The Christmas Supply Chain Race

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We started seeing Christmas goods arrive on our shores back in June of this year. Now, normally that arrival would take place end of August, beginning of September, and run through about the first week of November.

Welcome to the Barron Streetwise Podcast. I'm Jack Howe, and the voice you just heard is Gene Soroka. He's the executive director of the Port of Los Angeles. You've no doubt heard about the massive backup of ships waiting to unload their containers of merchandise headed for American shoppers. It's become a symbol of supply chain mayhem. I hear people mention the port when they want to explain shortages of refrigerators or video game consoles. They say Have you heard about the ships? And some say persistent shortages and all those ships could mean that Christmas shopping will be a disaster with half-empty shelves and huge price spikes. I made some calls and did some digging on the subject. The outlook is decidedly more upbeat than that. Not quite jolly, but moderately mirthful, trending toward merry. Listening in is our audio producer Jackson. Hi Jackson.

Hey Jack.

Have you seen the 1987 logistics movie Planes, Trains and Automobiles?

Can't say I have.

It's a must-see for supply chain managers. There's the famous two pillows illustration of how one mishap in a linked transportation system can lead to all sorts of uncomfortable downstream consequences. Steve Martin plays a marketing executive, Neal Page, trying to get home for Thanksgiving, and John Candy plays a kind-hearted but annoying shower curtain ring salesman, Del Griffith. I sell shower curtain rings, best in the world. A flight to Chicago was rerouted due to a blizzard, which leads to a surge in overnight visitors to Wichita, Kansas, which creates a shortage of hotel rooms, which makes Neil agree to share a room with Del. Only it turns out there's only one bed, and to my eye, it's not a king size. When the two wake up the following morning, they've inadvertently become closer than they expected. Why did you kiss my ear?

Why are you holding my hand?

Where's your other hand?

Between two pillows.

Those aren't pillows.

Now, some of the details of today's logistics challenges are a little different. The main cause isn't a blizzard, it's a pandemic, and the outcome has not, to my knowledge, included mistaken pillow identification.. But it has included widespread shortages of all sorts of consumer goods, including pillows. At the beginning of this past summer, we did an episode of this podcast on what we called the Everything Shortage. 4 months later, many goods are still hard to come by. Shoppers and investors want to know when it will end, and I'll tell them in a moment. First, let's assign some blame. And there's a lot of it to go around. There were some one-off events which were temporary and limited in scope, but they didn't help. For example, a ship grounding back in March blocked the Suez Canal, which usually allows goods to take a shortcut between the Asian and African continents and carries about 12% of global trade. Also, if you had a hard time buying pool chlorine this year, You can blame an August 2020 hurricane that set off a Louisiana factory fire. Then there were missteps and unforeseen consequences. Many company CEOs have told me that in the initial days of the pandemic, they followed a playbook written more than a decade ago during the global financial crisis. They halted production and orders, and when customers kept buying, they got caught short. By far, however, the biggest contributor to shortages has been the virus itself. I'll leave it to political partisans to debate the effects of COVID responses and stimulus spending. The most important factor I see is all of us and our abrupt spending shift. When lockdown sent us home, we canceled our trips to Disney World, and those of us who were fortunate to still be working reappropriated those funds for refrigerators and big-screen televisions and 27-ton hydraulic log splitters. Probably more fridges and TVs than splitters, but you get the idea. Purchases of experiences collapsed. Goods purchases took off. And since factories in Asian markets make a lot of American goods, exports there soared. Investment bank UBS points out that Asian exports jumped 20 percentage points during the pandemic relative to European or American exports. That was far greater than the rate of increase before the pandemic. Vaccines were supposed to get people out of their houses and back into theme parks, movie theaters, and restaurants and reverse this shift. But uptake has been slow in places, and COVID cases, especially the Delta variant, have raged. So purchases of goods have fallen much more slowly than expected. By only a percentage point or so per month since March. Air travel is still limited, and since half of air freight is carried on passenger planes, more of the burden has fallen on ships. Trans-Pacific shipping has jumped 30% this year. Supplies of 40-foot shipping containers have run low. The cost to ship a container from Shanghai to LA has soared from $2,000 to $20,000 in a year and a half. Small retailers and manufacturers that lack supply chain have been especially affected. Let me give you an example.

