Retailers challenged with roadblocks in near term

The news: Many retailers have recently warned that a number of challenges—inflation, supply chain woes, and global unrest—are converging to make for a difficult near-term environment. 

  • Costco Wholesale noted it is combating growing labor and freight costs.
  • Gap said shipping and rising prices will persist at least through the first half of the year.
  • Urban Outfitters expects supply chain costs to remain elevated through the remainder of its fiscal year 2023.

More on this: This year may well be a tale of two halves, with a difficult environment in the first part of the year and easier terrain in the latter half. 

  • There are a number of supply chain disruptions ranging from the interrupted supply of basic materials to factory and port closures in China, as well as congested port operations and labor contract negotiations in the United States, per Barron’s. That’s left retailers such as Best Buy struggling to keep items in stock. 
  • While inflation was initially stoked by supply-chain problems during the pandemic, Russia’s invasion may prolong those issues and push up energy costs, per The New York Times. 
  • The tight labor market is making it difficult to attract and retain retail and supply chain workers. 
  • Many workers have not seen their incomes keep up with inflation. Consumer prices rose 7.5% in January from a year earlier, the fastest pace in four decades, according to the U.S. Bureau of Labor Statistics. And wages were flat in February. 

While those challenges are likely to persist in the short term, retailers are increasingly optimistic about the latter part of the year as the pandemic subsides.

A reason for optimism: Americans in the aggregate have roughly $2.7 trillion in “excess savings” accumulated since the pandemic began, thanks to a combination of government financial support and limited spending options during the pandemic, per the Times. 

  • Companies are optimistic. They’re spending to combat supply chain issues. For example, orders for nondefense capital goods excluding aircraft—equipment that corporations purchase to produce the goods they sell—are at a record high.
  • “We should see better supply-side news as shipping bottlenecks slowly clear, input shortages diminish, and Americans return to the job market,” said Nancy Vanden Houten, lead US economist at Oxford Economics, in a research note reported in TKer.

The big takeaway: There’s no escaping the reality that the global landscape is causing significant uncertainty. But retailers can lay the groundwork for a strong second half. 

  • They can accelerate their planning to account for the possibility that elongated transit times will persist. 
  • By exhibiting inventory discipline, they can limit their excess inventory.