As today’s retailers prep for a busy holiday season, they find themselves at a critical crossroads.
On the one hand, retail sales are up over 2% year-over-year, encouraging businesses to enhance their demand forecasts for the latter half of the year. On the other, new supply chain constraints — whether they stem from Houthi attacks on commercial ships or a potential East Coast port strike — are sending them scrambling to secure sufficient inventory on time to avoid late arrival markdowns.
Some are attempting to get out ahead of these headwinds by ordering products earlier. Yet this only exacerbates existing pricing power dynamics, in which retailers — outside of a few big names — struggle to pass on supply chain price increases to consumers in a timely manner.
Fortunately, there are several strategies (and technologies) that retailers can leverage to stay ahead during this uncertain moment.
Pricing Power: A Growing Challenge for Retailers
Retailers’ lack of pricing power compared to those who transport their goods deepens the potential impact of today’s supply chain constraints. Executives should take note.
When it comes to ocean carriers, there are real vessel and container constraints, though some may be self-imposed by the carriers themselves. Carriers, after all, possess the ability to dynamically adjust capacity in response to market conditions. In the Red Sea, for example, carriers have responded to increased shipping times and port congestion by imposing peak season surcharges, prioritizing spot-rate customers, and skipping ports to keep ships moving.
When ocean transit is constricted, retailers often pivot to air freight. However, this backup plan comes at a premium, as air freight typically costs significantly more (global level ocean rates are now six-times lower than air freight, though historically they have been 12-15 times cheaper).
What’s more, upward pressure on air freight capacity and pricing has been exacerbated with the rise of e-commerce retailers like Shein and Temu, who take advantage of the de minimis tax loophole to send 600,000 packages to the U.S. daily.
These pricing power dynamics stand in stark contrast to those of retailers, where unexpected costs within a development cycle are typically absorbed by the retailer in the form of lower margins — with hopes of recovery in future seasons or with vendor support on future buys. And they’ll only be worsened should the East Coast port, where over half of imported apparel, footwear and accessories come through, goes on strike. Smaller retailers that lack scale and sophistication in managing their supply chain are bound to be impacted even more.
Strategies for Retailers
Given the challenges articulated above, retailers should consider the following response strategies:
- Strengthen relationships with carriers—and diversify. Negotiating long-term contracts can help ensure a more stable supply chain with better rates and guaranteed capacity. Also, diversifying capacity commitments with carrier groups, even at a premium, ensures retailers have backup options when carriers fall short of committed service levels and capacity.
- Use AI and data analytics to improve demand forecasting and inventory management. This helps retailers stay ahead of potential disruptions and protect their bottom line. AI tools, for instance, can be utilized to foresee potential logistics constraints or disruptions such as port issues, weather, and capacity constraints, enabling retailers to proactively adjust their supply chains.
- Invest in supply chain resilience. Investing in flexible and responsive supply chains can help large retailers adapt to changing market conditions. This includes budgeting for expedited options such as air freight for key floor sets and high-demand items.
- Forecast complexity and assortment strategies. From a CFO perspective, a robust forecast of the cost implications and timing of potential supply chain scenarios can inform decisions across the business that help mitigate today’s risks. Assortment planning is one such program: done right, such planning can shape demand towards products that are widely available (and highly profitable) when other products are facing constraints.
- Understand category nuances. For instance, when logistically constrained, prioritizing inventory for highly productive categories can help retailers avoid discounts and protect margins while meeting consumer expectations during peak seasons. As for perishables, implementing faster and more reliable logistics solutions is crucial.
Connectivity and Empowerment are Key
To put these strategies into action, connectivity across teams and functions is critical. Facilitating communication between various functions of a retail organization ensures that business leaders have the right (and most up to date) intelligence necessary to make quick decisions, conduct better advance planning, and form the right strategic partnerships.
These strategies also require executives to take a step back and consider their capabilities: Do you have the right team in place? Do they have the right tools? And, just as importantly, are team members empowered to use them and raise the right alarm if/when necessary?
Whatever the case, adopting more advanced strategies is key as retailers look to navigate today’s supply chain disruptions. By understanding industry dynamics, leveraging technology, adopting fortified strategies, and staying connected, retailers can overcome these challenges and thrive this holiday season — and beyond.
