Barrons Cargo

Keewa Nurullah recently discovered a hot seller for Christmas. “I posted these cute little scooters on Instagram,” says the owner of Kido, an online seller of clothing, toys, and books, with a store in Chicago’s South Loop. “The likes were piling up, and people were headed to the site.”

The metal push scooters for 2-to-5-year-olds, called Primo, resemble the Italian motorbike Vespa. Nurullah suspects that demand got a boost from the June release on Disney+ of Luca, which stars a teenage sea monster who takes to land in human form with dreams of owning a Vespa. But when Nurullah sent an email to check on inventory, she was told the factory was closed.

That factory, in Ho Chi Minh City, Vietnam, belongs to Ambosstoys, founded by brothers-in-law Elisha Ruesch and Nguyen Nguyen, who launched the Primo at the 2019 New York Toy Fair. “From the beginning, it was a success,” Ruesch says.

Then Vietnam, which had fared well with its Covid-19 response, was hit hard by the Delta variant and went into lockdown in July. Ambosstoys closed production. Ruesch now hopes to reopen his factory next week, but it will take a month to ramp up output, and ports are clogged.

“I had to make the decision last week,” he says of supplying U.S. sellers with more scooters for Christmas. “It’s too late.”

December outages of hit toys are nothing new. This year could see more shortfalls than most, judging by the 88 vessels backed up near an important California port complex. But predictions of holiday sales strangled by supply-chain havoc—think Charlie Brown Christmas trees surrounded by few boxes and bows—look decidedly overblown.

In late spring, Barron’s reported on a seeming “everything shortage” set off by abrupt pandemic shifts in consumer spending, combined with company miscalculations and freak events (“The Everything Shortage Is Here”). Now, our conversations with retailers, manufacturers, shippers, and Wall Street forecasters indicate that businesses are learning to cope with bottlenecks, which will largely ease next year, albeit slowly.

Virus trends have taken a promising turn in recent weeks. Critical overseas manufacturing centers are reopening. Consumers are only slowly returning to spending on experiences after a huge shift in preference toward household goods, but that reversal will continue and even pick up speed as new Covid cases fall and vaccines become available for children. Even those backed-up ships could be hiding good news.

“You’ve heard it here first: Christmas will happen on Dec. 25,” says Gene Seroka, executive director of the Port of Los Angeles. “Many of our savvy retailers and importers advanced their orders. We started seeing Christmas goods arrive on our shores back in June of this year. Normally, that arrival would take place at the end of August, beginning of September.”

Large retailers with sophisticated supply chains—like Walmart (ticker: WMT), Target (TGT), and Costco Wholesale (COST)—will continue to thrive, as will transportation brokers like XPO Logistics (XPO), which can help level the field for smaller companies. Toy giants Mattel (MAT) and Hasbro (HAS) will have a holiday edge over smaller rivals.
For shoppers, Xbox One gaming consoles will be easier to come by than PlayStation 5s. Videogame publishers will do well, along with GameStop (GME)—although what that means for its stock is up to the meme chasers at Reddit.
Inflation, which has lately sparked a rise in bond yields from barely perceptible levels to almost mentionable ones, could remain elevated and uneven through the holidays: Turkey, up 6% from a year ago, might be easier to swallow than pot roast, up 13%. Labor markets remain tight. Higher pay and prices for manufactured goods will stick, but overall inflation is likely to slow to unalarming levels next year. All told, fourth-quarter mirth estimates appear beatable, and a happy new year for shareholders isn’t out of the question.

The causes for shortages since the start of the pandemic have been many and varied, but they fall into a few groups. A handful were true one-offs, like the March grounding of a ship that blocked the Suez Canal, which carries 12% of worldwide trade, or a Louisiana factory fire in August 2020 that knocked out production of swimming-pool chlorine.
Some were actions with unforeseen consequences. Executives following playbooks written during the global financial crisis slashed orders at the pandemic’s start and were caught short-handed. Brexit drove off too many United Kingdom truck drivers, resulting in fuel lines. Decades of trimming fat from supply chains may have left them too fragile.

