I just talked with one of my guests about how to circumvent this issue. It will be interesting to see how brand owners manage their supply chain issues over the next year.
There’s a new pandemic portending the future of the economy and no, it isn’t Covid.
Supply chain upheaval from early in the Covid pandemic is still haunting companies today, and those constraints are affecting both sellers and consumers. Inflation is just over 5%, posing the biggest annual jump since 2008, and economists agree that it’s largely driven by specific sectors such as importing and manufacturing. The cost run-up is largely in part due to logistical challenges.
Why is inventory missing?
In recent months, if you’ve perused the aisles of grocery stores, frequented a number of restaurants, purchased products online or shopped at your local liquor store, you probably have noticed an overall trend: Things are missing. And it’s not just staples, such as toilet paper and bleach wipes, that are out of stock. The lack of products such as chicken wings, vodka, face masks, diapers and other goods is (mostly) the result of supply-chain congestion that has led to unprecedented shipping lag-times, skyrocketing shipping costs and ports along the west coast of California being clogged. This has resulted in a longer wait time for consumers as well as an increase in unit prices.
China’s shipping crisis
And this anomaly isn’t just affecting consumers. Both ecommerce and brick-and-mortar stores are feeling the pressure, with delivery times that used to be 6-8 weeks extending to a 4-6 month window. This is a direct result of lockdowns, staffing shortages, and China’s recent action of rationing gas and electrical power.
Shipping costs have dramatically risen over the last year. Today, a container from Shenzhen to the port of Los Angeles can run a merchant anywhere from $20,000 – $42,000. Compare that cost to 2019, when the same shipment would cost around $3,500 — you get a broad picture of why so many retail stores are struggling. This amassment of problems is so vexing that larger conglomerates like Home Depot and Costco have decided to take matters into their own hands by renting out entire container vessels for more control over shipping from Asia to the US. Even with these proactive modifications, Costco still has to limit the purchase of certain products for each customer.
While this “pandemic” is affecting retailers across the board, it is especially problematic if you are an Amazon FBA seller for a few reasons. Those sellers that utilize Amazon’s fulfillment centers are limited to how much inventory they can store with Amazon. The limits are based on how well a seller’s store is doing, so newer sellers typically have lower inventory thresholds. This means they have to order units more often. Because of the manufacturing and shipping delays, Amazon sellers often run out of items without being able to replenish their inventory quickly. This then leads to their Amazon listing getting suppressed.
There is also a shortage in the freight trucking industry
Oversea shipping isn’t the only part of the supply chain that is suffering. The trucking industry has taken quite the hit as well. Data from the Bureau of Labor Statistics signified that one of the repercussions of the Covid-19 pandemic was that the truck transportation industry lost 6% of its pre-pandemic labor force of 1.52 million workers. Yet, the industry never recovered after things began opening up, largely in part due to low pay, long hours and little benefits
The aggregation of all of these supply-chain issues has manifested in what undoubtedly could be considered a pandemic in its own right. And it’s not just Amazon SMBs that are suffering the consequences of this domino effect — even large M&As and aggregators with massive capital are in an unfavorable position.
How will shipping delays affect Amazon aggregators?
Amazon aggregators accumulate SMB businesses that predominantly rely on Amazon’s FBA structure to sell products. Think of aggregators as house-flippers; only instead of reselling the house, they keep it.
When it comes to ecommerce aggregators or buyers, their biggest assets — cash, ability to scale and operational management — can be the very cards that could make them fall. In these tumultuous times, the abundance of outside cash may be in limbo as investors are pressed by other market factors, calling upon them to possibly pull out.
Rapid growth for aggregators can mean acquiring a few businesses a month — often from brands that were recently run by small teams that didn’t have the operational efficiencies or SOPs which makes integration highly manual. Surprise abound, once the original owners exit, it’s up to the aggregator to distill and migrate everything (including production and logistics). With a portfolio of brands, the complexities of such scale are compounded because, oftentimes, the manufacturer or inspection company for each business is different. In turn, this leads to the aggregator dealing with multiple shippers, ports, containers and relationships to manage.
This is all assuming that they’ve also made accurate inventory predictions during an ambiguous and highly unpredictable year. When demand fluctuates, they go out of stock earlier than expected and then they’re that much further behind the 8-ball. Playing catch up with expensive shipping costs, the congestion at ports, the hardships of keeping inventory in stock, plus disruption in the trucking industry poses one very plausible predicament: How do you get ahead of looming debt that outside investments require, regardless of profit margins?
What is the trajectory for future shipping operations and Amazon Sellers?
Supply chain finance has come into the spotlight more recently, but this specialty financing is often reserved for the largest corporations in the world. Smaller companies are left with business loans, which can be difficult to get approval for given the inherent risk. The cash crunch is very real and very acutely affecting Amazon FBA businesses.
The stranger on a plane
Recently, I was on a plane seated behind a man fervently working on a brand deck. From what I saw/heard from my nosy vantage point, he was an executive of a publicly-traded company — a brand in the admirable position of retaining huge consumer loyalty and increasing profits YoY. His seatmate started loudly chatting with him about the brand, saying he’s a fan, but had some questions.
“Are you really out of stock or are the waitlists a marketing ploy to create scarcity?”
The executive very earnestly explained what the past year as a consumer brand has looked like. Starting with a very welcome but unexpected demand, their models were for a normal year — not a year of upended consumer behavior. Their supply on hand and manufacturers were caught off guard. Then came the lockdowns. Factories where their goods were manufactured closed entirely for months. They scrambled to find new manufacturers in other countries, hoping the redundancy would alleviate the strain. And it helped. The manufacturing and shipping times improved — only to be caught in traffic, sitting at the U.S. ports alongside hundreds of other containers. Ports had been closed, people had been laid off at the early part of the pandemic in fear of diminishing revenue, and many of those positions still haven’t been refilled.
So therein lays the recipe for a perfect storm: unprecedented consumer demand with very little productivity in manufacturing, exorbitant shipping costs, understaffed ports and trucking companies working through backlogged containers.
This executive and his brand were lucky in that they had multiple retailers who would take their inventory when it came in. They also had a direct ecommerce site where customers could still find them and make pre-orders, loosening the chokehold of cash flow needs.
While the aforementioned problems have systematically impacted nearly everyone in retail, it seems that Amazon brands that rely on Fulfillment by Amazon have been dealt the largest blows. Inventory restrictions, listings disappearing as a result of inventory shortages, revenue loss — these are all struggles Amazon sellers are currently facing.