RETAIL INVENTORIES LOW AND DEALS HARD TO FIND AS HOLIDAY SHOPPING INTENSIFIES

Dominick Keefe, Vice President of Hilco Merchant Resources discusses the current state of the supply chain and the challenges facing retailers, manufacturers and distributors this holiday shopping season and in the year ahead.

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Steve Katz:

Hello again, and welcome to the Hilco Global Smarter Perspective podcast series. I'm your host, Steve Katz. Today we're speaking with Dominic Keefe, who's Vice President of Hilco Merchant Resources about the current state of the supply chain. Something we've all been experiencing from both a business and personal perspective in recent months and the challenges that developments there are causing for retailers as the lingering effects of COVID 19 are amplified ahead of the 2021 holiday shopping season. Just a little quick background over the last 30 Years Hilco Global has built one of the most successful and comprehensive retail practices in the global marketplace, focused on servicing the needs of retailers from strategy to execution. Hilco's reputation for excellence is driven by the delivery of unique and customized solutions, including valuation analysis and expertise and the extensive toolbox of monetization strategies that help retailers maximize asset values and a highly experienced and proven retail advisory consultative practice. With that said welcome to the podcast for your first visit with us Dominick.

Dominick Keefe:

Hi, Steve. Great to be here. Thanks for having me.

Steve Katz:

Yeah, well, we're really pleased to have you on to discuss this topic because obviously, it's so timely. The holidays are almost here. And everybody's looking beyond that into next year's selling season in the course of things are going to take in terms of keeping shelves stocked and meeting demand. So great to have you on and to get us started, I'd like to ask you if you could give us a quick lay of the land on key factors behind these supply chain issues that we're all seeing and why we are where we're at right now.

Dominick Keefe:

Sure. I think the first thing that you have to think about when thinking about the current supply chain dynamic is the impact that COVID's had on it, right? One of the analogies that I've used to sort of explain the way COVID has affected companies and now, in this case, the supply chain is you could think about in the same way it's affected people. If you were healthy, you probably were hopefully okay, when COVID hit, but if you were unhealthy, some of those problems would've been exacerbated by COVID. And so that's true with people, companies, and now the supply chain, right? And so all of the inefficiencies that the supply chain had leading into COVID, COVID just put a magnifying glass on those and amplified them. The first problem really was the massive shift in demand for consumer goods over experiential purchases.

Dominick Keefe:

And so for instance, people were spending a lot more money on TVs, appliances, automobiles, home improvement goods, compared to things like vacations or going out to restaurants with their family. And so that shift in demand has led ultimately to a lot of pressure and stress on the supply chain. And of course, that's sort of a unique element in cause of COVID, but that hopefully will dissipate as we go down. But nevertheless, we're in the thick of it. And then that really leads to sort of another element, which is to say the Delta variant didn't do us any favors. The supply chain is sort of unique in that it's not going to necessarily fix itself, right. It needs time to catch up. And so as more people are continuing buy goods over services, the supply chain is continually under pressure. And what many people thought would've been a summer of easing up, we had Delta variant.

Dominick Keefe:

What that did is really is it pulled back a lot of the plans for people to start going on vacation and going out to dinner and instead cause a greater and further shift in the demand. And so right now, really, when you think about it, the supply chain, unfortunately, is as bad as it's ever been. It hasn't had the chance to recover, consumers are continuing to buy goods in mass and the problem is really sort of at a fulcrum point right now. And so ultimately sort of the way we look at this is, okay, so the overseas issues have been well documented. We're going to dig into that a little bit, but one of the topics that we don't think has been covered quite as extensively as some of the more domestic issues like trucking and the labor shortage and things of that sort. One of the things I think we're excited to dig into today about is really unearthing and uncovering what's going on on the domestic side of the equation.

Steve Katz:

Yeah, absolutely. I want to hit on both of those issues relating to shipping and trucking, but first, maybe we can talk a little bit about what's going on competitively in the retail environment. You walk into a big department store and you look around, maybe shelves are fully stocked. Whereas if you walk into a store or in your neighborhood where it seems they used to have a good supply, the shelves are a little thinner. I guess the question is what's happening in the competitive landscape? Are larger players currently at an advantage over smaller companies in getting supply?

