Date: Tuesday, May 18th, 2021
Christmas is still over seven months away, but start worrying now about whether you’ll get what you want under the tree. It might end up stuck at the docks in China that morning.
The Census Bureau’s March retail trade report, released Friday, together with a new analysis of those numbers released Monday, highlight the enormity of the import challenge in the coming peak season.
Despite the unprecedented boom in containerized imports over the recent months, the retail inventory-to-sales ratio has sunk to a new all-time low. And as retailers struggle to catch up, imports could be capped in the months ahead by a trans-Pacific shipping network that has reached its limit.
That, in turn, implies more premium charges and even higher all-in costs for importers racing the holiday clock, which practically speaking, may be already ticking.
Inventory-to-sales ratio at record low
The broader measure of retail goods shows both inventory to sales and real inventories in March down sharply from pre-COVID levels in 2019 — and still falling.
But these numbers don’t tell the true story, according to Jason Miller, associate professor of supply chain management at Michigan State University’s Eli Broad College of Business.
The overall figures include the motor vehicles and parts subsector, which skews the data. This subsector accounted for 36% of retail trade inventories in 2019.
“This poses a major problem because motor vehicle and parts dealers’ inventories are down tremendously at present due to strong consumer spending on trucks and SUVs, coupled with motor-vehicle production being curtailed by the shortage of semiconductors,” Miller wrote in his analysis of the census data.
After removing the automotive data, the story is very different: Real retail inventories are actually back to 2019 pre-COVID levels — which explains the record throughput at U.S. ports — but the inventory-to-sales ratio remains historically low, because sales have outpaced restocking.
Inventories excluding automotive were down to 1.04 months of sales in March. “That’s the lowest reading we’ve ever seen,” Miller said in an interview with American Shipper. In full-year 2019, the average was 1.217 months; in the mid-2000s, around 1.35; in the early 1990s, around 1.6.
Data on real inventories excluding automotive mirrors comments made by Deutsche Bank transportation analyst Amit Mehrotra in March.
“If you look at inventory dollars per store, they’re actually up year-over-year,” Mehrotra told American Shipper. “What has changed is that sell-through rates are way faster. Inventories are flying off the shelves faster than companies can replenish them. That is why the inventory restocking cycle is still in the early innings.”
Retailers scramble to catch up
Assuming retailers seek to bring the inventory-to-sales ratio back to 2019 levels by the end of this year, Miller calculated that they would need to build inventories to $467.72 billion, up $30.62 billion from the end-of-March nominally seasonally adjusted figure of $437.1 billion.
That’s where Christmas enters the equation. “Retailers need to build up their inventories by October to be prepared for the peak holiday shopping,” noted Miller. If the inventory-to-sales ratio needs to revert to 2019 levels by the end of October, demand will be frontloaded.
Miller calculated that retailers would need to increase inventories by $65.11 billion to reattain the 2019 inventory-to-sales ratio by the end of October.
He then compared this year’s peak-season build to 2019’s. The pre-COVID inventory build between the end of March and end of October 2019 was $35.12 billion. To reach the circa-2019 inventory-to-sales ratio this year, inventories would have to grow by 85.4% more than they did in the same period in 2019.
“Even if we trim a few dollars off of this figure to account for inflation, this is still an incredible figure,” said Miller. What that means, he continued, is that “there will be tremendous demand for inventory replenishment over the coming months.”
And this is where calculations on paper collide with reality. The trans-Pacific container system is already maxed out in May, which raises the question of how all this inventory could possibly get built up in time for the holidays.
“I don’t see how that figure I came to, $65.11 billion, gets done given how tight things are now,” said Miller. “I just don’t see it. And so, I think my message would be: If you want to get stuff in for the holidays, every container slot available is going to be used up and you have to plan for that.”
Bookings data confirms demand surge
Implying future containerized import demand from the census data is inherently theoretical, based on assumptions of future sales and the inventory-to-sales ratio. However, there is real-world data that confirms the import wave is coming.
FreightWaves’ SONAR platform features a proprietary index of shippers’ ocean bookings (SONAR: IOTI.USA) measured in twenty-foot equivalent units (10-day moving average) as of the scheduled date of overseas departure and indexed to January 2019.
While these are bookings, not loadings, the index provides a directional indicator of U.S. import volumes in the future, when ships from various export destinations arrive at American ports. The index hit another all-time high on Monday. Forward bookings data shows that yet another record will be set within the next seven days.