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How bad will product shortages get this time?
Costco plans to bring back purchase limits on toilet paper and other basic merchandise, although it’s largely due to supply chain challenges and inflationary pressures, rather than the hoarding that took place in the early months of the pandemic.
The wholesale club reported U.S. same-store sales excluding gas inflation and currency effects increased 10.3 percent in the fourth quarter and 13.6 percent in the year ended August 29.
“The factors pressuring supply chains and inflation include port delays, container shortages, COVID-disruptions, shortages on various components, raw materials and ingredients, labor cost pressures and trucker and driver shortages,” Costco CFO Richard Galanti said last week on its quarterly call.
Various major brands are requesting longer lead times, partially due to hurdles finding drivers and trucks on short notice. Lead times on ingredients and packaging have been extended in some cases. “We’re putting some limitations on key items, like bath tissues, roll towels, Kirkland Signature water, high-demand cleaning-related SKUs related to the uptick in Delta-related demand,” Mr. Galanti said.
Major shortages in computer chips are also still “impacting many items” including tablets, video games and major appliances, and those problems “will likely extend into 2022.”
Asked about differences from 2020, Mr. Galanti stressed that the core problem is supply chain related, citing an example of one cleaning supply company’s logistic bottlenecks. He said, “A year ago there was a shortage of merchandise. Now, they’ve got plenty of merchandise, but there’s two to three-week delays on getting it delivered because there’s a limit on short-term changes to trucking and delivery needs of the supplier. So, it really is all over the board.”
To combat shortfalls, Costco is making bigger buys, bringing items in earlier, including toys, and has chartered three ocean vessels for the next year to transport containers between Asia and North America.
At the same time, the retailer is encountering inflationary pressure, caused by many of the same issues. Price increases include mid to high single-digits in fresh foods, led by high single to low double-digits hikes in meat. Mr. Galanti joked, “It’s a lot of fun right now.”
- Costco Wholesale Corporation Reports Fourth Quarter And Fiscal Year 2021 Operating Results – Costco
- Costco Wholesale (COST) Q4 2021 Earnings Call Transcript – The Motley Fool
- Costco brings back purchase limits on toilet paper, cleaning supplies and more – CNBC
- Costco placing purchase limits on toilet paper, other products due to COVID-related demand – USA Today
Discussion Questions
DISCUSSION QUESTIONS: How will the inventory challenges likely facing food and general merchandise sellers in the months ahead be different than those in the initial phase of the pandemic? What similar and unique solutions do you see?
Poll
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Inventory management is going to be the key focus for the holiday season. As noted in the article, the current shortages seem to have more to do with physically moving product rather than shortages of goods per se. That said, shortages are shortages, regardless of how they occur. There are no easy answers here, and the challenges will vary across the board. Retailers will simply need to do their best to manage the situation as best they can.
The causes of the food shortages are understood and how they have been handled has mostly been corrected. The logistics chain was not prepared for this kind of shutdown, however now everyone has learned and is prepared for any kind of similar situation. While costs are still high for logistics, I believe we’ll start to see those decline over the next six months to a year.
I agree with Mark – shortages are shortages whether they are material related or logistics related. Retailers need to load up when they can and, I hate to say this, consumers need to load up too.
Let’s start by saying an overwhelmed logistics network is not a good thing. And, today, our logistics network is completely overwhelmed. Costs are rising rapidly. Goods are not able to get from one place to another. Shortages and inflation are sure to follow. It will be bad and likely get worse before it gets better.
Although you and I are generally optimists, Michael, I agree that the worst is yet to come.
I took a tour this summer at an aviation maintenance contractor near Phoenix. The owner said, “I have 50 jobs available, will provide the training, have plenty of work to do, and will pay extremely well – but (pointing at a giant warehouse across the highway) that Amazon warehouse that keeps expanding is sucking up all the people.”
So not only can we not fill logistics positions today, there won’t be enough mechanics to work on aircraft for years and years. Ugh.
While a spike in consumer demand was the source of most supply chain issues during the initial phase of the pandemic, there are other issues impacting supply chains today. Most of the supply chain issues in the spring and summer of 2020 were isolated to a few product categories and now the supply chain issues are impacting many products. The current supply chain issues are structural ones that don’t go away with changes in demand. Shortages of containers, components, raw materials and ingredients combined with labor cost pressures and shortages of key workers (truck drivers and warehouse employees) make for a perfect storm that will challenge supply chains for quite some time. These issues take time to solve.
