Retail Sales, Rising Food Prices, Shipping Bottlenecks, Chip Convulsions, and an Electric Final-mile (Whew!)

As we close out the second week of the New Year, mixed results from the holiday shopping season are coming in. According to the Department of Commerce’s advanced monthly report released this morning, retail sales in the U.S. declined for a third straight month in December. The report also revised November figures downward, which includes Black Friday and the start of the Christmas shopping period. [1] A number of retail companies posted declines in revenue over the holiday including Victoria’s Secret, Urban Outfitters and Nordstrom. [2]

Target, in contrast, announced 17 percent growth in sales for the holiday season compared to last year. This was less than its forecast of 18 to 19 percent, but a sharp contrast to the overall trend. Target’s results were driven by a two-fold increase in online sales and an almost four-fold increase in same-day fulfillment services including a 500 percent increase in “Drive Up” fulfillment. [3]

Last fall many retailers and shipping companies warned of potential shipping problems (“shipageddon”) due to the surge in online shopping and overstretched parcel networks. [4] The holiday season did prove to be a significant challenge for parcel carriers with record demand of more than 3 billion packages—almost 2 million of which were not delivered by Christmas—but the shift to same-day services and overall softness in the retail market may have relieved some pressure on parcel networks. [5]

The Postal Service struggled with coronavirus cases in its workforce and a deluge of packages from shippers who exceeded limits imposed by UPS and FedEx. Postal delays have been especially hard on small publishers who rely on the USPS to deliver their newspapers, magazines, and other products. [6] (I just received my October/November issue of Nautilus!) Despite record demand and challenges related to the pandemic, however, delivery performance by UPS, FedEx and even the Postal Service largely exceeded expectations. [7] After surviving the holiday crush, carriers are now sorting through record return shipments that expanded from “National Returns Day” to “National Returns Week” with the shift to online shopping. [8]

In addition to shifting consumer shopping behavior, the pandemic has driven up the cost of food worldwide. And it comes at a time when there has been an increase from pre-pandemic levels in the number of households struggling to put enough food on the table. [9] While general consumer prices and personal expenditures have been held down by depressed employment levels—which dropped sharply again last week—supply chain disruptions and a weak U.S. dollar pushed the U.N.’s FAO Food Price Index to a three-year high. Price increases were led by vegetable oils, cereals and dairy with soybeans soaring to a seven-year high. [10]

Demand for soy and grain has increased in China to feed growing hog herds. Simultaneously, global supply has been constrained by weaker-than-expected harvests due to dry weather in the U.S. and South America. [11] And in Argentina—a leading exporter of soybeans, corn and wheat—a 20-day union strike of port and grain workers stranded more than 150 grain ships at the country’s ports. Government intervention ended the strike in the final days of 2020, but it weighed on markets and contributed to the global grain price rally. [12]

Some governments have started to take action. Russia announced a tax on wheat exports and a grain-export quota from mid-February through June. [13] Pakistan has seen the highest level of inflation among Asian economies and began aggressively importing food essentials like wheat, sugar and canola last year with a record 30 wheat vessels handled at Karachi Port in the fourth quarter. This surge in imports has clogged ports, overwhelmed local infrastructure, and led to a significant decline in exports from Pakistan. [14]

Grains are not the only markets impacted by port congestion and supply constraints. Nearly three dozen container ships are waiting outside of L.A.’s ports—an increase from 20 vessels in December. Similar “flotillas” can be seen outside of Europe’s major gateways including Rotterdam, Antwerp and Hamburg. [15] Last week we discussed the soaring cost of shipping containers, and this week the cost of shipping liquified natural gas (LNG) reached record highs, with BP booking the most expensive cargo-ship charter in history. [16] Congestion at the Panama Canal, production outages in Asia and heating demand from extreme winter weather in Asia has driven the rally in rates for LNG carriers. LNG spot rates in Asia also surged 18-fold from last year. With the polar vortex just beginning to sweep across North America, Europe and Asia it is shaping up to be a bumpy winter. [17]

Supply constraints are hitting the automotive and electronic industries as well. A global shortage of semiconductors has led to production cuts at most major automotive manufacturers including Fiat Chrysler Automobiles, Ford Motor Co., Honda Motor Co., Nissan Motor Co Ltd., Subaru Corp. and Toyota Motor Corp. Chip production capacity has been stretched thin after an October fire at a plant in Japan and strong demand for consumer electronics with homebound workers buying laptops, PCs and gaming consoles. [18]

The chip shortage comes at a time of significant changes in the semiconductor industry. Last fall, Nvidia announced it plans to acquire Arm Holdings for $40bn and SK Hynix announced it plans to acquire Intel’s memory-chip business. This week, Qualcomm announced it plans to acquire chip startup Nuvia. Intel also replaced its chief executive this week after successive manufacturing delays with its next generation of chips and Apple bringing chip design in-house. [19] To recover from delays, Intel is considering outsourcing some of it production to rivals Taiwan Semiconductor Manufacturing Co. (TSMC) and Samsung Electronics Co. [20] TSMC—the world’s largest contract chip manufacturer—seized on the moment announcing this week it was planning $28 billion in capital spending this year to expand its technological lead and build a new manufacturing facility in Arizona. [21]

