Unhappy Holidays ahead as Coupa study finds supply chain crisis leaves retailers pessimistic

Profile picture for user slauchlan By Stuart Lauchlan November 22, 2021
Summary:
Retail's supply chain nightmare before Christmas! How badly is the global crisis likely to derail retailers prospects in the upcoming Holidays season? A Coupa study will do little to calm nerves.

Christmas

We’ve heard a lot about the global supply chain crisis over the past few months, particularly in relation to the retail sector where no analyst call at present is complete without a lengthy dive into how the organization in question plans to get goods onto the shelves or into the e-commerce distribution hub.

Some of the larger retailers, such as Walmart and Target, have taken proactive action to tackle the situation, commissioning their own cargo ships to get goods to the right place at the right time. But few retailers have the deep pockets to be able to emulate this approach and are heading into the Holidays with considerable nervousness.

Quite how bad this season will be remains to be seen or how much it is going to hit already COVID-beleaguered retailers bottom lines. We’ll have some clue to the former in a matter of weeks. 

As for the impact on the bottom line, spend management specialist Coupa has just released the results of a four nation study that provides little evidence to calm the retail nerves. 

Retailers in the US, UK, France and Germany anticipate revenue losses of between 5-20% over the past 18 months due to supply chain issues. More than half (58%) estimate losses over 5%, while a quarter (26%) said losses were likely to be greater than 10%. And things aren’t likely to get much better over the next 18 months, with 90% of respondents downbeat in their expectations.

The US and the UK are likely to be the hardest hit, according to the study, which polled more than 600 retailers. US retailers report average losses of 5.7%, equating to $68 billion from its GDP across the past 18 months, followed by the UK with 5.3%, equating to £5.6 billion from its GDP. Germany and France reported lower average losses of 5.3% and 4.8% respectively.  

National circumstances vary of course. The UK, for example, has the additional complication of a post-Brexit shortage of HGV drivers. Supply chain disruption is the biggest concern for US retailers (61%), followed by staffing issues (34%) and reduced foot traffic due to COVID (34%), while in the UK supply chain disruption comes in at 64%, followed by COVID’s impact on footfall (37%) and ongoing staffing issues (27%).

Holiday planning 

And the Holidays are only to highlight all of this further, according to the study.  Nearly two thirds of retailers globally (63%) are concerned that supply chain disruptions will hit Christmas revenues. UK firms are particularly wary, with 72% fearing festive failures compared to 63% in the US and 60% in France and Germany respectively.  As of now, with Black Friday/Cyber Monday looming, 70% of respondents warn that there will be fewer deals to be had for consumers, by as much as 75%.

What all of this means is further incentive to shop early. We’ve seen plenty of predictions of an extended Holidays shopping season this year and that’s looking increasingly likely. Over half of all retailers globally (51%) plan additional promotions to get customers shopping, while 46% will be displaying Christmas products earlier. (Given the first Christmas puddings appear on the shelves of UK supermarkets in September anyway, that’s a challenge that some retailers may find hard to meet…)

So how is that all tracking out on the ground? As noted above, every public presentation by a major retailer currently has a focus on how far the supply chain issue is or is not impacting on the firm. For Walmart, John Furner, CEO Walmart US, insists that the firm is ready for the Holidays:

It's an important time of year in general merchandise and the food businesses as our customers prepare to celebrate Holidays all across the country. We took a lot of steps early in the year to try to get ahead of what we thought could be some congestion and some other supply chain pressures that we've been facing throughout the year. Some of the things that helped us in the quarter…like chartering vessels, ensuring that we were forecasting appropriately and then managing the labor across each and every piece of the supply chain, has been paramount to being able to deliver an increase in inventory of over 11%.

But at Kohl’s, the inventory level at the end of Q3 is down 25% on a two-year basis. This inevitably presents challenges for the business, admits CEO Michelle Gass:

Like many, our business has been impacted by extended transit times resulting in inventory receipt delays, and significantly higher transportation costs…While we planned inventory to be down this year as compared to 2019, aligned with our strategy to drive margins and turnover, our levels remain below that original plan.

We have aggressively implemented a number of measures throughout the supply chain to mitigate and minimize production and transit delays. We also made sure that we protected new brand receipts and inventory tied to key promotional events. While it will take time for our inventory to rebuild, I'm confident that the team is doing everything they can to mitigate the supply chain challenges as effectively as possible.

Product availability has picked up since earlier this year, argues Niraj Shah, CEO of home furnishing e-tailer Wayfair, but it’s far from normal:

We feel reasonably well positioned in the Holidays and have built our promotional calendar to ensure adequate supply and sufficient lead times. Still, it is true that the home category, like many sectors of the economy, is facing various supply chain bottlenecks that are resulting in inventory shortages, prolonged delivery time lines and inflation in both wholesale costs and retail prices. Ripple effects from factory closures in Asia, ocean container shortages, port log jams and a tight labor market are all factors that will continue to cloud the picture through much of 2022 even as governments and private enterprises mobilize to remedy them.

This is all changing both buyer and seller behavior, he adds:

Wayfair did not sell items that were currently not onshore, in either our or our suppliers' warehouses. Therefore, we've listed these items as out of stock to the customer. In the current environment, customers have come to terms with much longer lead times on products, and we need to adjust to that. We're just now beginning to sell products that we know are in transit, including those goods that are on the water. In doing so, we are estimating delivery timing further out and using that to level set customer expectations.

Shah’s outlook for the retail sector as a whole is bleak:

To be clear, there is no panacea solution for the supply chain challenges. It will take some time for the world economy to work through, but we're staying flexible and we're doing all we can to drive the best outcomes for our customers.

My take

What plays out over the next few weeks will extremely interesting to track. It’s going to expose a lot about those retailers who have done the spadework on the back end as well as the flashy omni-channel front end. We will return to this as the Holidays data starts to come in.