We're actually situated right around the corner from Target. So when I'm buying items for the store, I'm very strategic in choosing things that independent vendors or makers don't sell on Amazon, they don't sell on eBay, that people walking into our store will be, you know, kind of astounded by.

That's Kiwa Nerula, who owns Kiddo, which sells clothing and toys online and through a store in Chicago's South Loop. She recently discovered an item with great Christmas potential.

Just this past week, I posted these cute little scooters on Instagram. And usually if we post something that's, you know, super cute and unique, we get an immediate response. And then we see at least a certain amount of people go to buy it on the website. And so once I saw the likes were piling up, I immediately emailed call the scooter maker saying, "Wow, I didn't expect for these to kind of blow up.

Just checking on your stock for a reorder sooner than I was anticipating." Kiwa suspects that demand for the push scooter, called Primo and designed for kids ages 2 to 5, got a boost from a Disney movie called Luca, which has been streaming since June. See, Primos look a bit like Vespas, the Italian motorbikes. And Luca is about a teenage sea monster who takes to land in human form with a dream of one day securing a Vespa of his own. What's that?

Oh, it's just the greatest thing that humans ever made—

the Vespa. Whoa! But when Kiwa emailed the manufacturer, she was told a primo reorder wouldn't be possible.

I had to make the decision last week. It's too late. So if we start ramping up manufacturing by, let's say, next week, it takes 3 to 4 weeks to run a batch, ship it. That means it arrives early December, mid-December, and that's too late.

That's Elisha Rush at Amboss Toys. Back in 2000, he and his brother-in-law Nguyen Nguyen began refurbishing Vietnam War-era motorbikes in Ho Chi Minh City and selling them in Switzerland. When the two became fathers, they switched to toys and launched the all-metal Primo at the New York Toy Fair in 2019. It was a success from the start, even before Luca. When the pandemic hit, Vietnam fared relatively well with its response. Rush shifted from supplying mostly small retailers to doing mostly dropshipping, where goods are sent from factories straight to end buyers. But then Vietnam got hit hard by the Delta variant. And went into strict lockdown in July. Elisha says he hopes to reopen his factory next week, but that it's too late to supply the U.S. with as many scooters as he'd like by Christmas.

Initially, I was very disappointed, but then when I spoke with other manufacturers and stores, they actually told me it's the same for most. So a lot of manufacturers or brands, they can't ship a because they couldn't produce, or B, the costs are too high. So it's not a unique situation for me. So I hope that it's a pause for the whole industry. And then once we can release, the popularity and the demand is still there.

Elisha's experience raises the question of whether many companies will fall short of fourth quarter sales expectations because they can't get their products to stores. That would disappoint investors and hurt share prices. When Nike announced earnings recently, it took down its sales guidance in part due to factory closures in Vietnam. Its shares lost 6% in a day following the announcement. Wall Street sounds more pessimistic about Christmas by the day. Well, it's not even October, but you might want to get started on your holiday shopping. These mom-and-pop toy stores are already feeling the pinch. Not only are there fewer lorry drivers, but with with supply problems becoming a global phenomenon, there's often less to put in them.

All the experts are saying that we've got to start doing our holiday shopping ASAP.

If you're looking for reasons to worry about the Christmas selling season, it's not hard to find them. Here's what one toy company chief told me this past week.

We have the orders. The bad news is getting those orders on the retail shelf. And it is a nightmare, a worldwide nightmare. Nightmare what's going on. We have 87 or 88 days left to Christmas. There is a ton of inventory still sitting in China, sitting on the ports of LA and Long Beach and other ports trying to get unloaded. 43 years I've been in business, I've seen many challenges and many things. I've never seen anything like this before.

That's Isaac Larian. His company MGA Entertainment had its first big hit 20 years ago with a line of dolls called Bratz. Today MGA makes the LOL Surprise OMG Fashion Dolls and the Poopsie Dancing Unicorn and the Little Tikes Cozy Coop and the Baby Born Magic Potty Surprise. Wait, what's the surprise?

She's the magic potty doll.

