America’s largest retailers are weathering the country’s supply chain storm while smaller rivals struggle to secure sufficient supplies, according to earnings announcements and survey data which point to a widening rift between the biggest store owners and the rest.
Walmart, Home Depot, Lowe’s and Target all reassured investors in recent days that they were starting their peak season with strong inventory levels.
Most of the “big box” chains commented that their size, deep vendor relationships and strong balance sheets were helping them gain market share, albeit at a cost to profit margins. But smaller brands painted a more challenging picture of inventories not recovering to pre-pandemic levels.
Kohl’s, the $9bn department store chain, said that “extended transit times” had left its inventory levels at the end of the third quarter 25 per cent below where they stood at the same point in 2019, with particular shortages in women’s clothing. Macy’s inventory was more than 15 per cent below the levels of two years ago.
The surging recovery in demand since last year’s Covid-19 lockdowns has strained all importers, as rocketing ocean freight costs, port logjams and shortages of materials, truckers and warehouse space lead to unprecedented supply chain challenges.
But the deepest-pocketed retailers, such as Walmart and Costco, have been able to charter their own vessels and air freight in-demand products to secure deliveries.
“It’s kind of the haves and the have nots,” said Jennifer Bisceglie, CEO of Interos, a supply chain consultancy: “The bigger retailers are the ones who have. They had the ability to reach deep into their coffers and start airfreighting produce forward. The have-nots are the small shops, the SMEs that are beholden to their local markets.”
The largest chains could also count on key suppliers giving them priority, she added: “If I was selling to Walmart, wouldn’t I want them to remember that I was good to them in the 2021 holiday season?”
“The retailers that are in most trouble are medium-sized retailers that aspire to compete against larger retailers with a similar product mix,” said Henry Jin, a Miami University associate professor. “These are the retailers that have neither the financial resources and relational clout with third-party logistics companies to take greater control over their inbound logistics nor a geographically diversified supply base,” he added.
Investors have not punished smaller retailers’ stocks en masse but import-dependent apparel companies have been hit particularly hard by delayed shipments, said Nick Mazing, director of research for Sentieo, the financial data group.
Brands including Steve Madden, Carter’s and Decker’s had all reported steep increases in “inventory in transit” in their latest earnings statements, he noted.
Independent retailers are feeling greater pressure, according to Alignable, a network for small business owners whose polling shows small stores struggling with surging inflation and a shortage of supplies.
Its latest survey showed that 40 per cent of small US retailers expected to be unable to pay their rent for November, up 7 percentage points from October, and more than a quarter said they were in danger of closing for good in the fourth quarter.
The large retailers’ efforts to get around supply chain blockages have eaten into their profitability, with shares in Target slipping this week after it warned that higher costs were weighing on its gross margins
TJX said its “vast vendor universe”, the largest in the off-price retail sector, had allowed it to stay well stocked but added that its freight costs would rise by 80 to 90 basis points between the third and fourth quarters as it paid “significantly higher market rates” to secure inventory.
Smaller retailers which went into the pandemic with thinner margins have less of a cushion, said Simon Freakley, chief executive of consultants AlixPartners.
“There are very limited options” for smaller companies, he said: “Your only real options are to build your regional and local supply chains, which you can’t do quickly. If you’re a business that’s already struggling, that puts more pressure on your margins, which makes you more vulnerable.”
That would lead to “more distress” at the smaller end of the retail sector, he predicted, after a period in which low interest rates and government support have sustained companies that had been struggling before Covid-19 hit.
“As inflation starts to tick up and borrowing costs start to tick up you’ll see a bunch of companies that were not in great shape fall away or be bought,” he said.
James Gellert of Rapid Ratings said his group’s assessments of retailers’ financial health showed that bifurcation was already happening. While its ratings for the largest chains had already rebounded to 2019 levels or beyond, “the smaller companies have degraded at a faster pace”.
For many individual store owners, the challenges are immediate and acute. Katrina Parris, owner of a Harlem gift shop called NiLu, thought she was acting early when she ordered her holiday assortment of ornaments, candles, jewellery and other items back in August.
The holiday shopping rush after Thanksgiving at the end of November is usually her “time to shine”, she said, and the moment when her sales for the year typically peak. This year, however, she has received only half of what she ordered and has no guarantee that the other half will arrive in time.
Bob Amster, principal at Retail Technology Group, an industry consultancy, said the supply chain crisis could leave small stores in need of more support from Washington. “Unless there is an intervention by the administration,” he said, “many of them will actually suffer and possibly close.”