October 5, 2022

Flexe Institute Market Watch: Large Inventories Remain as Peak Season Starts

Weak consumer demand projected six weeks before the biggest shopping weekend.

Market Watch Collage October 22 1

Retailers face an impending recession, inventory surpluses and potential supply chain upheaval.

Key Takeaways

  • 18 million daily parcel capacity surplus
  • 6.9% YoY increase in parcel carrier rates
  • 75 vessels backlogged at New York, Houston and Savannah ports
  • 2.9% industrial vacancy rate

As holiday shopping inches closer, supply chain disruption continues. Recession looms, and inventories remain bloated as logistics costs rise. Conditions force brands and retailers to rethink supply chain strategies to maintain margins.

Shoppers tire of spending #

Consumers are as price-sensitive as ever. They shop less or look for deals, discounts and coupons. Eighty-five percent of U.S. adults say rising inflation impacts their consumption.

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Consumers say they plan to spend slightly less this holiday season than a year ago, signaling stagnant sales for retailers with already high inventory holdings costs.

Retailers with excess inventories face a highly competitive and promotion-rich environment.

A look at peak season logistics #

Last month, large parcel carriers sent shockwaves through the supply chain and the broader economy. FedEx expects a global recession and projects a drop in package shipments—its demand is frequently cited as a bellwether for economic health.

Analysts predict capacity will exceed demand for the first time since the pandemic. The peak season parcel market will operate with 110M parcel capacity per day. But daily demand will average 92 million parcels, an 18 million daily capacity surplus.

Port update #

After extensive maritime rerouting, East Coast ports grew market share. They now lead West Coast ports’ import volumes. As the trend continues, processing times and outbound transportation markets face challenges. About 75 ships wait outside the ports of New York, Houston and Savannah.

Rail workers avoid strike #

Major freight rail companies and unions representing tens of thousands of rail workers struck a “tentative” deal that thwarted a $2 billion per day strike. This allows businesses to continue moving intermodal freight without significant disruption.

Supply chain challenges pile up #

Retailers and brands face numerous peak season issues. While pandemic conditions ease, problems persist.

Natural disaster disruption #

Hurricane Ian’s landfall could exacerbate challenges for weeks to come. The storm’s destruction in Southwest Florida may significantly disrupt logistics operations. Because of the recent switch to East Coast maritime lanes, import transportation may be delayed.

Costs climb #

FedEx will levy a general rate increase averaging 6.9% for its Express, Ground and Home Delivery services. UPS is “extremely likely” to mirror FedEx’s 6.9% increase. Freight rates remain elevated even as capacity loosens.

Leading businesses optimize their supply chain networks to cut transportation costs.

FedEx will levy a general rate increase averaging 6.9% for its Express, Ground and Home Delivery services. UPS is “extremely likely” to mirror FedEx’s 6.9% increase. Freight rates remain elevated even as capacity loosens.

Peak season strategies for shippers #

Optimize selling channels #

Businesses optimize sales channels to control margins amid rising costs and weaker demand. Consumers now favor omnichannel retailers, including hybrid fulfillment strategies.

For example, retailers who utilize BOPIS boost in-store traffic, control shipping costs and meet evolving consumer expectations. Fifty-nine percent of consumers expect BOPIS as a shopping option. And analysts predict BOPIS will top $100B in sales in 2022, a 21% increase year-over-year.

Minimize inventory costs #

Brands with excess inventory look for ways to reduce inventory while they assess demand generation strategies.

Network diversification #

Leading companies build resilience through network diversification to mitigate risks and control costs. Over the past year, many made structural changes to their supply chain networks with dual or multiple sourcing strategies and regional networks.

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Market watch: The logistics industry month-over-month #

Logistics Managers’ Index (LMI) #

Last month, the index fell again in all categories aside from warehouse capacity. The metrics suggest the industry continues to expand, albeit slower than in previous months.

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Disposable Income vs. Durable Goods Spend #

Durable goods consumption and disposable income are intertwined. This month’s data shows that personal consumption rose, while disposable income fell. Continued consumption predicts the need for logistics services. But continued decreases in disposable income may signal decelerated future consumption.

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Industrial Real Estate Vacancy Rate #

The lower the rate, the more difficult it is to find warehousing, distribution and fulfillment space. The market currently operates at an all-time low of 2.9%.

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U.S. Manufacturing Purchasing Managers’ Index #

The index captures industrial output in the country during a given period. Like durable goods consumption, it provides context for demand forces: The higher the manufacturing index, the more volume enters logistics networks.

This month, the index ticked up relative to August 2022. This indicates potential for economic expansion, though low relative to Q1 and early Q2 2022. A continued expansion in outlook indicates an increase in goods entering the supply chain.

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