Talking shop: Choppy waters persist

Conflicts in the Middle East and Ukraine have shown no sign of abating, with their impacts still sending shockwaves throughout global supply chains. It’s estimated between 80-90% of global freight touches the sea, which is why the impact is so profound. The additional sailing time and costs of diverting ships around The Cape of Good Hope, coupled with port and labour strikes, port congestion, blank sailings and poor weather conditions has compounded delays and costs. In this snippet, we discuss the ongoing impacts on UK Retail, on specific segments of retail, and what alternatives are out there.

Impacts on UK retail

Large Retailers navigating rising costs and ongoing supply chain disruptions must employ effective and innovative strategies to maintain competitive pricing. Those able to do so will gain a significant advantage, while those unable to adapt may struggle to sustain profit margins.

Larger companies can often leverage contracts to lock in prices and maintain pricing stability, which can protect them from seasonal swings and idiosyncratic volatility. These companies also benefit from established relationships with forwarders, giving them greater bargaining power and more flexible shipping options, further insulating them from market volatility.

Small and Medium-Sized Enterprise Retailers
Many SMEs may be compelled to revise their pricing and offering strategies in response to increased freight costs. This could result in:

• Rising Product Prices: SMEs may need to pass on the additional costs to consumers by increasing prices.
• Absorbing Costs: Some businesses might opt to absorb the higher costs, leading to smaller margins.
• Streamlining Product Lines: SMEs may eliminate product lines that are no longer profitable due to cost increases, which could potentially risk their overall business stability especially when it comes to core products.

Impact on specific retail segments

Electronics
The electronics industry heavily relies on importing components and finished products from China. With the rise in ocean freight rates, many electronics companies have been forced to raise their prices to maintain profit margins. However, at a time when consumers are particularly price-sensitive, these price increases may suppress demand and negatively impact sales volumes.

Apparel and footwear
The industry is facing significant inventory management challenges. To mitigate potential supply chain disruptions caused by extended shipping times, many retailers are considering air freight in the short term, and near shoring in the longer-term.

Garden & Furniture
This segment saw over-ordering during the COVID-19 pandemic and may rely on some of this excess stock to bridge supply gaps.

Transport options

Air Freight
Retailers are expediting a proportion of stock using air cargo to fill short-term inventory gaps, especially for high-demand items. While air freight is significantly more expensive, it provides a faster alternative to avoid empty shelves during peak seasons for high-value products.

Rail Freight
While rail is more expensive than ocean freight, it is significantly cheaper than air freight. Rail transport is particularly beneficial for larger & high-value goods that require faster delivery times but cannot justify the higher cost of air transport.

The primary route utilized is the New Silk Road. this route is part of China's Belt and Road Initiative and provides a land-based alternative to ocean freight. However, the geopolitical landscape significantly affects who can or chooses to use this route.

Alternative Routes
In response to the reluctance to use the Russian corridor, there's been a growing shift toward the "Middle Corridor," which bypasses Russia by passing through Kazakhstan, the Caspian Sea, Azerbaijan, and Georgia. While this route is longer and more complex, it is increasingly favored by companies looking to avoid the geopolitical risks associated with the northern route.

What does this all mean?

Peak rates for 2024 should’ve passed albeit still significantly elevated from 2023. So long as conflict persists in the Middle East, effectively blockading the Suez Canal, sea freight rates will remain volatile. However, the ingenuity and resilience of UK Retail never ceases to amaze even the most pessimistic observer.