Baby born surprise. Isaac is easily the most bearish sounding of the toy company chiefs. He predicts his own sales will be flat to up by a mid-single-digit percentage this holiday season, but he thinks the industry as a whole will shrink by 5%. And that's not the worst of it.

A lot of toys that MGA or other toy companies bought to sell for this Christmas are already manufactured. They're sitting in China, they're sitting on ships, they're sitting in the warehouses. They're not going to get to retail in time. So what's going to happen come January, February, March, April, May, June? All that inventory that was supposed to sell out in 2021 It's going to be hangover for the first half of the year. And if those pipelines at retail are full, the retailers are not going to buy other products from MGA, other toy companies, because their shelves are full of old merchandise.

Isaac predicts that the entire world, including the U.S., will be hit by, as he puts it, a major recession. If that's not enough, those sky-high shipping costs I mentioned earlier have coincided with a jump in the U.S. inflation rate. The latest reading was 5.3%. A year ago, the rate was 1.3%. If inflation doesn't come back down soon, the Federal Reserve could have to raise interest rates earlier or by more than it had anticipated. And all those investors who have been piling money into stocks for lack of other options, they could find themselves with other options. Like savings accounts that pay a few percent, and stocks could fall. We could even have elevated inflation with stagnant demand, and that's called stagflation, and it's not good. Jackson, the worries are piling up so quickly, I don't even know if I can go on. Can you tell me anything to pick me up?

Well, I got kicked out of the mall trying to interview people about Christmas. Go on. Yeah, so the security guard, this guy looked like he was maybe 19.

And I am feeling a little better.

Go ahead. And then he told me I couldn't be recording at the mall. And so I told him I'd leave. I was parked all the way at the other end of the mall. And so he walked me the entire way.

I mean, but it wasn't like a big mall, right?

I've actually heard it's the largest carpeted mall in America.

So pretty big. Did you get any good insights before you were perp walked by a teenager across a half mile of carpeting?

Very little.

All right, well, hang in there for now and we'll get to it. And thank you for cheering me up. Now then, there's plenty of good news if you listen for it. Look, overall for the full year, we are still expecting to have the kind of great year that we've been outlining throughout the year. And we believe we'll have all the product, albeit maybe we'd like a little more product in certain categories, but we'll have the product for the holidays. That's Brian Goldner, and he runs a much larger toy company called Hasbro, which has brands like Transformers, Nerf, and My Little Pony, and holds a license to make lots of toys for Disney. Including princess dolls and Star Wars and Marvel action figures. Brian was speaking just then at a Goldman Sachs conference, and he says his toys will be on shelves for Christmas. And at the same conference, Mattel CEO Enan Kreese sounded bullish too. He stuck by his guidance for 12% to 14% sales growth this year. He said he had anticipated supply chain challenges, and so they're already factored into that forecast. Overall, we very much look forward to a happy holiday season with lots of toys for children to play with. And remember Nike's sales warning? Well, New Balance recently told analysts that its factories in Vietnam could go from operating at 30% to 40% of capacity now to 60% to 70% by mid-October. That's a big move in the right direction. If there's one data point that bodes well for supply chains, it's that COVID rates have begun falling again worldwide and in the U.S. since the end of August. That could not only help factories get back up to speed, it could also gradually get people spending more on doing things and not quite as much on buying stuff, which could help ease trade route congestion. Speaking of which, let's go back to the Port of LA. Where for now, Executive Director Gene Soroka has his hands full.

Even as the country has opened up slowly from an economic standpoint, the American consumer is buying at levels that we've never seen before. Then take that ramped up buying with seasonal products like summer fashion, back to school, fall fashion, even Halloween. The National Retail Federation just noticed today that our Halloween sales are the biggest in history. Now you take all of that and combine it with the traditional year-end holidays, and you've got a mixture of cargo the likes of which we've never seen before.

Gene says there are 88 ships now anchored near the San Pedro Bay port complex, which consists of the ports of LA and Long Beach. Of those 88, 64 are stacked with containers, with about half headed for each port. Now, the ideal number of ships to have drop anchor outside the ports is zero. Back in June, the count got down to 6 from an earlier pandemic high of 40. So the backup now is as bad as it has ever been. But remember, earlier we heard Gene say that part of the backup is from sophisticated companies that knew shipping would be slow and put in holiday orders months earlier than usual. Gene says it's a squeeze, but port productivity isn't a problem.

