The Gist

Recent rapid declines in ocean-shipping freight rates are not likely to lead to lower prices on promo products, industry executives say. Meanwhile, the “inventory glut” and demand drop that some retailers are experiencing are not issues in promo, suppliers report.

Freight Rates Drop Dramatically

According to data available from online freight marketplace Freightos, spot rates for shipping containers that carry products – including promo items – from China/East Asia to the U.S. West Coast dropped 30% between May 20 and June 10. Mid-March to mid-June, the rates were down 40%. Meanwhile, China/East Asia to the U.S. East Coast rates were down 25% from May 20 to June 10, and 31% since mid-March.

Impact on Promo Pricing

During the pandemic, exponentially elevated shipping/container costs have contributed to price increases on promo products and other goods. With rates in retreat, could there be a boomerang effect, with reduced container costs helping lead to lower prices on promo?

Probably not – at least not any time soon, industry sourcing pros say.

“While it may cost suppliers less in the short term, they will need to work through current inventory before distributors see price reductions,” explains Jeffrey Nanus, CEO of Norwood, NJ-based hard-goods supplier AAA Innovations (asi/30023). “For direct import orders, it’s still difficult to lock in lowest ocean cargo rates in advance, so we still need to be conservative.”

Related question to freight rates and pricing: Will removing tariffs on China-made imports lower prices on promo products? ASI Media’s Christopher Ruvo tackles the question in this quick-hit video.

Factors Keeping Promo Prices Up

Furthermore, despite recent declines, freight rates remain an ample cost burden as they continue to be far higher than pre-pandemic norms or what was seen early in COVID. For instance, current rates for China/East Asia to the U.S. West Coast are up 268% from late June 2020, according to Freightos.

Another factor that could keep promo prices around current levels – or possibly even drive them higher – is that industry suppliers continue to shoulder heavy inflation on a variety of inputs that impact what a product costs. Rising prices for labor, fuel, raw materials, transportation, warehousing space and more can – and have – elevated the expense of producing, stocking, decorating and selling a product. Such elements remain in play.

“We have to remember that container freight charges are only one piece of a cost structure that we need to account for,” says Teresa Fang, vice president of supply chain at alphabroder (asi/34063), promo’s second-largest supplier. “Decreases in freight costs may be offset by increases in labor costs to decorate, for example, as minimum wage increases and other wage increases go into effect to secure labor. Also, keep in mind: Ocean carriers have the power to cut capacity to try and drive up rates as much as they can.”

10.8%
The Producer Price Index, a measure of the prices paid to producers of goods and services, rose 10.8% year over year in the U.S. in May.

(Bureau of Labor Statistics)

A Temporary Reprieve?

As Fang alludes to, it’s possible the freight rate decline is only temporary. Consider: Container imports bound for the U.S. declined 36% between May 24 and early June, a key reason for rate drops. There’s uncertainty over the extent to which demand might rebound, but at least some shipping-industry leaders are expecting importing to intensify as the year’s peak importing stretch hits in the third quarter in advance of the holiday shopping season. That could cause freight rates to rise again.

“Peak-season cargo is on the way,” Gene Seroka, executive director of the Port of Los Angeles, said recently. He anticipates an early start to peak volumes in 2022, with arrivals beginning at the end of June, Freight Waves reported.

Freightos added in a note: “Any significant increase in container traffic out of Asia – either from Shanghai reopening (following COVID-related societal lockdowns) or from the expected increase during peak season – would likely exacerbate the existing congestion and delays at destination ports, which in turn will put more pressure on rates.”

Retail’s Overstock Issue

Retailers like Walmart, Abercrombie & Fitch, Kohl’s and Macy’s say their inventory levels have swollen substantially. Some, such as Target, report that the stock levels have risen disproportionately high and they’re scaling back orders and cutting prices to correct. A potential ordering reduction from retailers and other importers could be one of a number of possible reasons for the recent importing decline.

The inventory bloat at some retailers appears to be a consequence of shifting consumer spending patterns. Retailers pumped up importing in 2021 and for much of the first half of 2022 to meet rampant consumer demand for things like home goods and particular types of clothing. However, as Americans have devoted more spend to travel, nights out and different types of products, retailers are now overstocked on certain items. Discounts are a way to clear excess inventory and make room for more in-demand items or holiday-season goods.

Promo Demand Remains High

Retailers’ overstocking woes don’t appear to be a problem for promo so far. Indeed, a persistent challenge for promo throughout the COVID economic recovery has been the opposite of too much product – it’s been stock gaps, with suppliers suffering inventory shortages on key items.

As such, suppliers have become more proactive on importing, bringing greater quantities of inventory stateside farther in advance than normal and keeping more inventory on hand. It’s a strategy they say has helped reduce stock shortages – and one they plan to continue to pursue for the time being.

“While we’re seeing signs in the economy that there could be a slowdown, we have not seen a drop in demand. We continue to be optimistic for a strong Q4.” Liz Haesler, PCNA

“As shipping issues fade, suppliers will look to reduce inventories back to normal levels, but I believe most of us will be cautious about doing this,” says Nanus. “Most suppliers will wait until at least spring of 2023 to bring inventory to more normal levels. Our company’s strategy for the second half of 2022 is to maintain current high levels of inventory. We’re looking to place orders now for spring 2023.”

The pace at which promo suppliers can build up inventory could potentially quicken if overall importing demand remains at lower levels or declines, but as noted earlier, it’s uncertain how that will play out … and there’s the potential for a rebound.

Regardless, Nanus and others say the impetus for continuing to import aggressively and keep inventory at higher-than-historic volumes is because demand for branded merchandise remains high, even if there have been economic headwinds. “Presently, demand is strong and growing,” says Fang. Adds Nanus: “Business has remained very strong.”

Polyconcept North America (PCNA, asi/78897), promo’s fourth-largest supplier by revenue, frontloaded importing this year to propel a stock-up to ensure there would be deep inventory on hand, particularly as the holiday branded gifting season swings into high gear. It’s a bet the company believes will pay off handsomely.

“While we’re seeing signs in the economy that there could be a slowdown, we have not seen a drop in demand,” says Liz Haesler, PCNA’s global chief merchant. “We continue to be optimistic for a strong Q4. We will have the inventory, labor and decoration capability to deliver.”