The days may be growing colder, but retail is beginning to feel the heat.
Persistent shipping delays have constricted a normally abundant flow of seasonal goods to a trickle as the holiday gift-giving season kicks into overdive. While brands grapple with how to stock their shelves, they’re also contending with unfavorable margins on goods that have become increasingly costly to import.
For the consumer keen to spread holiday cheer, that spells fewer gift choices online and in stores—and higher prices at checkout.
“There’s been this massive, mind-numbing disruption in service and supply all over the world in all categories,” Mark Cohen, director of retail studies at Columbia University’s business school, told Sourcing Journal. “Little Johnny and little Mary won’t be bereft of gifts,” he added, “but their gift givers may have to be a little more creative this year.”
Brands at an inflection point
While brands have attempted to shield shoppers from price hikes in recent seasons, the levee is finally breaking.
Normally characterized by aggressive markdowns and shopping events like Black Friday and Cyber Monday, this holiday season could instead be defined by price increases of up to 20 percent, according to data from Salesforce.
The group’s insights, gleaned from the 24 top online retailers in the U.S. over the month of August, revealed that American brands and retailers are expected to face a $223 billion increase on the cost of goods sold this fall. The maelstrom caused by skyrocketing logistics and labor costs, along with inflationary pressures, is pushing brands to augment prices during the busiest shopping season of the year.
U.S. companies are on track to spend $163 billion more on ocean freight in the second half of 2021 than they did during the same period in 2020, the group said. Meanwhile, the Ports of Los Angeles and Long Beach—which together handle about one-third of the cargo that arrives on American shores—have seen upward of 60 vessels waiting to berth for weeks, with seasonal goods ripe for sale trapped in containers.
Salesforce also estimated that retailers will spend an added $47 billion in November and December on additional wages for store associates, as compared with 2020 numbers—and stores still stand to face a labor shortage of about 350,000 workers heading into the holidays.
A confluence of issues with “products, process and people” have precipitated the crushing costs, which have left companies desperately grasping at slipping margins, Cohen said. But asking brands if they plan to pass price increases along to shoppers is akin to asking parents if they favor hitting their children, he added. “Very few will go on the record, because it’s not good press.”
Some brands and fashion firms have spoken publicly about the challenges they continue to face this fall, and the role that price hikes will play in their forward-looking strategies.
American heritage denim brand Levi’s said it raised prices on its products by 5 percent during the second quarter. On an earnings call Oct. 29, president and CEO Chip Bergh said that the decision was one factor that helped limit the revenue impact of the supply chain disruption to less than $10 million during Q3, which ended in August.
The company has taken a hard look at its pricing structure over the past 12 months, he added, “in anticipation of costs going up.” U.S. spot cotton prices averaged $1.14 cents per pound for the week ended Nov. 4—the highest weekly average in about a decade. “I think, if the inflation issues and-or cotton and-or cost of goods can get worse, then we’ve got that built into our model right now,” he said. “If we have to take more pricing, we’ll figure out where and how to do that.”
Meanwhile, the average selling price for a pair of clogs from Crocs jumped 15 percent year over year, reaching $24.42 in Q3, which ended Sept. 30. CEO Andrew Rees addressed the challenges posed by ocean freight delays on a call in late October, noting that Crocs is “aggressively leveraging airfreight”—to the tune of an added $75 million in added logistics costs—to bring in units for the spring 2022 selling season.
“We do have some price increases that we took this year that will flow through into next year,” executive vice president and chief financial officer Anne Mehlman added, noting that Crocs is still “proactively looking at other measures and things that we can do to kind of offset any inflationary pressures.”
Colorado-based Qurate Retail, which owns and operates home shopping networks QVC and HSN along with e-tailer Zulily, noted the headwinds posed by rising logistics costs while detailing third-quarter results. President and CEO David L. Rawlinson noted on Nov. 4 that Qurate is “seeing cost inflation for freight, fulfillment labor and marketing costs,” which led to a “larger-than-normal deviation between demand sales and net revenue in the quarter.”
“We took multiple pricing increases to counter cost inflation and average selling price increased at all of our businesses,” he said.
Coach, Kate Spade and Stuart Weitzman owner Tapestry also addressed price increases in a Nov. 11 earnings call, where chief financial officer and head of strategy Scott Roe noted that the company has taken early action to mitigate supply chain challenges by heavily investing in securing freight options heading into 2022. Roe said it plans to drive continued underlying gross margin expansion—despite increased logistics costs—through lower discounting and “price increases that will be implemented for the balance of the year across brands.”
