Supply chain disruptions force retailers to stock up early for holidays

Dan Marshall hopes he has enough stacks of board games and towers of toy trucks stockpiled in his family's St. Paul toy store to last the holiday season.

Still, unprecedented supply chain disruptions, including congested ports and a lack of truck drivers and warehouse workers, could mean his Mischief Toy Store might run out of popular gifts, a risk that retailers big and small face in the coming months.

Large retailers like Minneapolis-based Target have begun to take drastic measures to fulfill customer's holiday shopping lists such as chartering their own international cargo ships, dramatically increasing inventories and hiring thousands more employees to help keep shelves stocked.

"The wild shifts in the purchasing patterns from consumers themselves and the item selections have really thrown traditional demand planning out the window," said Noah Hoffman, vice president of North American surface transportation for Eden Prairie-based C.H. Robinson, one of the largest logistics companies in the world.

After a year of forced transformation as COVID-19 changed the way people shop, retailers this year are faced with another holiday season where they will likely need to pivot quickly or lose out. The result could push consumers to shop earlier, shop local or reevaluate what makes the best gift.

Retailers from Target to Mischief have stocked warehouses or storage rooms full to anticipate what consumers will buy.

"We are just trying to find places to put it all," Marshall said, as he looked over the shelves of toys in the lower level of the Grand Avenue store he co-owns with his wife and daughter. "It's crazy, but we think we are doing the right thing by trying to get things sooner."

Already, there are items that are hard to keep in stock such as flavored Japanese sodas, certain candies and Pokemon cards. Gift wrap paper is low. And the store has heard books are going to be hard to come by soon, Marshall said.

Target and Best Buy also have stocked up. At the end of July, Target had more than 26% more inventory — or nearly $2.5 billion worth of goods — on hand than in 2020. Richfield-based Best Buy said it had 55% more goods on hand than the same time the year before, and 23% more than in 2019.

"For consumers that want to have their eye on presents, getting their shopping done earlier I think is going to be helpful," said Carlos Castelán, managing director of local retail consulting firm the Navio Group.

Usually retailers do not risk having a ton of inventory on their balance sheets that they might not be able to sell, Castelán said. This holiday season is an exception.

"In this case, the paradigm has all been flipped where it's actually more risky to potentially miss sale targets if you don't have that inventory on hand on the front end," Castelán said. "I think that's a dramatic shift."

Best Buy CEO Corie Barry acknowledged during an earnings call in August that congested ports and transportation disruptions will continue to present challenges. She said the company has responded by "acquiring additional transportation, pulling up product flow and adjusting store assortment based on availability."

Target last month announced it had chartered its own container ship to regularly bring its merchandise from overseas ports to the United States. Other retailers such as Walmart, Home Depot and Costco are doing the same.

In the last week, Target announced it would add 30,000 new roles across its supply chain facilities nationwide with about 1,000 of those hires for distribution centers in the Twin Cities.

As the supply chain problems keep compounding, the country is rapidly approaching the holidays. According to Deloitte's annual holiday retail forecast released in September, holiday retail sales are likely to increase between 7% and 9% in 2021 compared to last year. Target has set its first early holiday sales for mid-October.

The supply chain problems go back at least to the beginning of the international coronavirus pandemic. As the world shut down temporarily to slow the spread of COVID-19, consumer needs changed and so did shipping patterns. There have also been manufacturing stoppages, including recently in China because of electricity outages but also because of COVID-19 outbreaks or border restrictions over the past year and a half.

A traffic jam quickly formed as retailers tried to fulfill pent-up demand and economies started to run full force again with the consumers expecting fast online delivery, said Hoffman of C.H. Robinson.

Retailers, seeing the wait times increase, started to increase inventory to compensate, he said.

As a result, dozens of container ships — and thousands of containers — are waiting at the Los Angeles and Long Beach, Calif., ports, according to the Washington Post. This month, the median cost of shipping a standard rectangular metal container from China to the West Coast of the United States hit a record $20,586, almost twice what it cost in July, which was twice what it cost in January, according to the Freightos index.

According to a recent National Retail Federation survey, 98% of retailers said they have been affected by port and shipping delays.

All of these considerations are on top of changes going into effect this month that would increase the delivery time of some first-class mail delivered by the U.S. Postal Service and raise prices for the holiday season for commercial and retail domestic parcels.

While many consumer prices have not yet been raised, the increased transportation costs for retailers will eventually trickle down to customers, said Patrick Sedlak, principal of Sedlak Supply Chain Consultants headquartered in Cleveland.

"There is going to be no near-term solution to the supply chain challenges facing the globe or any specific industry," Sedlak said.

To Kingshuk Sinha, chair of the supply chain and operations department at the University of Minnesota's Carlson School of Management, there is only so much even a large retailer can do in the face of disruptions like COVID-19 and natural disasters.

A more pragmatic solution would be for consumers to rethink the type and number of gifts they buy and purchase items that are locally produced so there is less concern about shipping delays and availability, he said.

Legacy Toys — which has seven locations including stores at the Mall of America and the Galleria — started ordering inventory for this holiday season early in January, owner Brad Ruoho said.

In February, Ruoho purchased a 15,000-square-foot warehouse in Eden Prairie to help keep up with the influx of online orders. As traditional mail carriers have gotten more expensive, Ruoho has also purchased vehicles for his store to deliver its own packages within the Twin Cities by the holidays.

Business is booming, he said. The store has already run out of popular toys and had to reorder hot items.

"So many of the things that we pre-bought for Christmas are long gone," he said "It's a good problem to have, but it's still a problem."