But most causes have been direct results of the virus. That missed trip to Disney World, with the funds redeployed on a new patio set and big-screen TV, was part of a vast spending shift from services to goods, bolstered by stimulus checks. Exports from Asia, where many consumer goods are made, jumped 20 percentage points relative to those from Europe and the U.S., according to investment bank UBS. That compares with just a 1.5 percentage point increase over five years before the virus arrived.

Vaccines should have reversed that trend, but the uptake was slow in places, and variant cases raged. As a result, goods spending has been falling by only about a point a month since March, and remains 15 points above prepandemic levels.

That has led to runs on key components, like computer chips for appliances and vehicles. Spending on plants and equipment to make those items is expected to surge more than 50% this year from prepandemic levels, but shortages there are likely to stretch well into next year.

Passenger planes carry about half of airfreight, so a sluggish recovery for air travel has added to shipping burdens. Trans-Pacific shipments are up some 30% this year, which has worsened a shortage of 40-foot shipping containers. The cost to send one of them from Shanghai to Los Angeles has jumped to nearly $20,000 from $2,000 in a year and a half. (It is still relatively cheap to send one in the other direction.)

Under normal circumstances, the ideal number of ships to drop anchor outside of California’s San Pedro Bay Ports Complex, which consists of the busy ports of Los Angeles and Long Beach, is zero. In June there were six, down from an earlier pandemic high of 40. Among the 88 vessels recently waiting to dock, 64 are carrying containers, with about half of these headed for each port. Los Angeles port chief Seroka compares ship arrivals now to drivers being squeezed from 10 lanes to five. Port productivity is up, he says, but truckers and warehouses haven’t added as much capacity as shippers, so unloaded containers are sitting at the port for six days rather than two, and at warehouse doors for seven or eight days versus three or four.

The ship jam will not be cleared by Christmas, Seroka says. And retailers tell him they plan to spend early next year replenishing inventories, which have been running unusually low relative to sales. But he predicts a holiday of plenty.

“There will be goods on the store shelves, in the fulfillment centers, for us to order,” he says. “My only advice is maybe for the American consumer, like I’m doing, to shop a little early.”

Trucking companies have struggled to find new drivers. XPO Logistics, which operates its own trucking network and provides brokerage service for others, has sped up graduations at its driving schools.

“That piece of it, certainly for us, is beginning to abate,” says its chief strategy officer, Matt Fassler. Industry capacity remains exceptionally tight, but retailers have had time to prepare, Fassler says, and shoppers can expect full shelves: “There will in fact be gifts under their trees.”

Signs of supply-chain stress remain unnerving to investors. In a recent earnings report, Nike (NKE) lowered its revenue forecast to account in part for factory closures in Vietnam. Shares lost 6% in a day. But there are also signs that relief is coming. New Balance recently told analysts that its Vietnam factories could return to 60% to 70% capacity by mid-October, versus 30% to 40% today. If there is one promising indicator on that front, it’s that Covid cases worldwide and in the U.S. have been falling since the end of August.

Toy makers sound confident, mostly. At a recent Goldman Sachs conference, Barbie maker Mattel confirmed that it has already factored shipping challenges into its full-year guidance for a 12% to 14% sales increase. It and Nerf maker Hasbro said some sales might slip from the third to the fourth quarter, but wouldn’t hurt overall holiday business. “Maybe we’d like a little more product in certain categories, but we’ll have the product for the holidays,” said Hasbro CEO Brian Goldner.

Yet at smaller MGA Entertainment, which makes Bratz dolls, founder Isaac Larian is easily the most bearish-sounding of the group.

“It’s a nightmare, a worldwide nightmare,” he tells Barron’s about transportation delays. “Forty-three years I’ve been in business. I have never seen anything like this before.”

He says he expects holiday sales for his privately held company to be flat or up by a single-digit percentage. But he predicts shortages and sales declines for the broader industry, followed by delayed merchandise arriving too late for Christmas, resulting in an inventory overhang next year, and a “major recession.”

Jefferies analyst Stephanie Wissink, who covers mass merchants and toy companies, says holiday goods availability could go either way, depending on whether congestion eases over the next 30 days.