It's like taking 10 lanes of freeway traffic and shrinking it down to 5 to get through this gateway. You're still doing really well. Our productivity per each vessel that comes in is still the highest in the world, and it's 50% above where it was pre-pandemic times. So all of that's working in the right direction, but we've got bottlenecks throughout the system. We've got nodes that are not meeting the demand of the American consumer overall. Yet because of the inventory flows and the way we're seeing things, there will be goods on the store shelves, in the fulfillment centers for us to order. My only advice is maybe for the American consumer, like I'm doing, shop a little early.

Gene says one of the key bottlenecks now comes after containers are unloaded from ships because trucking companies haven't added as much capacity as shipping companies. And warehouses are struggling to keep up.

On average, once a container is offloaded from a ship, it's sitting for 6 days at the Port of Los Angeles, where in more normal times a container would sit for 2 days. So we've tripled what we call the dwell time. Once a container does leave the port, and 2/3 of all of our boxes move out by truck, they tend to sit at the warehouse door for 7 to 8 days, which is more than double normal waiting time to get into these warehouses.

Truck fleets are incredibly strained right now, but here's what one trucking executive told me.

I understand the concern that people are expressing, uh, because there are a lot of headlines about logistics logjams in the ports in particular. The reality is that We're working with our customers to overcome that. And I think Christmas will come. And I think that when people wake up the morning of December 25th, there will in fact be gifts under their trees. It's going to take a lot of work.

That's Matt Fassler, chief strategy officer at XPO Logistics, which has a big truck fleet of its own and provides trucking brokerage services. Matt says One of the biggest constraints on trucking now is the availability of drivers, but there's reason for optimism.

There are some pinch points, and I can speak more to our own, that we are addressing through our own efforts, and we're starting to chip away at some of those. For example, one of the bigger issues impacting the transportation world has been a shortage of drivers. Obviously, not only are the The freight market's tight, but the employment markets are tight. That's true throughout the service economy in particular, and that's certainly true for our driver population. We have been ramping up the pace at which we are graduating drivers. That element of the business slowed down dramatically, of course, with the pause in in-person driver schools in 2020. We are now graduating new drivers at a brisk pace.

Okay, so a port chief, a trucking executive, and the heads of the two biggest U.S. toy makers all say there will be goods on shelves for Christmas. I also spoke with analysts who cover toys, retail, and video games to get a sense of which goods might be top sellers this year and which companies will thrive and which stocks look attractive. Let's do a part two of this episode next week Well, we'll get to those conversations. When will things get back to normal? Well, Gene at the Port of LA says those ships will not be cleared out by the end of the year, and the companies tell him they'll spend early next year replenishing inventory, but by the second half of next year, supply chains should look more normal. Some goods will take longer. There's a shortage of work-a-day semiconductors for things like appliances, And chipmakers have spent a lot this year on new factories and equipment, but it takes a while to ramp up output. So some goods with chips might take until late next year to become more available. As for inflation, you might think those soaring shipping rates help explain it, but that's a tiny contributor, less than 1/10 of 1 percentage point of the increase, according to UBS. A lot of it is things that slumped a year ago. Like energy. Futures markets suggest energy prices will moderate. Wages are rising and that will stick, but UBS expects inflation rates in developed markets to be much lower next year than now. By the way, the COVID story for Barron's magazine this week is on this subject, and Jackson was a huge help, and he's listed as a contributor, even if his mall conversation got cut short. We'll hear that too next week. I might have more questions about how SEAL Team Spencer cuffed him and stuffed him right near the Annie Anne's Pretzel Shop, right, Jackson?

Yeah, I don't know his name and there are no cuffs, and I'm pretty sure it was between a GameStop and a Hot Topic.

Were you using that giant microphone with the shaggy gray fur that makes it look like a big faceless Muppet? Yeah, well, that is your most menacing microphone. Thank you for listening. Jackson Cantrell is our producer. Our friends at MarketWatch have a new podcast called Best New Ideas in Money. Give it a spin. Do the kids still say that? They never said that. Got it. Follow me on Twitter if you like. That's @JackHowe. H-O-U-G-H. See you next week.

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