Dominick Keefe:

The reality is we live in a world where companies are fiercely competing for access to the same factories, raw material, shipping slots, et cetera. And so being a large player comes with certain advantages. Vendors traditionally, and especially now are always going to give preference to their larger players. And the reason is quite simple. If you are a more creditworthy company and you're putting a large order out there, that matters. If you're placing a larger order in general, that makes a difference. And so larger players have this inherent advantage and then they actually went ahead and created an even greater advantage when they were willing to do things like prepay for orders or accelerate payments. And in some cases, of course, you, are going to have some risk associated with doing that. There could be cash flow, risk or risk of ordering a bunch of products and having that product underperform.

Dominick Keefe:

But in most cases, that was actually a very successful strategy. And with the demand right now for inventory, you didn't really have a ton of instances where companies were buying large lots and then stuck with underperforming inventory. And so right now, what you have too, is the smaller vendors often can't even meet the minimum order requirements that vendors have or smaller players can't meet the minimum requirements that the vendors have. For some small players, you can't even buy inventory. So if you're a small toy store that wants to buy this new hot product, but the minimum is greater than what you can afford or absorb in your margins. You can't pay for it. You can't buy it, you can't get it.

Dominick Keefe:

And so that's another area where large players just have an advantage because they have more cash and the ability to spend and absorb. Inherently what this has led to is a lot of M&A acts. And so we've seen that because companies and private equity firms are recognizing that bigger, in this case, is better, but even so that's just one link in the supply chain, but certainly, we've seen that bigger companies are at advantage and unfortunately smaller ones are not.

Steve Katz:

Yeah, it makes a lot of sense. And I think you see it out there in the marketplace as a consumer, but when you look at some of the factors that are causing that, it's interesting to kind of dig into those. And then I guess now would be a good time to discuss some of those topics that you mentioned at the start of the conversation. No matter where you are right now in the pecking order, whether you're big or small, right? You're still challenged by how you get your products to consumers. Everybody's seen those videos on the nightly news of cargo ships sitting in the holding pattern off the coast of California and around the world. Is retail product getting into the stores then whether it's big store or a small store what's going on now?

Dominick Keefe:

So I think this is the part that's been very well documented, and we've all seen these pictures of these ships outside the ports in California and elsewhere. Right now you have hundreds, literally hundreds of ships sitting idly out there in the middle of the ocean or outside of these ports that can't unload inventory, and obviously, that's not an efficient practice. In a normal time, ideally, the number of ships sitting out there is zero and that's sort of the way that it used to work and it's just not happening right now. So it's a compounding effect, and cascading effect. So you have these ships that are sitting out on the ports and they're waiting for slots, but the ports themselves have too much inventory, too much freight and they can't process it all. And so the reason they can't is in part due to labor. There's a labor shortage, which has been well documented, which we're all at least to some degree aware of.

Dominick Keefe:

And even if they do have the labor, just a simple volume equation. The ports are just not built to process that much freight in that short of a period of time. They've been working tirelessly somewhere around the clock, but even so, if you can process it, you still need somebody to pick it up. And in this case, it's the truckers. So if the truckers can't actually pick up the freight, then the freight just continues to pile up. And so all of these links are very interconnected and if one goes wrong, it affects the entire system. In this case, you can find a fault within every single link. And I think that's really been the biggest problem here is that all of these solutions are all these problems are they're interconnected and they're all compounding on one another. And so it's something that's going to be very difficult to solve. But I think as we get closer to looking at these domestic issues really starts with the truckers.

Steve Katz:

Yeah. So let's talk about that a little bit. What's going on there? Hears about, there's a trucker shortage. It's nothing new it's been having for a while. What factors are really impacting the trucking industry and how do they tie into this overall scenario that's developed?

Dominick Keefe:

Sure. The trucking shortage is fundamentally different in terms of, cause and effect than the shipping shortage. In the case of ships, there's no problem with the amount of people we have or the labor to actually drive these ships and pilot these ships. In the case of ships, it's actually not enough ships, not enough container slots, port capacity, and all these things that I just mentioned, wherein the case of trucks, you actually don't have enough truck drivers. There's a shortage of qualified workers. And then there are also a lack of efficiencies, plus the high demand for moving this product across the country. And so you ask, why do we have these issues? Why don't we have enough truck drivers? And there are a few reasons for this. One is some drivers are leaving for other jobs. Labor shortage is not necessarily isolated, but to truck drivers, there's a or shortage everywhere.