To say that the combination of factors has produced the perfect storm is an understatement. Demand is high (consumers have money to spend), ports are full (and there are not enough freight carriers to transport the goods), expenses are up (shipping costs, fuel costs, and labor costs are at record highs), and store shelves are becoming bare.
From a similarity standpoint, I see “stock-ups” on essentials as well as retailers scrambling to find substitutions to avoid out-of-stocks. From a difference standpoint, the U.S. supply chain is in a state of unsustainable disarray.
I believe this will be one of the most disruptive and challenging times that retailers (and their suppliers, partners, and consumers) have experienced in decades. Old Mother Hubbard may be dealing with empty cupboards throughout the holidays and several months into the new year.
There is a wave effect and the tsunami of the pandemic has ripple effects up and down the supply chain. Given the new variants the aftershocks are still occurring causing new waves of lumpy demand and the associated delays. Supply chain disruptions are continuing and hitting retailers from every angle possible. Those retailers who have significant supply chain challenges are really going to have to think on their feet this season. Unfortunately, we will probably be seeing an upswing in the pandemic right when retailers are expecting their biggest sales weeks of the year. When retailers have all their numbers in early next year, it will be interesting to compare those who were able to better control inventory accuracy and visibility by using RFID vs. those who haven’t implemented it yet.
Let’s be clear what we mean by shortages. It is about reduced choice, some inconvenience in having to wait for popular items, and higher prices because demand is high relative to supply. None of that is optimal and there will be negative side effects; but this isn’t an apocalypse which will see families starve because of a lack of food on supermarket shelves. Unfortunately, the disruption will continue for some time as the supply chain snafus will not be untangled easily or quickly.
The disruptions in the supply chain that have been a thorn in consumers’ sides during the pandemic continue. But I do think most retailers have learned from this over the last year and most likely won’t see the massive outages that we saw 18 months ago. I also believe that consumers are less reactive, they’ve also adapted to life in the pandemic and they won’t resort to the same level of panic buying that affected some of the commodity businesses last year.
Product shortages will continue to push retailers to put supply chain and planning in the spotlight. Retailers need to do better in managing inventory and planning the right quantities of the right product at the right time.
Overbuying and inflated forecasting will continue to feed the cycle of bad planning and this will not only lead to product shortages but also managing excess inventory.
Supplier management and localization of critical vendors as well as building better relationships with key vendors are just some ideas on how retailers can rethink their supply chain. Inventory management is just part of the solution.
In phase one of the logistics/supply chain disruption, there were shortages on select items primarily caused by fear of the unknown. No one had seen this type of pandemic in 100 years, and so consumers loaded up on key essentials. The second phase of this disruption is, unfortunately, broad based, covering nearly all products and all industries. And because there are so many geo-political and economic dynamics in play, the disruptions are much more complex and will take a long time to untangle. I hope I’m wrong, for everyone’s sake.
Hopefully, because these are partner-caused delays versus consumer-driven delays, demand forecasting won’t be as off. Meaning, retailers can hopefully predict these shortages earlier and create workarounds. However this is yet another prime example of why retailers need to start disclosing more of their data to suppliers. If retailers continue to keep consumer demand data from suppliers, that will add even more stress to this system. We need to mitigate as much risk as possible since we’re now experiencing supply chain issues from all angles.
We are witnessing widespread supply chain shortages across the entire retail and grocery segments. Since the onset of the pandemic, global supply chain constraints have made inventory management, which was once relatively predicable, an uncertain and dynamic process.
The supply chain constraints will have a material impact on the customer experience, along with a direct impact to retailers’ Q4 revenue forecasts. Leading retailers, such as Target, Best Buy and others have leveraged predictive demand forecasting models, and an assortment diversification strategy to help mitigate the product shortages.
Unfortunately there are already empty shelves, longer lead times on digital platforms, and less dependable fulfillment commitments. Retailers which have established strategic mitigation plans around the shortages will be the winners this holiday shopping season.
The national media is putting out the message that consumers need to start shopping now for the holidays due to anticipated shortages, so perhaps this is a bit of chicken and egg.
I watched QVC this past weekend and saw the same appliance and electronic items being sold over and over again several time over the weekend. They were very honest about telling the audience that they were short on product and there is no way to know if they will get all the product they ordered for the holiday season and advised that if you see something you like, you need to buy it as it may not be available for a long while due to ordering issues. Many vendors are saying they don’t see this cleaning up till spring at the earliest. Time will tell.
