Mike Lesso has a problem that two years ago most furniture retailers could only dream about: too much product.
Lesso, who serves as division vice president of supply chain for furnishings retailer American Freight Company, said his locations—which number more than 300 in 40 states and Puerto Rico—have around 850 containers of product sitting in parking lots, waiting for room in warehouses and on the showroom floor.
“When we couldn’t get primary inventory, we went out and bought contingency buys,” Lesso said. “We have a lot of that product on the water and in our stores. We’re trying to burn through that product to free up cash.”
At the recent American Home Furnishings Alliance (AHFA) Logistics Conference, Lesso and several other retailers, as well as global supply chain experts, gave attendees a look at the changing landscape of furniture retail and shipping in a post-pandemic world.
As demand for home goods skyrocketed in 2020 and 2021, desperate retailers scrambled to order inventory to replace product flying out of their showrooms. But Covid shutdowns in China and Vietnam coupled with container shipping logjams at West Coast ports meant many of those orders went unfulfilled for months or even years. Now some retailers are receiving a glut of backordered product when demand has softened, leaving them with too much inventory and nowhere to put it.
“It’s feast or famine,” said John Gray, owner of Custom Home Furniture Galleries in Wilmington, N.C. “When it’s feast we ran out of warehouse space and we had to find more warehouse space. We tripled our output, but we’re barely keeping our heads above water. We placed an order a year ago and a backup order six months ago, and they’re both ready now.”
And this problem isn’t limited to smaller furniture retailers. In early June, Target announced it would pull back on home goods and furniture to better right-size its inventory.
“The amount of time from when an importer picks up a container to when they return it empty has ballooned by 50 percent since April,” said Peter Tirschwell, vice president of maritime, trade and supply chain, S&P Global. “There’s a huge increase in inventories, so you see Target saying they’re going to discount a lot of stuff.”
Freight v. warehouse
But while large retailers like Target can stomach losses from discounting, smaller companies don’t have that luxury since they’re already paying more for inventory thanks to inflated ocean freight fees.
“We’re not discounting with the thin margins because of freight,” Lesso said. “We have about 60 weeks of supply on hand across the country.
A lot of us are trying to cancel POs from 16-17 months ago that we just don’t have the space for.”
Ocean freight rates have dipped a bit in recent months, but they still far exceed any pre-pandemic number. According to Statista, global container freight rates averaged around $1,720 per container in January 2019. By September 2021, that number was $10,361, and it had only dropped to $7,365 in May 2022.
“Many times our container’s goods were worth the same amount as the freight costs,” Lesso said. “When you have the goods coming in and need somewhere to put it, you’re in a bidding war for property. It’s an actual problem if you’ve been able to procure product.”
And for retailers that deal in seasonal merchandise, the inventory they receive now may be late orders for holidays that they won’t be able to use for months.
“So much product has been bottled up in transit,’ Tirschwell said. “Christmas goods are not going to be needed for a while in [the] distribution center, so you have a mix of inventory they need now with inventory they won’t need for months, and that’s not an ideal distribution center inventory.”
While Tirschwell said things have begun to move a bit more smoothly across the ocean, once containers reach the U.S. ports, challenges with ground transportation become a hurdle. According to the trade group American Trucking Associations, the U.S. experienced a record deficit of 80,000 truck drivers in 2021.
“Containers are there but there are no chassis so your ability to move and get it going is severely limited,” Tirschwell said. “It’s the tail end of this macro situation since we shut down in 2020.”
Tirschwell said that even though demand for home furnishings has begun to soften, the ocean and ports are still congested because of disruptions dating back months and even years.
“The only reason it has persisted throughout the pandemic to this time is because of one barrage one after another,” he said. “The Suez Canal being blocked, followed by the lockdown in Shenzhen, followed by the Union Pacific shut down, followed by Shanghai being locked down. This year is going to be rough until the volume begins to ease.”
‘Like stabbing your friend in the back’
Add to that longshoreman union negotiations on the West Coast that have the potential to further disrupt the flow of product. The International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA) have been negotiating the contracts of more than 20,000 port laborers, with a deadline of July 1 to reach a deal. The Biden administration has stepped in to assist in the negotiation process, with the aim of preventing labor strikes that could cripple the flow of goods into the U.S.
“Pressure on the union and management to get a deal is white hot,” Tirschwell said. “Biden is the most pro-union president in a generation, and the disruption would come from the union—it would be like stabbing your friend in the back.”
One of the issues stalling negotiations is automation. The ILWU allowed three West Coast terminals to automate handling in 2008, but the union has since changed its stance on automation and asked to rollback that approval. But Tirschwell said the ocean carrier lines represented by the PMA have coffers full enough to leverage a deal if necessary.
“The ocean carriers are very wealthy right now, so they have potentially the war chest to buy these guys off,” he said. “Maybe they throw in longterm care insurance and other benefits that make the union happy enough to let automation go for the time being.”
“You see longterm decline of market share on the West Coast and a longterm increase of market share on the East Coast and in the Southeast,” he said. “When you’re using East Coast ports, the possibility of longshoreman disruption isn’t there. Here, things are moving, and that has been a foundation of the growth of ports on the East Coast.”
And while relief for shipping challenges may seem distant, Tirschwell said the system is on track to right itself and return to a more normal flow, barring any further unexpected disruptions.
“Economists say the U.S. GDP growth will be half of what it was last year,” he said. “We’re entering this period of economic slowdown, and unless we have a black swan event, things are going to normalize. That will result in more consistent service and lower rates.”