The chip shortage comes at a time of significant shifts in the automotive and truck industries as well. Investor appetite for electric vehicles has fueled a wave of new public offerings including electric bus and battery maker Proterra Inc. announcing this week it is going public through a special purpose acquisition company (SPAC) and electric vehicle maker Lucid Motors Inc. is in talks to go public through a similar SPAC deal. [22]

General Motors (GM) unveiled a new electrified logo and announced a new business unit (BrightDrop) devoted to building an "ecosystem of electric first-to-last-mile products, software and services to empower delivery and logistics companies.” GM’s new unit is making an electric light commercial vehicle for delivery companies and an electric-powered pallet to move goods from the vehicle to customer’s doors. [23] The company also announced it has signed a deal with FedEx to take delivery of its first 500 vans by the end of this year. GM’s new push into electric package delivery comes after Amazon, Ford, UPS and others have announced new electric vehicle orders and investments in the “red hot” electric-vehicle and final-mile spaces. [22,24]


Have thoughts or feedback? Anything I missed this week? Email me at kellen@supplychainweekly.com. You also can reach me on LinkedIn and Twitter.

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Chart of the Week

Batteries are a critical technology frontier in the shift toward electric vehicles. Tesla, GM, Samsung and many other companies are investing billions in search of technologies that can extend the range of vehicles and extend battery lifespans. These efforts have paid off according to data released by the U.S. Department of Energy and Environmental Protection Agency. Both the median and maximum range of electric vehicles has increased from under 100 miles in 2011 to a median of over 250 miles and a maximum range over 400 miles last year. [25]


What I’m Reading


References

[1] https://www.census.gov/retail/index.html

[2] https://www.ft.com/content/12274b14-d6b8-4396-b39e-b355bdee0009

[3] https://investors.target.com/news-releases/news-release-details/target-provides-update-holiday-sales

[4] https://www.nytimes.com/2020/10/16/technology/holiday-shipageddon.html

[5] https://www.freightwaves.com/news/shipageddon-averted-it-wasnt-a-bad-holiday-delivery-season-after-all

[6] https://www.washingtonpost.com/business/2021/01/04/usps-delays-newspapers/

[7] https://www.freightwaves.com/news/shipageddon-averted-it-wasnt-a-bad-holiday-delivery-season-after-all

[8] https://stories.ups.com/upsstories/our-stories/customer-first/another-returns-record--but-with-a-twist.html

[9] https://www.cbpp.org/research/poverty-and-inequality/tracking-the-covid-19-recessions-effects-on-food-housing-and

[10] http://www.fao.org/worldfoodsituation/foodpricesindex/en/

[11] https://usda.library.cornell.edu/concern/publications/5q47rn72z?locale=en

[12] https://www.hellenicshippingnews.com/argentinas-grain-port-strike-ends-after-20-days-exports-to-resume-gradually/

[13] https://www.bloomberg.com/news/articles/2020-12-14/russia-plans-wheat-export-tax-as-putin-seeks-to-cool-food-prices

[14] https://www.bloomberg.com/news/newsletters/2021-01-13/supply-chains-latest-pakistan-s-ports-are-swamped-with-imports

[15] https://www.bloomberg.com/news/articles/2021-01-13/world-economy-s-fragile-rebound-boxed-in-amid-shipping-logjams

[16] https://www.freightwaves.com/news/new-world-record-set-for-shipping-rates-350000-per-day

[17] https://www.bloomberg.com/news/articles/2021-01-15/bitter-cold-brings-chaos-as-global-energy-systems-show-strain

[18] https://www.reuters.com/article/us-honda-output/chip-shortage-forces-ford-toyota-nissan-to-cut-vehicle-production-idUSKBN29D1NF

[19] https://www.intc.com/news-events/press-releases/detail/1438/intel-appoints-tech-industry-leader-pat-gelsinger-as-new-ceo; https://www.apple.com/newsroom/2020/11/introducing-the-next-generation-of-mac/

[20] https://www.bloomberg.com/news/articles/2021-01-08/intel-talks-with-tsmc-samsung-to-outsource-some-chip-production?sref=PhB3liAe

[21] https://www.bloomberg.com/news/articles/2021-01-14/tsmc-profit-beats-expectations-as-chipmaker-widens-tech-lead

[22] https://www.bloomberg.com/news/articles/2021-01-12/hunt-for-the-next-tesla-fuels-wave-of-electric-vehicle-deals

[23] https://investor.gm.com/news-releases/news-release-details/gm-launches-brightdrop-new-business-will-electrify-and-improve

[24] https://www.axios.com/general-motors-fedex-electrify-package-food-delivery-5d87c6cc-25d5-4ec2-9be3-bce811380874.html

[25] https://www.energy.gov/eere/vehicles/articles/fotw-1167-january-4-2021-median-driving-range-all-electric-vehicles-tops-250