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Supply Chain Woes May Not Ease Without a ‘Softening of Consumer Demand’

Though last year was characterized by the breakdown of the consumer goods supply chain, experts worry that 2022 could be cut from the same cloth.

“The No. 1 challenge in 2022 for importers, exporters and U.S. retailers of apparel is still the trans-Pacific capacity issues and pricing,” said Vincent Iacopella, executive vice president of growth and strategy at Alba Wheels Up.

The customs broker first noted a “shock” to the balance of supply in demand around April 2020, Iacopella said. Consumer appetite for apparel initially did a nosedive before roaring back, prompting brands and their logistics partners to shift into overdrive.

Over the past year shipping prices have skyrocketed on surging demand for container space. “The only thing that alleviates this, really, is a softening of consumer demand,” Iacopella said. “As long as there’s a demand for products, there’s going to be demand for space and capacity, and the price is going to be high.”

The sector has already seen evidence of this during the holiday season, according to fashion and retail consultant Rick Helfenbein, who formerly helmed the American Apparel and Footwear Association. Retail sales grew year over year by more than 14 percent, National Retail Federation data shows, amounting to $886.7 billion spent on gifts and other items during the period.

“It was a good holiday season, and the way things are going right now, it looks like this will be strong all through 2022,” Helfenbein said—a phenomenon considering that “inflation is at a 40-year high, while consumer sentiment is at a 10-year low.” As consumers begin to feel comfortable returning to restaurants and going on vacations, spending should conceivably shift from products to experiences. “You would think the well would dry up, and that they’d be spending less online,” he said. “It hasn’t happened yet.”

“We all know [consumer demand] is going to cool off,” Iacopella added, “but the question is when, and whether it’s a soft landing or a crash.” In the meantime, however, prices on freight are unlikely to completely stabilize, as brands and retailers may have been hoping heading into the new year.

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Logistics costs may never return to pre-Covid levels, in fact. If the cost of shipping a container was $4,000 in 2019, and that price rose to $20,000 during 2021, the stabilized rate may lie somewhere in between, Iacopella said. “$20,000 may be the wrong price, but so is $4,000,” he added. “We can look for an adjustment with the softening of demand, but I don’t think we go back to pre-pandemic pricing.”

In fact, the Purchasing Managers Index (PMI) shows that an “extreme” softening of demand might only have a 10-percent impact on ocean freight, Iacopella said. “If [prices] increased by 5x during the past two years, and there’s only a 10-percent adjustment, that’s not much,” he added. Brands are “still going to be looking at a higher cost than what we were used to,” even when supply and demand stabilize.

Helfenbein pointed to spiraling costs of raw materials, especially cotton, a factor that will add to brands’ production costs even if they are able to solve the logistics puzzle.

The recently passed Uyghur Forced Labor Prevention Act bans the import of products from China’s Xinjiang region without proof that they were produced free of forced labor, stymying importers dependent on the country’s cotton. “You’ve got to be really careful where you get your cotton from,” he said, adding that the new legislation “raises the demand and limits the supply.”

The race for raw materials will likely accelerate companies’ adoption of sophisticated traceability solutions like DNA tracing and isotopic testing, which can determine a material’s provenance down to the fiber level, Helfenbein said—but these new capabilities will come at an expense. Still, despite these many headwinds, he cautioned brands against raising prices too high in response.

“We have an old saying: prices go up, sales go down, jobs get lost,” he said. “If you are a retailer and you set your prices too high, you’ll see diminishing returns,” he said.