Drew Wilkerson, the company’s CEO RXO, North America’s fourth-largest freight forwarder, but remains uncertain. “We’re all hoping to start seeing an increase in the back half of the year, but with each passing day, expectations are moving into Q4. Hopefully not Q1,” Wilkerson said.
Similar to comments from DHL, RXO expects a stronger peak season this year as there was no peak season last year. “I think holiday volumes will be more in line, in 2018, 2019, maybe slightly beyond that,” Wilkerson said.
He added that back-to-school orders can provide information on consumer expectations among retailers ahead of the holidays, and so far this is sending a positive signal.
“Our discussions with clients about going back to school are ongoing,” Wilkerson said. “We’re seeing a lot of orders for clothing and other back-to-school items that are either the same or slightly higher than last year. It was up last year because more kids were going back to school in person.”