Most product shortages are driven by media and social media pressure. People panicked last time and they will panic again if they start to see shortages. However how many households still have a few years’ supply of toilet tissues is open to question.
Why is there a worldwide shortage of truck drivers? Is it that so many of them have decided they can have a better life with less time away from home by driving online delivery vans? We are not moving significantly more product than before so they have gone somewhere.
The bigger issue is the lack of product available through raw material supply like computer chips and that will take longer to resolve and will cause concern for some time. If retailers start to restrict purchases they could cause the panic to return and create their own problems. Some retailers may use this to drive up early sales and spread the load over the holiday period. This all seems crazy because the world is not consuming more!
Recalling the gas shortages in the late ’70s made me MORE likely to get online during Sandy as I saw lines starting to form. I think consumers will engage in panic buying as they sense shortages (which limits might make worse paradoxically acting as a signal to consumers) and then they will get around those limits (wives and husbands will shop separately, people will go through checkout and come back, etc.).
The shortages situation as perceived by consumers is quickly spiraling into itself. As more consumers run into issues obtaining the products they want because shipping delays deep in the supply chain are causing delays to restocking shelves, the risk of inflation from demand pressures becomes quite real. Retailers are now forced to truly refine their forecasting skills and leverage every tool available to them to manage the flow of goods in their supply chains and logistics system. It will get worse before it gets better as ports continue to back up and trucks become harder to secure to get products from those ports to their needed destinations. For this holiday season, retailers that haven’t already secured their inventory for the season will see extra pressure and less than happy customers. Those that planned well in advance will be better off but, as the year closes out, restocking will still be a challenge in many categories. Not because of excessive demand but because the supply retailers have ordered just isn’t making its way through the logistics network to the store shelf.
I visited several malls and strip centers this weekend to see what is happening at the retail counter. Some retailers, like Nordstrom, still had limited assortments and empty spaces on their sales floors. Other retailers were low on stock and choices were limited so you’d better buy it when you see it. Apparel selection in many cases was limited to tiny sizes because the larger ones were already gone. Michaels Crafts was low on inventory in some categories, but overstocked in others. One Michaels had a 20’ aisle of plastic computer trays, plus additional trays in other areas of the sales floor to fill space.
I can’t say for sure if it will get worse before it gets better, but it sure looks like we are headed in that direction. And will be for a while.
Unpredictable — when a container gets loaded overseas, and when it finally docks at a US port will defy all guesses and algorithms. About the only thing that can be estimated is the time on the water between the two wait points. If retailers backed up their delivery dates particularly for seasonal product and one time buys to account for the container time gaps, it might not be so bad. However, the regular flow of basic product will no doubt see big delays, stock outs and price increases depending on where in the container shuffle it sits.
This time around, cost increases are being passed on to the consumer. In order to avoid backlash, Costco (and others) should make sure that the communication is clear. There are long-run implications to take into account as well, such as the upcoming holiday season, and the fact that inflation will only further bifurcate wealth disparities. Some of the same problem-solving mechanisms from last year might be deployed, but much of it will come down to proactively adjusting pricing and marketing strategies to fit the times.
This morning the Today Show ran a piece about the “Cargo Ship Logjam” which warned of likely product shortages to come and urged shoppers to stock up now on consumables and holiday gifts.
Ironic, since that story seems likely to trigger just the sort of consumer panic that can exacerbate the problem.
The core issue is not a lack of goods — the container ships anchored offshore are full — but a shortage of labor to unload ships and transport products once they land here. Also, many empty containers are stuck on the wrong side of the oceans, which has stranded some finished goods in their source countries.
I think we can expect his problem to persist through the upcoming holiday season. For Americans the impact will mostly be reduction of choice and somewhat higher prices, not an absolute inability to obtain essential products.
While product shortages likely won’t be as rampant as in the early pandemic days, I do think we’re seeing fluctuating levels of price and supply chain challenges for many different grocery categories. The pandemic created shortages driven by shocks to the market as consumer behavior changed overnight. As we settle into the new normal, I think we are going to start experiencing more structural changes as companies rethink the fragility of their supply chains and as consumer demand starts to settle in. This will lead to another wave of indirect price increases as brands look to manage demand with higher supply costs. We have yet to see strong signs in commodity costs that would portend more direct price increases.