Friday Reflection | September 17, 2021
In the developed world, we have long taken for granted the ability to order what we need and then watch the goods arrive, without any thought of the people, factories, container ships, trains, and trucks involved in the delivery. Or going to our local grocery store and expecting to see shelves stocked to the brim with a wide variety of options. This invisible process of transporting goods supports consumer confidence and the belief that we, in the US at least, live in an economy of abundance.
The past two weeks have seen global stock markets drift lower, reflecting growing uncertainty about the trajectory and timing of our economic recovery. When inflation spiked early this year, investors predicted that factories would catch up with demand after a few months and the backlog in shipping would eventually abate. That hasn’t occurred yet, and consumers are increasingly confronted with the experience of higher prices, or worse yet: no inventory available, and no idea when it will come in.
The snarled supply chain and corresponding employment disruptions have led to an uneven production landscape across companies and sectors.1 For investors, the unpredictability of consumers’ access to goods in the future makes it hard to forecast consumer spending – which accounts for 70% of our GDP. Unpredictability in the supply chain leads to unpredictability in the markets.
The Economics of Shipping
Since the days of silk trading in ancient China and Egyptian trade routes through the Red Sea, maritime trade has connected people in distant cities. In modern times, cheap and reliable sea transport has allowed manufacturers to shift production far and wide in pursuit of low-cost labor and cheap materials. ‘Just-in-time’ transportation has kept inventories lean and has underpinned globalization – production on one side of the planet, connected to consumers on the other. But the economics have changed.
Prior to the pandemic, shipping a 40-foot container from Shanghai to a warehouse in Michigan would cost $6,000 to $7,000. Today, that same shipment will cost at least $26,000, and businesses were warned that the price could rise to $35,000 because of rail and trucking difficulties in the United States.2
This has caused massive headaches for manufacturers and small businesses, but it also translates into big money for container carriers like Maersk and Cosco Shipping. The industry is on track to post $100 billion in net profit this year, up from about $15 billion in 2020. Similarly, contractors handling FedEx Ground deliveries have seen revenues increase by 50% over the past three years as e-commerce has accelerated during the pandemic.3 The market is effectively regulating the scarcity of goods – in this case, shipping containers and delivery contracts – through higher prices, and certain companies are rewarded in that process.
Ripple Effects Reaching Consumers
As producers face higher shipping and materials costs, they pass those increases through to consumers in the form of inflation.
The apparel company Lululemon said last week that the company was struggling with shortages and higher transportation costs because much of its supplies are made in countries such as Vietnam that have suffered from COVID-19 shutdowns in recent months. The company has been one of the retailers to see a surge in sales during the pandemic, as working from home pushed a boom in athleisure wear.4 Other companies are opting to spend more to combat these challenges: Walmart and Home Depot are both chartering their own private cargo vessels so they don’t get caught short as the holiday season approaches.
Similarly, the CFO of Kroger, the nation’s largest supermarket chain, said the company will be “passing along higher costs to the customer where it makes sense to do so.” This may be felt by consumers as global food prices were up 33% in August from a year earlier with vegetable oil, grains, and meat on the rise, according to data from the United Nations Food and Agriculture Organization.5The issue is more acute in emerging markets where the cost of food accounts for a greater chunk of household spending, and even more in crisis-hit nations. In the US, food banks have needed to navigate higher food prices as they attempt to meet an increased need for food security – with US food banks distributing roughly 50 percent more food in 2020 compared with 2019.6
Heading into the holiday season, consumers will see another ripple effect: fewer Black Friday sales as stores struggle to stock shelves and demand remains strong. Consumers keen to make up for last year’s Covid-disrupted holiday season may buy early to get what they want. That means retailers won’t have to discount as much as in the past. Better margins will help offset higher costs.7The market is regulating scarce goods through higher prices – and while the consumer impact is negative, the impact on profitability and stock prices is likely to be more mixed across the landscape of companies.
Patience and Adaptation
The inventory shortages haven’t stopped consumers from returning to shopping – with US retail sales increasing in the month of August after a sharp decline in the month of July. The demand side of the equation heading into the holiday shopping season is looking positive. Companies’ challenges will be more concentrated on the supply side, with production and shipping bottlenecks not going away any time soon. That’s a relatively good problem to have: Retailers would rather be forced to turn eager customers away than be stuck with loads of unsellable inventory.
There will continue to be a paradox for consumers and businesses. It feels impossible to plan months ahead because restrictions, public health guidance, and consumer patterns are changing so frequently, but the supply chain is necessitating planning and orders further in advance. Both consumers and investors will need to rely on a combination of patience and adaptation that has been built over the past year.
1 Pinch Points: Reflecting on the supply crunch in lumber and semiconductors. North Berkeley Blog
2 The World Is Still Short of Everything. Get Used to It. NY Times
3 FedEx Ground Delivery Becomes a Road to Riches for Contractors Bloomberg
4 Executives warn customers to brace for continued shortages and price hikes in 2022: ‘I half-jokingly tell people, “Order your Christmas presents now”‘ Business Insider
5 Priciest Food Since 1970s Is a Big Challenge for Governments Bloomberg
6 How Food Banks Succeeded and What They Need Now NY Times
7 Get Ready for an Expensive Revenge Christmas Washington Post
About Brian Kozel, CFP®
Brian Kozel works as a partner and lead advisor at North Berkeley Wealth Management to help his clients feel confident in their financial decisions.
This commentary on this website reflects the personal opinions, viewpoints, and analyses of the North Berkeley Wealth Management (“North Berkeley”) employees providing such comments, and should not be regarded as a description of advisory services provided by North Berkeley or performance returns of any North Berkeley client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. North Berkeley manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.