Dominick Keefe:

And so if you want another job, you pretty much have your pick of the litter right now. There's better pay in some cases elsewhere, better working conditions. If you want to spend time with your friends and family, truck driving doesn't necessarily lend itself to that. There's just always been a high turnover in general. There's an uncertain future too, right? If you think about autonomous trucks and what the future of trucking may be, it's not necessarily an industry that's poised for long-term growth. And people know that right. And so for all of those reasons, there is a shortage and it's how do you combat that? And so you think about how much freight actually moves by truck, and the answer is about 70% of all freight within the U.S. is moved by truck at some point. And so with that, if you have long delays or clogs at ports, that is going to cause a problem for nearly all of the inventory that you and I buy.

Dominick Keefe:

If you think about just the delays, for instance, right now a trucker could be waiting six times as long to pick up freight from a port. Some of that is because if you are there and you miss your slot and everyone's there at the same time, you can't just simply get next in line. You have to wait until it becomes available. And when you're on a 14-hour workday, time matters. Truckers don't get paid on their time on you. A trucker gets paid based upon the distance in which they are moving freight. They don't get paid on their time. And so if you're waiting there six times as long or waiting there for 12 hours, in some cases, that's a big problem because time where you're on the clock, but you're not being paid. If you think about sort of how wages have adjusted to meet these increased wait times, you're looking at about 600% compared to 8%.

Dominick Keefe:

So that in and of itself doesn't necessarily lend itself to this huge demand in this industry where the sort of working conditions worsen more than wages have risen. Now, I think for all of these reasons, you have this sort of trucking mess and web to untangle and there are certain inefficiencies too. If you just even think about the way that trucks arrive to pick up goods from a port. It's not like you're just a truck driver and you show up and they put some freight on the back of your truck and tell you where to go. It actually doesn't work like that at all should probably, but it doesn't.

Dominick Keefe:

Instead, you have to show up at a certain time to pick up a certain item and then you take it to a certain location. All of this is predetermined. And if you miss it, it could mean you're sleeping in your truck overnight because your 14-hour shift just ended and you got to wait until the next day in order to get back on the road. And so for all of those problems that we have quite the issue surrounding trucks in trucking in this country right now,

Steve Katz:

It is a colossal mess. No question about that. So, all right. We've touched on jobs at ports and now we talked about the shortage of truck drivers. What about retail jobs? What are you guys seeing there?

Dominick Keefe:

So again, labor shortage here too. There are about 1.1 million unfilled retail jobs right now, at least that was the case in July. And a bunch of retailers are ramping up hiring, or at least they're trying to right now, but we're probably still in any event about a million jobs short of where you would ideally like to be. Whereas you continue to put pressure on retailers with increased holiday sales growth, that demands more workers. And if they're just not there right now, and if you're projecting and which most people are a five to 8% year over year growth in terms of holiday sales, well, you're going to need the additional retailers to support that growth in many cases, but it's actually the opposite fact. We have more retail sales and less retail workers. And, and that in and of itself is a bit of a problem.

Dominick Keefe:

And to add on top of that, most people have committed to doing their holiday shopping early about 70% of people have planned to do their holiday shopping early this year. And I think we all saw that right? When the pumpkins were very quickly replaced with Christmas trees that doesn't necessarily help the retailer either. I mean, it does certainly with sales in making sure that they're moving product, but it places a lot of stress on the system. And so another interesting statistic here is Pinterest even found that holiday searches were up 43% in August compared to last year. It just really goes to show how early people were starting to think about holiday shopping. Now retailers have some certain things they can do to fight this and they've done those things like increasing wages. Most retailers are paying 15 to 20 bucks per hour in some cases for entry-level jobs.

Dominick Keefe:

That's much more than they were a few years ago. Offering large signing bonuses and things of that sort. And big companies can mostly absorb these costs and margins are up right now. People are paying more for products, but smaller companies can't. That's really where I think the issue lies for most retailers. They're having trouble staffing adequately because they can't absorb these increased costs, both on the retail side and then also on the shipping side that we talked about on the vendor side, et cetera.

Dominick Keefe:

Ultimately what that can lead to is a negative in-store experience, right? If you're going to a small retailer and you're looking for a certain product because you want to support that small retailer, but the shelves are bare, the prices are up and there's nobody in this store to help you. And I think that's really where you could be exposed a little bit if you're a smaller retailer. And again, they realize this, and that's why you have that increase in M&A activity. But those are the types of things that are sort of the end result, how the consumer experiences, the supply chain shortage, or at least one of the ways that at least people don't always think about.