Despite logistics logjams causing delivery delays and reduced production capacity at its Vietnam factories, luxury firm Capri Holdings’ CEO John Idol credited two-year-old price increases at subsidiary Michael Kors for the label’s “higher revenues at higher gross margins” in fiscal Q2, which ended Sept. 30. Now, the firm has raised prices on Jimmy Choo products, not only to offset supply chain costs, but to recapture the brand’s luxury positioning, he said.
Price increases are unlikely to deter consumers over the holidays, Cohen said, as they have become increasingly aware of the challenges to the retail supply chain and attuned to the fact that deals and promotions will likely be “muted” this year. “Where supply is limited, demand will always cause prices to rise,” he said, “and the deadly discounting will abate.” A break from the discount-driven frenzy that has defined the Q4 retail landscape might also offer beneficial reset for brands looking to drive full-price sell-through, he added.
Out-of-stocks may leave shoppers stumped
In October, digital shoppers encountered 2 billion out-of-stock messages while shopping online for an array of consumer goods, according to Adobe’s Digital Economy Index. That’s a 250 percent increase from the pre-pandemic period of January 2020—and 325 percent higher than October 2019.
According to the group’s research, apparel searches yield the third-greatest number of out-of-stock messages, trailing only electronics and jewelry. And despite the well-documented and long-felt troubles impacting last-mile delivery services, consumers still plan to do much of their gift shopping online. Adobe projects they will spend a record-setting $207 billion online from Nov. 1-Dec. 31.
Still, an Oracle survey of more than 1,000 U.S. shoppers showed that consumers are anxious about how supply chain challenges will affect holiday shopping. Nearly all respondents (92 percent) reported feeling concerned that delays would prevent them from being able to buy the gifts and items they need, and 66 percent said they were worried the logistical delays would ruin the holidays altogether.
Their concerns aren’t unfounded: 87 percent said they had already been negatively impacted by issues with the consumer goods supply chain over the past year, and 43 percent said they had missed giving gifts for special occasions as a result. Product shortages were a source of ire for 60 percent of shoppers this year, and 62 percent worry that out-of-stocks will continue to impact future shopping trips. Seasonal products were a particular source of concern for respondents, 45 percent of whom said they worried they wouldn’t be able to find the cold-weather duds or holiday-themed gear they wanted for their celebrations.
Brands and retailers have made mad dashes to bolster their e-commerce capabilities over the past 20 months, with retail shutdowns forcing stores to shutter and the limited availability of goods pushing them to allocate inventory where it’s needed most. While shoppers are now noting a rise of out-of-stock messaging online, brick-and-mortar has been showcasing an anemic selection for months.
But retailers began placing their holiday orders weeks or months earlier than usual this year in anticipation of the continued delays, and Cohen believes the fear of empty racks may be overhyped. “Shelves are not going to be barren—some may be, in certain locations, of some things,” he said—but shoppers will likely gravitate to alternatives that are available.
The larger issue for brick-and-mortar may be the dearth of workers, according to Cohen. Without enough associates to offer guidance and re-stock shelves, the in-store experience could prove hectic and disappointing, and ultimately drive shoppers back to their digital devices.
“I think a lot of people will continue to do what they have been doing, which is take advantage of the convenience and the surety of shopping online,” Cohen said. “Availability is much more visible than in brick-and-mortar, and if you’re dealing with a reputable site, they’ll either show you whether something is available to ship or tell you it’s out of stock.”
Holiday 2021: year of the gift card?
There’s no question that holiday shopping will look different this year, but Cohen believes there’s an answer for “the frustrated shopper who can’t find anything that they find appealing” at retail.
“A smart shopper will wait until the first quarter because that’s when everything will be likely back on the shelf—but too late for the holiday season,” he said. Once the influx of shipments from overseas dies down and workers are able to sift through the backlog, retailers will be left with “a glut of inventory—and a lot of it is going to be merchandise that’s past its sell-by date.” Retailers will be forced to heavily discount seasonal holiday items and heavy-weight, cold-weather garments during the early months of 2022 in order to make way for spring product, Cohen said.
“I think I think that gift cards are the perfect answer to any level of frustration or concern or insecurity with regard to the holiday season,” he added. Shoppers are increasingly purchasing these vouchers digitally and sending them directly via email, eliminating the need to engage with overburdened mail service providers. National and online retailers like Costco, Walmart, Target and Amazon are most likely to benefit, due to their sizable retail footprints and ability to serve customers anywhere, in Cohen’s opinion.
“The e-gift card is going to have a wild year,” he said.