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Retail Newsline: Forget Final Mile… How About the First 5,000 Miles?

By Garrick Brown, Vice President of Retail Research, Americas

Historically, September has been one of the critical months for retailers in terms of building their inventories for the holiday shopping season. While many chains would begin building their holiday inventories as early as August, the bulk of this process has traditionally occurred during September and October and so Hanjin’s failure could not have come at a potentially worse time for many retailers. For the top importers who have a diversified shipping strategy this should be a manageable nuisance, albeit a costly one. One thing that Hanjin’s collapse should make clear to all retailers is that while they need to be focused on the “last-mile,” the first 5,000 miles matter too.

According to the National Retail Federation, retail holiday sales in the United States grew by 3.0% last year to $626.1 billion. The market had averaged annual growth of 2.6% over the past decade, but it is important to remember that this average includes a number of years at the peak of the downturn where the numbers were either flat or, in 2009, negative. Ultimately, these numbers proved disappointing to analysts who had largely expected growth in the 3.4% to 3.7% range. They proved to be even more disappointing to bricks-and-mortar retailers as a significant portion of the growth was driven by eCommerce players like Amazon which saw a reported 20% surge in sales. While early promotions for bricks-and-mortar concepts drove a surge of activity in late October and early November, retail foot traffic was largely down from Black Friday through the first two weeks of December. The nation’s bricks-and-mortar retailers saw a surge of last minute shoppers in the final two weeks prior to Christmas and record levels of activity post-holiday, but by then many had nervously resorted to extreme discounting to offload holiday inventories. The net result was that for many retailers that posted solid sales numbers, these were largely driven by promotions that eroded margins.

Ironically, all economic indicators point towards strong holiday sales in the United States this year. On September 13th, the Census Bureau released an analysis that showed median income growth increased by a whopping 5.4% in 2015, the highest level of growth in 49 years. The report reflected wage gains across the spectrum and not just in the top percentile of workers, which had been the case throughout most of the post-recession era (2010 to 2014). Meanwhile, though job growth has not been as consistently robust through the first eight months of 2016, it has remained strong and, if anything, upward pressure on wages has only increased this year. Additionally, American consumers continue to reap the benefits of cheap oil; personal consumption expenditures have consistently reflected growth, consumer confidence continues to increase (albeit at a pace that remains below what should be expected given the wealth of positive economic indicators). Thus, this year retailers may be facing their strongest holiday shopping season in a decade but the question remains as to whether they will have sufficient stock levels in place this year.  Last year’s disappointing holiday sales performance for many chains, as well as the continued acceleration of eCommerce and heightened pressure from Wall Street on publicly traded retailers to boost profitability already set the stage for many chains to be too conservative with their buying patterns this year. The potential disruption in the supply chain from Hanjin’s bankruptcy simply adds another wrinkle to the story. All of these factors beg the question for American retailers, “if the consumers show up this year, will retailers have enough stock on hand to capitalize on it?”

But the news is not all bad. First, the industry is no longer in lockstep when it comes to holiday stocking. Because early promotions (pre-Black Friday) have increasingly proven successful for retailers, many of the larger players have moved up their delivery calendars to now begin in August or even earlier. Meanwhile, an increasing number of chains (particularly among smaller specialty concepts) have embraced Just-in-Time principles in their supply chain in order to lower inventory costs. These players typically see the bulk of their incoming holiday inventories hitting their stores in October and November. Thus, the supply chain now is much more diversified than what it was a decade, or even five years ago.

Ultimately, while September remains among the busiest shipping months for retailers, October is what really matters for the holiday season.  It is also critical to note that while Chinese imports are a critical component of American retail (and holiday) sales, not all retail categories are equally as dependent upon them.

While 12 of the top 20 U.S. importers of foreign goods are retailers, not all of them face the same level of potential disruption from Hanjin’s failure. For example, while Home Depot and Lowe’s rank respectively as the number three and four importers of foreign goods, DIY/home improvement stores typically are far less dependent upon the holiday sales season as a sales driver than mass merchandisers like Walmart (#1), Target (#2), Family Dollar/Dollar Tree (#7) or Costco (#14). The same principle holds true for furniture concepts like Ikea (#10) or Ashley Furniture (#18). The DIY/home improvement and furniture categories do ramp up inventories somewhat for the holidays and typically benefit from the holiday sales season, but they don’t have the same dependence upon the season nor are their supply chains as seasonally geared.

Clearly this is not the case for mass merchandisers, consumer electronics and other specialty retail concepts. Ranking as the top two importers of foreign goods, Walmart and Target both could potentially see significant disruptions, as could Family Dollar/Dollar Tree and Costco.

Department stores may also face challenges, Sears (#15) and J.C. Penney (#16) may potentially face some issues, but there is some good news here as well. When it comes to apparel, many concepts see significant overlap between building their fall and holiday inventories so many of them begin building their inventories earlier. This could help to mitigate some potential issues for these players as well as for some purely apparel and shoe retailers like Nike (#12). That being said, department store chains may face some issues when it comes to appliances and consumer electronics. J.C. Penney, which is in the midst of significantly ramping up its appliance offerings, could be impacted, but as this initiative was launched over the summer, there is the possibility that Penney’s initial stock surges earlier in the year mitigate many of these challenges.

