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Flexport Holiday Forecast? ‘Steady As She Goes’

With the holidays right around the corner, Flexport’s consumption forecast sheds light on what to expect in consumer trends this coming season. Hint: it’s not great, but it’s not bad, either.

Overall, consumption is “steady as she goes,” Phil Levy, Flexport chief economist, said. “But that actually is news, because it certainly hasn’t been steady all the time. And of course, we also have pretty substantial fears out there that as we’ve had steadily mounting interest rates, that we’re going to see a major fall.”  

But not to worry about that right now. Forecasting solely through December, Levy said, the data points reference seasonably adjusted numbers.

The platform for global logistics has created the Flexport Consumption Forecast (FCF) to address the questions raised from an economics and logistics perspective based on real-time data rather than solely on historical data. The FCF shows the outlook for real, inflation-adjusted personal consumption expenditures (PCE) on a seasonally adjusted forecast.

Breaking PCE into three major components—services, durable goods (products lasting more than three years) and nondurable goods—PCE accounted for two-thirds of GDP in the 12 months to the end of June and has been a primary driver of the recent expansion in GDP with a growth of 5.4 percent on an inflation-adjusted basis in the 12 months to June 30, 2022, compared to the same period the previous year, according to the FCF.

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“It’s still true that we see nondurables consumption holding steady at fairly elevated levels,” Levy said. “This is not a crash or anything sort of moving down.”

So, what does this mean for the holiday season?

“We are having this kind of recession watch, we know there are policy changes coursing through and we’re getting a lot of conflicting signals on the economy,” Levy said. “Inventories are really full—that really sounds like a slow down, and it does but then you hear, oh, historically tight labor markets and prices are getting pushed up, it’s not usually something we associate with a slowdown. So it is a conflict.” 

Many retailers have suggested inventory levels are currently higher than what they would like, driving many to consider price reductions. The FCF stated inventories have increased 2.1 percent on an average monthly basis over the past 12 months on a nominal basis.

“This is one of the big puzzles, which is that we’ve seen inventories built up. But if you look at inventory to sales ratios, they’re fairly high,” Levy said. “One of the big questions is: How do we interpret that? What does it mean that things have gone up? Does it mean that [they] didn’t want higher levels of inventories but sales are disappointing? Does it mean they got shipments late and ended up with things that are no longer timely to sell? That’s one reason we’re so interested in what’s going to happen in the fourth quarter.”

Flexport research found that around half of companies believe they have overbuilt their inventories due to over-estimating demand. With inventory glut, around one-quarter stated they plan to apply discounts to reduce stock levels.

But not everyone is ready to jump to promotional price points.

“Our motto is to move like water, so things change, but we’re changing with it and pretty quickly,” Alex Polushkin, vice president of logistics at Parade, said. “Everything that we produced for the holiday season is here, we’re launching a few things early but I think 85 percent or 90 percent of the product that we brought in is ready. We’re not doing any early Black Friday [or] Cyber Monday type launches because we think we’re going to have a good situation in our warehouses.”

Inclusive underwear brand Parade serves a primarily millennial and Gen-Z audience since its founding in 2019 by Columbia University dropout Cami Téllez. As one of the fastest-growing D2C brands on the market, Parade has sold over 4 million pairs of underwear and acquired 1 percent of the U.S. customer file in the 32 months since its launch.

“I wish I could match your confidence,” Aman Advani, co-founder and CEO of Ministry of Supply, said in response to Polushkin. “How do we buy what we call tier one evergreen SKUs so that [the] inventory to sales ratio isn’t quite as scary when it’s grade A inventory? And if that’s the case, you don’t have to play the promotional game we’ll certainly see this holiday season. We are optimistic but I would say cautious on what the next three to six months look like.”

For the technology-led fashion brand, gross merch value is outpacing the brand’s growth by about 45 percent, Advani said. “Despite the explosive growth, we’re still holding a substantially larger amount.”

And Ministry of Supply isn’t alone. Adidas has cut its full-year revenue and income forecasts in response to a slowdown in sales and waning demand, Walmart lowered its full-year earning outlook and even Nike plans for an increase in markdowns in hopes to offload excess inventory.

Still, holding more product might be better than absorbing “immense” stockout costs, Advani said. “We’d like to be more lean naturally by focusing on these fewer, bigger SKUs,” he added, but if that’s not the case, “we’re much better off leaning heavily on the overstock route as long as it’s good inventory.”