Will freight operators serve as a canary in the retail coal mine?

Discussion
Photo: Getty Images/KingWu
Nov 01, 2022

The Wall Street Journal in the space of 11 days has published two articles on the drop in freight demand reported by some of the biggest long haul freight companies in the U.S. The trucking firms are raising an alarm of sorts as they have seen demand for their services wane somewhat at a time when they normally are at their busiest.

A piece published on Saturday said that declining demand has led spot market volume to soften, and that may have a ripple effect into longer term contracts that make up the bulk of the business.

“The fourth quarter is generally the peak of the holiday shipping season. However, judging by the feedback from our clients, this peak will be muted versus historic norms,” David Yeager, CEO of the trucking and rail freight services firm Hub Group, told analysts on the company’s third quarter earnings call last week. “Beyond 2022, we do acknowledge the potential for a continued softening economy, but we believe that we are positioned for success as we’ve taken several important steps to improve our resiliency in a down market.

Hub Group’s volume was down six percent year-over-year in the third and eight percent in October.

“The growth in U.S. import volume has run out of steam, especially for cargo from Asia,” Ben Hackett, founder of Hackett Associates and the author of the  National Retail Federation’s Global Port Tracker report, said in a statement. “Recent cuts in carrier shipping capacity reflect falling demand for merchandise from well-stocked retailers, even as consumers continue to spend. Meanwhile, the closure of factories during China’s October Golden Week holiday along with the Chinese government’s continuing ‘Zero Covid’ policy have impacted production, reducing demand for shipping capacity from that side of the Pacific as well.”

The decline in imports has affected cargo shipping, pushing container rates down.

Tim Smith, director of global transportation and logistics at Old Time Pottery, a discount home-goods retailer, told the Journal for an Oct. 18 article that ocean carriers are increasing their calls to get contracts signed through the middle of next year.

“Not only are the steamship lines reaching out inquiring about contracts, but they’re aggressively following up when you don’t get back to them immediately,” he said.

DISCUSSION QUESTIONS: What do declines in cargo imports and freight demand say about the sales outlook for retail over the next six months to a year? How will these developments affect the inflation rate and subsequently merchandising and marketing plans at retail?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"Retailers are going to have to work harder for their holiday sales."
"The shippers made a bloody fortune during the pandemic. It’s not the end of the world that they’re seeing a slowdown."
"Tighten your belt a notch, the next several months are going to be tough for many retailers and suppliers."

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14 Comments on "Will freight operators serve as a canary in the retail coal mine?"


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Mark Ryski
BrainTrust

Cargo imports are a leading indicator of demand, and the decrease in activity is telling. The slowing of demand is reflective of the inflation mitigation that the government is undertaking. This is what is supposed to happen when governments raise interest rates. Theoretically, as demand slows, prices should start to come down as consumers stop spending and businesses drop prices to attract customers. What this all means is that retailers are going to have to work harder for their holiday sales.

Neil Saunders
BrainTrust

The decline likely reflects two things. First, that demand (at least in volume terms) is going to be a bit more muted over the holidays. This trend has already set in and will simply continue during the golden quarter. Second, the retailers are already very well stocked with inventory (many have too much inventory) so have cut back on orders for Q4. This is a sensible rebalancing. All that said, this holiday will not be a disaster; it just won’t be as stellar as last year.

Paula Rosenblum
BrainTrust

You got it exactly right. I think the softening demand is less of an issue than an over-abundance of supply. If we can have a few months without a pandemic flare-up, I think we’ll find retail sales starting to normalize. To understand that number, we’d probably have to take 2019 and roll it forward as though each year increased 3.5 percent. I think the “fantasy” e-commerce number is probably +15 percent each year.

The shippers made a bloody fortune during the pandemic. It’s not the end of the world that they’re seeing a slowdown.

David Naumann
BrainTrust

Spot on Neil! Excess inventories from several retailers are reducing orders from manufacturers as they focus on whittling down their inventories during the holiday season. And many shoppers are going to be more conservative in their holiday spending, as their discretionary spending has been squeezed by inflation.

Ananda Chakravarty
BrainTrust

Neil you got this right. Excess inventory is still overloading many retailers, this drop in cargo shipments reflects the pack and hold steps retailers have taken to slowly wean off their existing inventory before buying new stock.

Brian Delp
BrainTrust
3 months 7 days ago

These averages don’t take into account the surges of recent seasons, which included a surplus of delayed goods that several retailers opted to hold onto for this year’s season. I’d be interested to know what the blended demand was. The pendulum seems to be swinging back.

Ron Margulis
BrainTrust

Trucking rates are down significantly since the beginning of 2022, although not even close to as much as container rates, which are down by close to 70 percent. Both indicators aren’t great news for the economy. Relatively flush retail inventories explain only a small part of the story with much of the rest due to wavering consumer demand. Tighten your belt a notch, the next several months are going to be tough for many retailers and suppliers. I do see several positive indicators, including employment and GDP growth, that could limit this downturn, but only if inflation starts dropping.

Jeff Sward
BrainTrust

It’s tough to tell if this is a short term tapping of the brakes as a result of the current overstocks, or if this is a real downshift into a lower gear for a longer term. How far out was freight space booked pre-pandemic? How far out during peak pandemic? And how far out now? As freight rates drop, it seems like a little pause in booking space might yield lower rates. Lots of tea leaves to read here.

Gene Detroyer
BrainTrust

“What do declines in cargo imports and freight demand say about the sales outlook?” It says retailers are hoping customers will buy last year’s merchandise.

David Mascitto
BrainTrust

Seems like a case of fear-induced overbuying in the last couple of years on the part of retailers combined with fear-induced under-buying on the part of consumers in the next couple of months.

Scott Norris
Guest

FedEx and UPS of course just hiked their base rates 6.9% — higher than their usual 5% — so it seems they believe demand will stabilize enough to justify the price increase. I’m not seeing any meaningful freight cost relief on short/intermediate hauls here in the Midwest, either, so for us Made-In-America manufacturers, all this talk accomplishes is handing our retail accounts a tool to reject necessary price increases with….

Craig Sundstrom
Guest

In the interest of introducing a note of holiday cheer — we are already 3 months into the Xmas shopping season, aren’t we? — let me offer another perspective: just as shipping shortages and delays had played an oversized part in the explosion of prices (and earlier shortages) we have seen this past year, a reduction in same signals a return to sanity … shipping companies may not like that they’re no longer running at 110% of capacity, but the rest of us should.

Ananda Chakravarty
BrainTrust

Retailers have left over stock in their warehouses that they’re looking to sell through first. They also downgraded new shipments, to brace for a market downturn, but they’ve done this more cautiously. The problem is that this slowdown is a lagging indicator and provides little if any view as to the future state of long haul shipments. The slowdown may have the effect of lowering shipping costs when the market needs to buy again, so the impact can be positive, but only time will tell. This will have limited impact on inflation, despite clearing up of supply chain congestion.

Kai Clarke
BrainTrust

These freight declines are simply an expected response as the economy responds to increased interest rates and the declining demand that this brings. This decline in orders, will bring about a drop in prices which will decrease the rate of inflation we are seeing. All of this should be expected over the next 12-18 months as the economy rights itself.

wpDiscuz
Braintrust
"Retailers are going to have to work harder for their holiday sales."
"The shippers made a bloody fortune during the pandemic. It’s not the end of the world that they’re seeing a slowdown."
"Tighten your belt a notch, the next several months are going to be tough for many retailers and suppliers."

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