02 August 2022
Supply chain update: Disruptions continue, candy constraints
Company earnings calls offered a view into the continued challenges in moving consumer goods.
Company earnings calls offered a view into the continued challenges in moving consumer goods.
The last two years brought many distinct economic swings: Pandemic, supply chain challenges, inflation, inventory glut. The effects of these aren’t playing out in isolation. Rather, they are overlapping.
While the conversation is currently focused on inflation and a potential downturn in consumer spending, it’s worth remembering that supply chain constraints are still present for consumer goods companies, even though the bottlenecks of 2021 are no longer as prevalent. Reports of shortages have continued, with products ranging from baby formula to tampons to sri racha hot sauce becoming more difficult to find in recent months.
Hershey recently delivered the latest sign that the supply struggles aren't completely over: The company warned that it won’t be able to deliver enough Halloween candy to meet demand.
Public company earnings calls to recap the second quarter offered insights into what’s going on behind the scenes.
For apparel company Skechers, delays remain present in Asia, where the pandemic continues to affect business operations.
“We continued to experience challenges from shipment delays, particularly in Asia as a result of COVID-related countermeasures to domestic processing congestion in our distribution centers and those of our customers,” said CFO John Vandemore.
Supply chain issues affect the future as much as they do the present, as goods are ordered months in advance to arrive for specific seasons. So it's a factor as the company looks toward the rest of the year, as well.
“Our supply chain and logistics teams are working diligently to ensure our products are delivered to our customers and stores and ultimately reach our consumers as quickly and efficiently as possible," Vandemore continued. "However, we do expect supply chain disruptions to continue to constrain our ability to fully meet consumer demand and to drive distribution inefficiencies throughout the balance of the year.”
Still, there are signs of improvement.
“Relative to the last time we updated you, we're starting to see the level of supply chain disruption ease, albeit nowhere near the pre-pandemic normal,” said Matt Puckett, CFO of VF Corp., the apparel company that owns Vans, The North Face and Dickies.
Puckett offered commentary on the steps that move goods from production to retail.
“In terms of logistics, we're seeing improved transit times across the water, reflecting a slight ease in congestion and shortened dwell times in port,” Puckett said. “This is leading to overall better predictability and reliability. From a cost standpoint, there is some abatement in spot rates, both ocean and air, albeit these remain high relative to historic levels.”
According to Nestle CFO François-Xavier Roger, the supply chain challenges for the food company are coming on three levels: Capacity, transportation and access to raw materials. Finding trucks and drivers was particularly "tense" in the second quarter, Roger said, while the war in Ukraine led to difficulty in obtaining raw materials.
“This has been a year of extraordinary supply chain challenges and input cost inflation,” said Mark Schneider, CEO of Nestle. “The situation was difficult before, but the war in Ukraine brought this to a whole new and unforeseen level, in particular for the food industry.”
Supply chain is one of the reasons Columbia Sportswear is taking a more conservative approach to its outlook for the rest of the year.
"Supply chain challenges remain elevated and are anticipated to continue throughout the rest of the year," CEO Tim Boyle said. "We have worked to mitigate supply chain constraints by taking orders earlier from our retail partners and placing orders earlier with our factory partners."
As-yet-unsolved labor negotiations in West Coast ports and continuing pandemic restrictions in China are among the factors playing into the company's considerations.
Hershey, which makes Reese’s, KitKat and Twizzlers alongside its eponymous chocolate products, offered a view into how supply chain issues have shifted over the last two years.
“Where we are now, I would say early on it was some of the basic logistics issues largely driven by labor, and as we've evolved, I'd say we're now starting to see bigger concerns relative to scarcity of ingredients needing to leverage different suppliers at higher cost and price points in order to secure production,” said Michele Buck, CEO of Hershey.
The war in Ukraine has led to issues sourcing raw materials, and natural gas disruptions in Europe, Buck said.
Combined with capacity constraints, this is leading to a shortage that may leave some trick-or-treat bags lighter this year.
When it comes to Halloween and holiday candy, “We will not be able to fully meet consumer demand,” Buck said. The company makes every day and seasonal candy using the same production line. When it made decisions about what to make in the spring, it identified a need to improve the every day inventory, which took precedent over the seasonal candy.
“We have a strategy of prioritizing everyday on-shelf availability,” Buck told analysts, adding that the company is still expecting single-digit growth through the fourth-quarter holidays.
