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Should US Retail Worry Much About the Red Sea Shipping Crisis?
Attacks on vessels by Yemen’s Houthi rebels in the Red Sea have disrupted international trade, threatening price hikes and shipment delays. Many importers are revisiting coping strategies tapped during the pandemic.
The Suez Canal is the main route for shipping from Asia to Europe and the East Coast of North America.
In December, IKEA became the first major retailer to indicate it was exploring other options to secure products after major shipping companies stopped sending vessels through the Suez Canal in response to the attacks by militants protesting against the Israel-Gaza war that started in October.
Scores of container ships at the time began rerouting around southern Africa to avoid the area, adding “up to 14 extra days to a ship’s journey” from Asia to Europe.
“The situation in the Suez Canal will result in delays and may cause availability constraints for certain IKEA products,” IKEA said.
Last week, Adidas CEO Bjørn Gulden said spot freight rates “are exploding again” due to disruptions in the Red Sea. He said on Adidas’ fourth-quarter analyst call, “If you don’t have a long-term contract or you ship more than your contract, there is an increased cost because of that. There is a delay currently of about three weeks which of course causes some delivery issues, especially to the European market.”
Daniel Ervér, H&M’s new CEO, told Reuters that the fast-fashion retailer is reviewing what it needs to transport via air freight, which is more costly. H&M is also continuing to invest in nearshoring in Europe and Latin America as well as buying more in-season to mitigate the disruption.
Last week in prepared testimony for the House Subcommittee on Coast Guard and Maritime Transportation, Jonathan Gold, the National Retail Federation’s VP of supply chain and customs policy, said NRF members are already pursuing mitigation strategies to ensure back-to-school and holiday shipments, including rerouting cargo around the Cape of Good Hope, which is estimated to cause delays of 10 to 14 days.
Some cargo is also being shifted to arrive in West Coast ports to avoid Red Sea disruption, then shipped to the East Coast via rail. Air cargo is being used by some retailers for more sensitive and timely shipments, Gold noted, while earlier shipments are being encouraged.
Against this backdrop, Gold urged the federal government to pay attention to freight rates and port congestion, noting that the West Coast shift may cause congestion at the ports that are not planning for the cargo surge. He also urged the government to be aware of vessel and equipment issues.
“There is growing concern about the impact on empty container availability overseas,” Gold said. “We have heard from some members that vessel space is becoming increasingly constrained, which may impact replenishment for spring and summer merchandise.”
Discussion Questions
What obvious and less obvious repercussions will U.S. retail likely face due to the Red Sea shipping disruptions?
Will mitigation strategies employed during the pandemic prove beneficial?
Poll
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Nicola Kinsella
SVP Global Marketing, Fluent Commerce
David Naumann
Marketing Strategy Lead - Retail, Travel & Distribution, Verizon
This is a concern for retailers. Having to divert ships around the Cape of Good Hope can add 10 days to voyage times which, in turn, has a consequent impact on costs. It also puts pressure on the shipping network as it means vessels and containers are not in the right place when needed, which pushes up shipping rates. Given retailers know this is an issue they can probably plan to mitigate the timing problems, but it is harder to avoid the cost implications. Some retailers I have spoken to are looking at alternatives, such as air freight, for time sensitive merchandise – but this comes with big costs attached. All that said, this is nowhere near as disruptive as the pandemic supply chain snafus.
I think we can skip potentially disruptive and instead ask how much and how long. (My guess is “moderate ” and “sporadic, but prolonged”) We may indeed find out how well the mitigation strategies work out – at least the ones that could be implemented within a span of a few years – and who didn’t bother to create any, but it doesn’t hide the reality that it’s just that…mitigation: the idea that a company, or even an industry, can somehow carry on unimpeded “if only they plan ahead” will be shown to be wishful thinking.
While less dramatic than the supply chain chaos of 2020-2021, Red Sea shipping disruptions affect U.S. retail due to the entwined global supply chain and costly contingency plans.
Some U.S. companies will face shipping delays, out-of-stocks and higher logistics costs, which erode customer satisfaction and growth.
Mitigation strategies that improved agility and resilience during the pandemic include moving the supply chain (sourcing, production, logistics) closer to home.
Shipping disruptions – regardless of the cause – cost retailers in a number of ways. The most obvious is in higher shipping costs and longer lead times in getting product to store shelves impacts conversion rates and sales. As retailers learned well during the pandemic, having a plan B, plan C and plan D are needed in order to manage supply-chain disruptions. As the examples from the article suggest, the most capable retailers are already working their mitigation plans. What’s different about this current disruption is that it was caused by geo-political events and as such they can disappear as quickly as they came, so retailers also need to be nimble and be able to shift back when circumstances allow.
Reality is nothing will change in the Indian Ocean until after the United States election and maybe not even then. Increased cost will be incurred by all. The options are known. Continue shipping using the Suez Canal and incur increase insurance costs and possible product loss. Ship around Africa and incur increase transportation cost. Ship to the west coast and transship by rail to the east coast. All option will require increase owned inventory thereby incurring additional holding costs. Now is the time to evaluate each delivery geographic area versus logistic option. Likely the least cost solution is different logistic path by delivery area.
Time is money, and this will hurt not only retailers but manufacturers as well. The SF Fed estimated that 90% of U.S. manufactured goods contain imported intermediate components. Prices of everything will go up.
To make things worse, a draught related to the Panama Canal is lowering the draft for the superships that now use it. The superships can’t use the Suez Canal in any case.
An alternative for China/Europe trade is the rail component of the Belt and Road Initiative, which has cut travel time by rail from 30/40 days to 10 days. Both Japan and China are exploring a trans-Africa rail line.
While the Houthi challenge may disappear in days, weeks, months, or not at all. Alternatives that don’t include the Middle East must be developed, which can be peaceful one day and not the next.
The last thing retail needed right now was another glitch in the supply chain. Between the Red Sea and the Panama Canal, these disruptions are very real and won’t go away any time soon. Air freight is certainly not a scalable solution. So time/action calendars just got longer and more difficult to manage. And what retail needs is exactly the opposite.
Retailers learned a lesson during the supply chain chaos of 2020-2021, and hopefully the savvy retailers have explored alternative sources of products. Challenges like this make a strong argument for sourcing products from our local continent.
With both the Suez and the Panama under pressure, it’s going to have a trickle down affect. Especially for seasonal merchandise. Shipping costs are going to stay high. That will mean mean more price and margin pressure. Meanwhile, seasonal items will hit the shelves later than planned. Which may mean more markdowns are required to clear stock out in time for the next season’s merchandise.
On the flip side? Maybe you’ll still be able to buy a bathing suit in July rather than a fall sweater.
Adding a 2 to (let’s face it) 3 or more-week delay to the time it takes to land product through the supply chain is a disaster to any Retailer moving seasonal goods on a JIT basis. Can you imagine Easter product that doesn’t make get to Stores in time for Easter? The impact will also not be just for this season. Cautious Retailers will likely try to land product 2 to 3 weeks earlier going forward, which adds to challenges in warehouse capacity, and financing of inventory.
We have the Red Sea crisis AND the Panama Canal drought crisis (not enough water in the Lake/Canal to move ships at pace) simultaneously. An escalation of tensions in the Mid-East, plus Panama Canal, plus unknown event to come could throw global supply chains for retailers and brands into chaos. Containers prices have already spike.
This is a time when every retailer and brand should be making short-term contingency plans B & C and plotting a new raw material to shelf operation for the long-term.
Perhaps the full impact of the Red Sea compromises has not yet been felt across the US supply chain. The additional time to reroute ships to avoid this area, the threat of losses due to crossfire, and the congestion (and added costs) at the West coast ports will certainly have an affect.
Hopefully the forewarnings of additional rest and the threat of a more intense military actions have given retailers and their suppliers time to mitigate the circumstances and develop back-up plans. Although back-to-school will likely not be an issue, I fear that holiday cargo and other winter shipments could become thorns.
This is a problem, geopolitically and economically. Deploy more Navy ships, sure, but at what cost? If it continues then longer term I believe it will push companies to, over time, source products that do not require shipment on a cargo ship. That is unlikely to happen in the near term since 90% of everything available gets moved by a ship at some point on its journey (source: Ninety Percent of Everything, Rose George).
Chokepoints for key shipping channels are starting to develop in several places. Some of these – like the drought-induced scaling back of traffic through the Panama Canal — are environmental. Others like the problems of negotiating the Red Sea and the Suez Canal are geopolitical.
But before we talk about mitigation strategies perhaps we should ask ourselves if we think the environmental conditions will be better or worse (Hint: Worse) or geopolitics will get more or less stable (Hint: Less) over time.
In other words, it may be time to start seriously rethinking the entire global supply chain and developing contingency plans and alternatives now rather than hoping it will rain more in the future and/or that today’s insurgents and terrorists will be only ones we will ever see and that they can somehow be effectively neutralized once and for all.
The time to solve a problem is before you have it. “Disruptions” are increasingly becoming the order of the day. The next time you see a lamentation of swans, see if you can spot a white one.
Anytime critical infrastructure presents a choke point, we should be very very worried. I don’t think we need any more evidence to affirm that both the Suez and Panama canals are vulnerable. As Ryan makes clear we cannot count on maintaining the geopolitical or environmental status quo.
So I’m signed on with the “time to rethink everything” team. My first thought is to stop valuing linearity ahead of resiliency. There is a trade-off between absolute efficiency and risk. It’s time to take the lesson and turn the brittle supply chain into a supply network that can take the blows.
A sudden change in the time it takes to ship merchandise from overseas manufacturers will have a similar impact as the changes around shipping and inventory issues as we came out of the pandemic. Eventually, everything will catch up. Until that time, savvy retailers will have to find ways to manage inventory and keep prices reasonable and competitive.