Cole Burston/The Globe and Mail
Major Canadian retailers are ramping up their use of air freight to bypass clogged shipping routes this holiday season, a move that adds substantially more to their transportation costs, but also bolsters their inventory heading into a crucial time for sales.
Aritzia Inc., Lululemon Athletica Inc. and Roots Corp. are among the Canadian brands that are increasingly moving product from overseas factories by plane, a direct response to supply chain troubles that are lengthening delivery times and leaving items stuck at ports. Many American clothing companies – including Nike Inc. and Levi Strauss & Co. – are doing the same.
Around 90 per cent of goods are transported by sea. But with so much consumer demand, the shipping industry is overextended, leading to a logjam of products and soaring rates for containers.
The situation has fed into fears of holiday product shortages. It’s taking an average of 73 days for ocean freight to make the door-to-door journey between China and the United States, according to Freightos, a Hong Kong-based online shipping marketplace. That’s about a month longer than usual.
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In essence, the deadline has passed to ship goods in time for Christmas.
“If a corporation hasn’t ordered their goods yet, they’re out of time,” said Eric Oak, research analyst at Panjiva, a trade data company that’s part of S&P Global Market Intelligence.
However, “air freight is still an option that can get you over the hump in the short term, even if it costs far more than you’d like to spend on your logistics operation,” Mr. Oak said.
Indeed, flying goods to Vancouver from Shanghai is about triple the cost of transporting them by ship, according to quotes from Freightos. And prices are rising quickly: The cost of flying items from Hong Kong to North America is US$10.45 a kilogram, up 206 per cent from two years ago.
Mr. Oak said air freight works best for items that are low volume and high value: iPhones, jewellery and luxury goods. Even so, it’s being embraced by clothing retailers as well, amounting to a pricey workaround in the short term, but helping them avoid the blowback of empty shelves this fall.
On a recent earnings call, Aritzia said it’s increasing its use of expedited shipping – which includes air freight and quicker deliveries to stores from ports – by three to four times, adding greatly to costs.
The Vancouver-based retailer is looking to satiate a groundswell of demand, and it’s been deliberately expanding its inventory over the past year. The company posted net revenue of $350-million in its most recent quarter, up 75 per cent from a year earlier.
Despite that, Aritzia is still feeling the effects of the supply crunch.
“Some of our best fabrics and styles, we’re short on,” chief executive Brian Hill said. “We’re not able to fulfill the demand, in some cases nowhere near. So although our business is excellent right now, we think it could be better if we weren’t dealing with this.”
In recent weeks, the apparel industry was hindered by factory shutdowns in Vietnam, owing to COVID-19 outbreaks. Lululemon said about 20 per cent of its inventory for the second half of this fiscal year was affected, forcing it to shift production elsewhere – and making air cargo a bigger priority.
“We are leveraging air freight to meet our guidance,” CFO Meghan Frank told analysts.
Large retailers have been preparing for the holiday season for months, and earlier than usual, on account of the supply challenges. That’s led to a number of creative solutions. Canadian Tire Corp. Ltd., for one, has been chartering entire ships for itself to make the overseas journeys.
In a recent note to investors, Scotiabank retail analyst Patricia Baker said Canadian companies have largely “responded early” to supply snags and “do have inventory for holiday shelves.”
In fact, an abundance of early orders is likely exacerbating the international supply bottleneck.
The Port of Los Angeles – where dozens of ships are anchored off the coast, waiting their turns to dock and unload – has become a focal point of supply issues. U.S. President Joe Biden recently intervened to bring 24/7 operations to the port, aiming to alleviate the blockages.
The strain there is largely from massive volumes. Through August, the Port of LA had processed 30 per cent more containers this year than over the same period in 2020, and is easily on pace for its busiest year in history.
“There’s absolutely a vicious cycle here, where if you don’t think that you’re going to be able to receive everything you need, you’re likely to order more,” Mr. