This earnings and holiday season, the supply chain crisis is dominating every conversation.
Port congestion, factory shutdowns and labor shortages are all a part of the problem, which experts say could last through 2023. In some cases, the delays are putting certain brands and retailers in jeopardy of missing crucial inventory targets.
While supply chain issues aren’t a new concept, many consumers are only now facing the impacts of product shortages and inflation.
As the holidays near, FN has rounded up our supply chain coverage to explain how it began and how it is affecting the footwear industry and consumers.
What is causing the supply chain crisis?
At Sourcing Journal’s Inflection Point Summit, top supply chain and industry exerts explained how supply chain problems came to be.
Eugene Laney, president and CEO of the American Association of Exporters and Importers (AAEI), pointed out that there were already existing problems when things took an unexpected turn amid the pandemic. For example, the U.S. was dealing with a tense trade relationship with China and ongoing infrastructure issues. Once demand for certain products started to increase in the pandemic, the stage was set for a perfect storm of issues.
Did the pandemic cause the supply chain crisis?
Given existing issues in the global supply chain, the pandemic only made things worse with an onslaught of material shortages and manufacturing delays. In many cases, the pandemic has forced periodic factory closures in China, Malaysia and Vietnam, which has halted production for months at a time.
And then there is the shipping crisis, which stems from a perfect storm of heightened demand for consumer goods combined with labor shortages at ports in the U.S. and Asia and limited transportation options. Basically: too much stuff and not enough ships to carry it.
However, despite all the hoopla regarding the supply chain this year, shortages are not a completely new concept for the footwear industry.
According to Matt Powell, the senior sports industry adviser for The NPD Group Inc., port congestion has been a constant theme for the last five years. And while the impact is more visible now, he believes these delays will not be the death knell to the industry.
How does the supply chain affect the footwear industry?
Vietnam and China are key manufacturing hubs for almost all major footwear brands in the U.S. When these factories shut down this summer, for instance, the impact was almost immediate.
For example, two Nike footwear suppliers in Vietnam stopped manufacturing in July for more than two months. Vietnam previously accounted for 51% of Nike’s footwear and 30% of apparel units last year. In September, shares of Nike fell after it missed revenue estimates as a result of supply chain hurdles. VF Corp. also faced major supply chain disruptions this quarter with the Supreme brand seeing almost 30% less inventory around drops.
Additionally, a global shortage of rubber and plastic, which are essential in the production of sneakers, has made it difficult for factories to meet demand. These shortages are driving up prices for certain raw materials. In some cases, companies are sitting on millions of dollars worth of inventory, because they don’t have access to certain materials to complete unit production.
On top of these issues, high freight and container costs are sending footwear prices to unprecedented highs. Overall, this translates to a smaller profit margin for retailers and a higher price point for consumers. Shoe prices already increased 6.5% in September, compared with the year-ago period.
How does the supply chain issue affect my shopping?
Given the supply chain issues, experts predict that empty shelves, out-of-stock product and fewer discounts will define the holiday shopping season.
According to Adobe’s annual holiday forecast report, out-of-stock messages are up 172% this year compared to the pre-pandemic period of January 2020 and up 360% compared to January 2019. Apparel is the category with the highest amount of out-of-stock messages. Adobe predicts that the problem will worsen as the holidays near.
Given that sneakers aren’t technically essential items, these shortages won’t be as dramatic as previous shortages of toilet paper and eggs that resulted from panic buying. According to BMO Capital Markets Analyst Simeon Siegel, while stores may have physical goods, the scarcity might be present in the lack of compelling product available.
“Newness sells out fast and it sells out at full price [or higher],” he said. “Excess can sit around. Just seeing boxes doesn’t guarantee you are seeing the boxes that will sell.”