Steve Katz:

Okay, great. That makes a lot of sense. I think it's really helpful to kind of approach it this way and talk about these various pieces of the puzzle that are causing the problem. Unfortunately, our time is getting near the end here. I'm thinking since it's the holiday shopping season, maybe you could put a nice bow around all this for us and let us know what your thoughts are and what the team is thinking in terms of where things are likely to then not for retailers this holiday shopping season, and then 2022. I know there have been some forecasts suggesting that we are going to be a little bit bare first quarter and I'm curious about that as well.

Dominick Keefe:

Sure. I just got done painting a little bit of a grim picture for small retailers, but I want to make sure the first thing I do is shed some positive light on that. One thing that small retailers can look forward to is 93% of shoppers are quoted as believing that supporting small businesses is important, especially after the pandemic, right? So we expect that small retailers are going to see an uptick and at least hopefully traffic, which is a question of whether they can meet that demand. But, but generally just sort of wrapping up the themes that we've discussed, margins, they've increased in part due to higher prices and a shift in the demand curve, certainly earlier in the pandemic. There's no guarantee that this will last forever, especially as people begin to go on vacation and as costs continue to increase. That tolerance may not be there forever.

Dominick Keefe:

And so those are sort of the things we're keeping an eye on as how does that consumer demand shift sway as we exit COVID and how do prices ultimately stabilize because they'll need to. And for those of you that are listening, that haven't started your holiday shopping, right? I mean, one thing that I would say is if you're looking for deals, don't get your hopes up. You know, discounts are basically down in every category. Some items like tools in home improvement, they're not being discounted really at all. And so if you do find deals, that's great, but you're waiting till that last minute, you may be a little bit disappointed just because there's going to be less inventory to go around and fewer last-minute sales as a result of that. Now I'd also say one of the things that retailers can do here, or what they should be prioritizing as they think about ways to sort of combat all these things is thinking about their buying habits, their buying behavior, their logistics.

Dominick Keefe:

That's always where Amazon has had a big, big advantage is on the returns, low-cost shipping, et cetera. There was a study that said 77% of online shoppers expect free shipping and 84% expect free returns. And those are pretty big numbers and it's illustrative of how things are changing. Again, we live in a world where there are certain ways to mitigate against all of these things. We continue recommending for retailers to get free inventory appraisals during 2022, as they did probably in the last two years. Keep a close eye on margins and inventory levels, the percentage of age inventory on hand is really important. Having the right inventory mix at the right time is always going to be one of the most fundamental keys to success for a retailer. And the supply chain, of course, is disrupting that because it's hard to have the shelves stocked with the right goods. If you're having all these log jams and clogs and the ports to the warehouses, et cetera.

Dominick Keefe:

There's manpower that's needed to process that inventory, especially in-store. That's something that Hilco can help with. We have sent people to stores to actually go process inventory and are able to do that for retailers all across the country. Those are all the sort of things that I think people should be thinking about, retailers should be thinking about as we go through this holiday season. It's all really important that looking ahead to 2022 inventory levels could be a little bit bare. Smaller retailers are going to be at a disadvantage. And so we'll see what happens. Nobody has a crystal ball, but generally, the holiday period will be good in following it up, it's going to be a question of what happens. The supply chain isn't going to work itself out. Everyone is working really hard to solve these problems, but it's going to be sort of an unknown 2022. We just have to sort of wait and figure out what happens. But again, there are certain things that retailers and people can do to put themselves in a better position to succeed.

Steve Katz:

Okay. Well, terrific perspective. So many things at play and so many variables both headed into the holiday season right now. And then as you said, nobody has that crystal ball moving forward into that big question mark of a year it's ahead and everybody's got the fingers press for that. I know. So for those of you listening in today, if you have exposure in the retail industry, closely monitoring inventory levels, mix, and associated buying behavior is clearly going to be essential right now. And Dominick and the retail team at Hilco, no doubt can be a great resource for you whether to assist for the temporary staffing issue, inventory procurement issue, or disposition need, or maybe even just to have a quick conversation as a sounding board. So with that in mind, Dominick's email is DKeith@Hilcoglobal.com. That's D as in disposition, K E E F E @hilcoglobal.com. Dominick, thanks again for joining us today. Good stuff.

Dominick Keefe:

Steve, Thanks for having me on the podcast, really appreciate it. And I hope the discussion is helpful for our listeners here.

Steve Katz:

Well, I'm sure that it was thanks so much and listeners, we hope that today's Hilco Global Smarter Perspective podcast provided you with at least one key takeaway that you could put to good use in your business or share with a colleague or client to help make them that much more successful moving full forward. Until next time for Hilco Global, I'm Steve Katz.