“It was a tough decision to balance that with the seasons, but we thought that was really important.”
The retailer's marketplace is expanding quickly.
When it comes to ecommerce growth, was the pandemic a blip or a new trendsetter?
As we move further from the height of COVID-related closures, it’s a question that will start to be answered through the lens of history.
So far, the narrative of ecommerce growth in the U.S. from 2019-2022 has gone like this: Ecommerce’s share of overall retail saw a huge spike at the height of the pandemic in 2020-21, when goods in general were in demand and online shopping was necessary to preserve health and safety. Experts looked out and saw a permanent exponential change in the penetration of ecommerce as a share of retail that would last beyond the pandemic. Then, in 2022, everyone went back to stores and the trendline came back to 2019 levels. Growth was no longer exponential. There was still growth, but it was not happening as fast as during the pandemic period.
With this in mind, it’s worth pointing out that 2023 is the first year that there likely won’t be a pandemic-influenced swing to influence ecommerce growth. It is also a year where demand has suffered challenges amid inflation and interest rate hikes.
So as we seek to determine the importance of ecommerce to overall retail, it’s worth it to continue taking a close look at what growth trends retailers are seeing now, whether ecommerce is remaining resilient amid consumer pullback and how retailers are preparing for the future.
The latest example arrived this week from Macy’s. It’s a fitting one for the times. Overall, Macy’s is seeing a slowdown as consumers pull back on discretionary purchases, with sales declining 7% in the first quarter versus the same quarter of 2022. Digital sales were down 8%.
Macy’s is particularly susceptible to the macroeconomic headwinds that many brands and retailers are facing, as spending among the middle-income consumers it counts as a primary customer base is particularly softening, said GlobalData Managing Director Neil Saunders.
But while ecommerce is slowing overall, the importance it gained to Macy’s business during the pandemic is remaining in place.
In 2019, ecommerce made up 25% of Macy’s revenue, CEO Jeff Gennette told analysts on the company’s earnings call. That jumped to a high of 44% in 2020. By 2022, digital reached 33% of sales after the pandemic boom. In the first quarter of 2023, it remained at 33%. So, while the trend line dipped after shoppers returned to stores, ecommerce share still settled in at a higher post-lockdown point than it was before the pandemic.
This came in a quarter in which traffic was “relatively good” across both online and in-store, Macy’s CEO Jeff Gennette said. It was “flattish” online, and slightly up in stores.
“We do expect that this is the reset year with the penetration between them,” Gennette said. “But we do expect more aggressive growth in digital in the future versus stores as we think about '24 and beyond. And that's going to be foisted by a lot of ideas and strategies.
Over the last year, the retailer has made investments in boosting ecommerce, even as shoppers returned to stores. In a bid to boost the assortment of goods available online, Macy’s launched a marketplace in September 2022 that welcomes goods from third-party sellers.
The marketplace had an “outstanding” first quarter, said Macy’s President Tony Spring, who is poised to succeed Gennette as CEO next year. Gross merchandise value increased over 50% when compared to the fourth quarter of 2022, while the average order value and units per order for marketplace customers was 50% above those not shopping at the marketplace.
Macy’s is continuing to build the marketplace even as it racks up sales. The retailer added 450 brands, ending the quarter with 950 brands.
This is helping to draw in new customers, as well as younger existing customers who are buying more items, resulting in increased basket size.
“We're very excited as to how marketplace is really attracting the Gen Z customer, particularly in categories where it was not economically feasible for us to carry in the past,” Gennette said.
In the end, Gennette said a strong digital and social presence is key to attracting younger consumers. That's a different type of shopper than other age groups.
“We know the younger customer starts first online,” Gennette said. That behavior will still be in place as the generation gets older, and gains more buying power in the process.
Going forward, Macy’s is seeking to expand the model to other retail banners in its portfolio. Bloomingdale’s will open a marketplace in the early fall.
The Macy’s ecommerce trajectory isn’t that different from the wider U.S. ecommerce narrative detailed above. With one quarter of 2023 data, there is evidence that ecommerce share settled out at a higher point after the pandemic than where it started before COVID arrived. There is flattening now, but the retailer is taking it not as a sign of a slowdown, or a signal to change course. Rather, it sees changing consumer behavior as a reason to build for the future.