Most years, retailers can replenish inventories two or three times between mid-October and mid-December, she says. This year, shoppers could see healthy stock levels to start, then a drawdown and a small surge, before popular items run out. “If there’s something on your holiday hit list and you see it, you better buy it, because it may not be there a couple of weeks later,” she says.

If that something is a PlayStation 5, good luck. Console makers often guess too low on demand for new machines, but shortages lasting a year are rare, says Michael Pachter, who covers videogaming for Wedbush Securities. This one is attributable to a scarcity of semiconductors combined with lockdowns. “Guilty parents were suddenly cooped up with their kids, and their kids weren’t going to school and weren’t playing Little League and had nothing better to do,” Pachter says.

Xbox One machines just became available online at Walmart and Target this past week, but that may change, says Pachter. His top tip for securing a $499 PS5 in a hurry is to pay $1,000 on eBay . But he notes that when eBay prices are near “par,” or $499, it’s a sign that the machines are in stock somewhere.

As for GameStop, Pachter says that it will thrive this holiday and receive plenty of consoles, and that the “Reddit raiders” are “directionally right,” but also that the stock is “overvalued by $150.” He is bullish on videogame publishers Activision Blizzard (ATVI), Electronic Arts (EA), and Take-Two Interactive Software (TTWO), but says Take-Two is less well positioned for the holidays because it recently delayed the release of a remastered version of its popular Grand Theft Auto 5.

Wissink at Jefferies says big retailers can afford to commission their own container fleets—a clear advantage now. She recommends Walmart for stock buyers, because it appears likely to emulate what has worked well for Target, the standout in the group.

Among toy makers, she prefers Hasbro stock to Mattel, because Hasbro has seen strong growth in digital games based on the role-playing franchises Dungeons & Dragons and Magic: The Gathering, and has an in-house studio to turn toys into shows for streaming services like Netflix (NFLX). This year, it’s particularly difficult to predict which toys will be hits, because of canceled toy fairs and few theater releases of children’s movies.

In conversations with executives, Wissink says many sound surprised at the strong demand for what are called poppets or waffle fidgets, which have rows of bubbles. “You poke the spaces and then you flip it over and you poke them the other way,” she says.

At a Rhode Island mall this past week, a teenager tending four trinket kiosks said that poppets have been selling well and there has already been mention of the holidays. “I’ve had a couple of parents say they might as well save these items for Christmas,” she says.

Jess Dankert, vice president for supply chain at the Retail Industry Leaders Association, a trade group, says that doomsday holiday forecasts are off the mark and that big retailers are managing extraordinary shipping constraints well. She adds, however, that online shoppers in particular should start early because of how busy parcel carriers will be. “Hopefully, we will be able to retire the word ‘unprecedented’ after this, because it certainly gets a workout these days,” she says.

Soaring prices for trans-Pacific shipping would seem a key reason that the U.S. inflation rate has jumped to over 5% from 1.3% a year ago. In fact, it has contributed only 0.05 percentage point to the increase, estimates UBS, because shipping is a small part of the cost of importing goods, and not nearly all goods are affected by those rates. Much of the inflation surge has come from components that slumped a year ago, like energy. Futures suggest that energy prices will moderate.

Inflation measures that trim items with outlying price gains imply that the headline measure will come down, but slowly, as bottlenecks ease, UBS says.

Back at scooter maker Ambosstoys, Ruesch is disappointed that he can’t get more Primos to the U.S. in time for Christmas, but he expects demand to remain strong next year, and is planning to introduce a follow-up toy in February. “It’s top secret,” he says, before hinting that it’s a scooter for older kids, ages 5 to 7.

In Chicago, Nurullah at Kido is pleased that business is growing, despite difficulty ordering some items. And while retail giants are flexing their supply-chain heft, she’s thinking small by turning to arts-and-crafts sellers online: “We’re looking at Etsy (ETSY) and we hadn’t before, just to see if there are any small makers who are working out of a garage workshop who can maybe fill in some of the gaps.”

Source: Barron’s October 4, 2021 | By Jack Hough