Top US Foreign Importers
2015 Rank Importer TEUs in 2015
1. Walmart 795,000
2. Target 537,000
3. Home Depot 352,900
4. Lowe’s 261,500
5. Dole Food 216,000
6. Samsung America 159,300
7. Family Dollar/Dollar Tree 153,200
8. LG Group 142,300
9. Chiquita Brands International 142,000
10. Ikea International 135,500
11. Philips Electronics North America 130,000
12. Nike 105,800
13. Jarden 105,000
14. Costco 101,500
15. Sears 100,000
16. J.C. Penney 98,000
17. General Electric 84,000
18. Ashley Furniture 77,900
19. Whirlpool 68,000
20. Williams-Sonoma 64,000

Source: Journal of Commerce

Consumer electronics players might not be so lucky. These players account for six of the 20 top importers of foreign goods. Samsung America (#6), LG Group (#8), Philips Electronics (#11), Jarden (#13), General Electric (#17) and Whirlpool (#19) all are active in this arena to varying degrees. Samsung Electronics revealed in court filings related to Hanjin’s U.S. bankruptcy proceeding that it had 304 containers from its Visual Display Business worth nearly $24.5 million sitting off the coast of Long Beach and another 312 containers of durable goods worth $13.5 million destined for U.S. ports.  LG Electronics, the world’s second-largest manufacturer of televisions, has not stated how much product it has stuck in containers thought it has stated that Hanjin accounted for between 15% and 20% of LG’s U.S. imports and that it is seeking new carriers. And while Hewlett Packard didn’t make the top 20 list (they rank at #44), they have reported that they currently have more than 500 containers stuck in limbo. Best Buy ranks 56th on the list of top importers, however, a significant share of their inventory is dependent upon the supply chains of companies like Samsung, LG and Hewlett-Packard and so they may potentially feel the indirect brunt of challenges created by Hanjin.

Toys ‘R’ Us also failed to make the top 20 list (they rank at #45), but they are also among the retailers that may be facing the greatest levels of disruption. The $25 billion dollar U.S. toy industry is among the most vulnerable to supply chain disruptions during the holidays as nearly half of its annual sales occur during this season.  Fortunately, according to the Toy Shippers Association, only an estimated 20 containers are on Hanjin-affiliated vessels.

Other retailers most likely to be affected include Williams-Sonoma (#20), The Gap, Kohl’s, Big Lots!, Pier One Imports, Dollar General, Staples, Michael’s, TJX, Bed, Bath & Beyond and others. But once again, the good news is that plenty of time remains. We spoke to a number of chains and repeatedly heard the same basic refrain, “so long as our distribution centers have the goods in October, we shouldn’t see any major issues.”

The same mostly holds true for pure play eCommerce players. It’s unclear how much Amazon depends upon Hanjin shipments, though Hanjin was the key user of the Port of Seattle’s Terminal 46 and there is likely a good deal of exposure here, especially as it related to consumer electronics. Amazon’s holiday ramp-up typically begins in August as they stress test their distribution chain. September is when they generally take corrective actions and start fully ramping up, with October being the month when they move full speed ahead to fill their distribution networks.  And so while Hanjin’s failure certainly isn’t good news for the world’s largest eCommerce retailer, its timing could potentially be worse. Because this has occurred at the point on the calendar when Amazon is already typically looking to correct any potential issues in the distribution chain means we think their exposure will be limited.  Additionally, sources tell us that Amazon generally diversifies its carriers so as to reduce potential exposure to incidents like this.  Thus again, we suspect that so long as eCommerce players are receiving impacted freight prior no later than November this year’s holiday sales season will see little impact in terms of disruption.

That isn’t, however, to say that there won’t be some impact. There definitely will be some additional pricing issues when it costs to imported goods sold during the holiday season this year. Freight charges from South Korea surged about 50% the day after Hanjin filed for court receivership. South Korean imports were among the most impacted by Hanjin’s collapse; about 70% of their overseas shipments are ocean-bound and Hanjin accounted for about 6% of that total. The fees on Hanjin’s main shipping route between Busan and Los Angeles have jumped from about $1,100 per container to roughly $1,700. Meanwhile, we have heard anecdotes of other carriers boosting rates by anywhere from 30% to 50%.

How will this ultimately impact consumers? Certainly increased delivery costs will factor into holiday pricing, though unevenly. Here is where size matters; increased freight costs will clearly impact larger consumer goods like appliances more so than smaller items that can be packed more densely into container units. Smaller items like toys may see only a blip in pricing while larger goods like appliances may see a modest uptick.  However, these all may turn out to be minimal factors.

While it is true that extensive markdowns have helped to drive and even define the holiday sales seasons of the past few years (particularly for bricks-and-mortar retailers), most mid-tier and upscale chains already have been looking to get away from the cycle of discounting that has eroded margins. Of course, whether retailers can get away from the pricing “race to the bottom” depends largely on whether or not shoppers show up but all of the data suggests they will this year.

While fire sale pricing has been so pivotal in driving sale volumes over the past few holiday sales seasons, most retailers are increasingly resistant to going this route unless it proves absolutely necessary. The potential impact of Hanjin (though likely minimal) and the fact that American consumers are now in the best position that they have been in since the recession may mean that this year’s promotions may be less severe, less common and not as likely to occur as early in the season as what was seen in 2015.

And so, back to the question of what kind of impact the Hanjin bankruptcy might have on the U.S. holiday sales season… the answer is likely not much, but we won’t really know for sure until next month.

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This post is commentary from the latest weekly edition of our Cushman & Wakefield Retail Newsline, which you can subscribe to for free by e-mailing garrick.brown@cushwake.com.

garrick-brownGarrick serves as Vice President of Retail Research for the Americas. He speaks frequently at industry events and has been a keynote speaker at symposiums, conferences and market forecasting events for groups like the Appraisal Institute, Urban Land Institute, CREW, ICSC and PRSM. He is also a member of Lambda Alpha International, an invitation-only land use society for those who are involved in the ownership, management, regulation and conservation of land, but also those who are involved in its development, redevelopment and preservation.

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