EBN_In response to the challenges posed by COVID-19 disruptions, European and US retailers have taken steps to enhance the resilience of their supply chains. These measures include increasing inventory, transitioning to nearby suppliers, and decreasing reliance on China.
Now facing shipping delays of two weeks or longer due to rerouted cargo ships in the Red Sea, European and US retailers find themselves constrained financially and unable to afford expedited solutions like air freight to speed up the delivery of products to stores.
Since November, attacks by the Houthis on ships in the region have had repercussions for companies and raised concerns among major powers. This development marks an escalation in Israel’s conflict with Hamas militants in Gaza, which has been ongoing for more than three months. The Houthis claim to be acting in solidarity with Palestinians.
A surge in inflation since the pandemic has also caused shoppers around the world to cut back on spending, putting retailers’ focus squarely back on reducing their costs, industry experts said. Many are simply opting to take the hit from higher transport costs rather than risk hiking prices.
The rapid growth of China-founded e-commerce companies like Shein and Temu that deliver huge amounts of low-priced clothes and accessories from China to Europe and the United States by air has also increased the pressure on competing retailers to make their supply chains as lean as possible.
“If supply chain resilience means paying more for your goods, then that isn’t going to wash,” said Matt Clark, who leads the EMEA retail practice at consultancy AlixPartners in London.
Retailers’ “need to drive profitability is trumping the intent around supply chain resilience”, he added.
Some fashion retailers are working around the Red Sea by using sea-air freight, which involves shipping products to Dubai and then flying them from there, but they are being highly selective.
Air freighting goods is around 10 to 12 times more expensive than shipping by sea, according to Sunandan Ray, CEO of US-based Unique Logistics. For budget fashion retailer Primark, air freight would not be economical, the finance director at parent company Associated British Foods, said on Tuesday (23 January).
Clothing and sportswear retailers also want to avoid overstocking, having only just recovered from a glut that forced them to sell products at a discount.
Sports equipment and apparel wholesaler Intersport Deutschland has stocked up over the past weeks to manage the expected two-week delays caused by ships rerouting from the Red Sea, Chief Financial Officer Thomas Storck said in an interview.
However, he mentioned that, in general, the company’s current inventory level is considerably less than it was a year ago. This is attributed to investments in warehouses that have enhanced its capacity to swiftly deliver products to over 1,400 independent Intersport stores in Germany.
Intersport Deutschland intends to bear the increased transportation costs instead of transferring them to store owners or consumers through elevated prices.
Similarly, Inter IKEA, a budget furniture manufacturer, has affirmed that its pricing strategy remains unaltered at present, notwithstanding the disruption in the Red Sea.
“We remain committed to our work to strengthen the affordability of IKEA products,” the company said in a statement.
Focus on ‘nearshoring’
To offset rising costs and prevent stock shortages, retailers are adopting a strategy of reducing discounts compared to the usual practice for this time of year.
In the United States, data from LSEG and Centric Market Intelligence reveals that retail discounts have averaged 39% in January, a slight decrease from 41% the previous year.
The interruptions in shipments from Asia to Europe and the United States might encourage a greater number of retailers to choose “nearshoring” or securing supplies from nearby markets. Nonetheless, the assessment of expenses continues to be a pivotal factor in making such decisions. For instance, Swedish fashion retailer H&M expressed its aim to “augment the proportion of nearshoring to be in closer proximity to the customer” without providing a specific target.
Intersport Deutschland also aims to “nearshore”, said Storck, but “you cannot do this overnight because you also have to reflect the cost, and what the consumer is willing to pay.”
For European retailers, buying from factories in the region is typically more costly than sourcing from China and other Asian countries, making it difficult to do at scale while remaining competitive.
“China is still the biggest origin country for fashion apparel, and the quality-price ratio is so good that even if some companies want to cut back on the share that China has in their overall production, it’s almost impossible because it is so well positioned,” said Laurens Schoningh, global head of fashion logistics at Hellmann Worldwide Logistics.
Swetha Ramachandran, who manages a consumer brands portfolio at Artemis Fund Managers, said she would not welcome companies “nearshoring” if that led to higher costs.
“We obviously as investors would not want to see them sacrifice long-term profits,” said Ramachandran, whose fund invests in companies including Inditex, Nike, and Adidas.
“There is a way for companies to diversify their supply chains without necessarily sacrificing their profit margins, by offsetting the cost of nearshoring through increased efficiencies.”