Supply-driven, capacity-crunch phase gives carriers pricing power

Last month’s Amazon Prime Day highlighted the struggle retailers are having with replenishing depleted inventories for the last year. Some are concerned that deep discounting during the two-day sales event would further deplete inventories. This would leave them short for the holiday season, which is still five months away.

This is partly why spot market load volumes are more than double what they were this time last year. For carriers, this means more delays at crowded warehouses and more spot market loads for rush orders to deliver much needed components in short supply.

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Retailers continue to struggle with fragile supply chains

Surging online retail sales during the pandemic has left many supply chains in tatters. According to the National Retail Federation (NRF)’s June 14 letter to President Biden, the situation facing the nation’s retailers is at a critical stage.

“Supply chain disruption issues, especially the congestion affecting our key maritime ports, are causing significant challenges for America’s retailers,” writes NRF President and CEO Matthew Shay. “The congestion issues have not only added days and weeks to our supply chains but have led to inventory shortages impacting our ability to serve our customers. In addition, these delays have added significant transportation and warehousing costs for retailers with more than two-thirds of members being forced to add two to three weeks to their supply chains.”

The letter called out five major concerns based on a survey of NFR’s more than 16,000 members:

  1. Port and shipping delays have impacted more than 97% of surveyed retailers surveyed.
  2. The most common challenges respondents mentioned were U.S. port congestion, lack of carrier capacity and lack of available containers overseas.
  3. More than two-thirds (70%) of respondents say they have had to add 2-3 weeks to their supply chains.
  4. All respondents said their costs have increased. The majority (75%) say they had to pass along some of the costs to consumers.
  5. Nearly all (85%) of those surveyed say they are experiencing inventory shortages because of the ongoing supply chain disruptions.

Back-to-school shopping is the next retail event

On top of this, the back-to-school shopping season has already begun. According to the MasterCard SpendingPulse, which measures overall retail sales (excluding automotive) across all payment types, sales are forecasted to rise from now to September by 5.5% this year and 6.7% compared to 2019.

As the economy continues to reopen at a faster than expected pace, consumer spending over the next three months is likely to top pre-pandemic levels. Parents and their children need to prepare for a new — and different — school year. Apparel sales are also expected to increase by 78% this year as wardrobes get a makeover and students and teachers resume in-person classes.

The U.S. Census Bureau’s monthly retail trade report supports MasterCard forecast. The May report showed monthly sales of health and personal care goods increased by 1.8% and clothing sales increased by 3%.

Carriers and brokers can expect strong demand in the retail freight sector based on current economic indicators. The recently revised NRF annual forecast adds further weight to this position. The initial NRF projection of 6.5% growth in retail sales in 2021 has just been revised upward to 10.5%-13.5%. That’s more than $4.44 trillion this year as the economic recovery accelerates.

“We are seeing clear signs of a strong and resilient economy and incoming data suggests that U.S. economic activity continues to expand rapidly,” says NFR Chief Economist Jack Kleinhen. “Most indicators point toward an energetic expansion over the upcoming months and through the remainder of the year.”

What does all this mean for the trucking industry?

We’re still in a supply-driven capacity-crunch phase where carriers have pricing power. Drivers aren’t yet re-entering the industry in meaningful numbers, although June’s recent employment numbers do show promise.

The addition of 24,500 new transportation jobs in June does suggest recent pay increases are having an impact. So while demand continues to accelerate at a faster pace than the industry can add capacity, the seasonal decline in dry van contract and spot rates from now to Thanksgiving looks less likely in 2021.

By comparing rates entering the market to those exiting in shipper routing guides, contract rates are still increasing. They’re now $0.37/mile higher than this time last year. But more importantly, new routing guide contract rates increased by 7% in the two weeks ending July 1 compared to the prior two-week period. Contract and spot rates should continue to remain elevated through the summer.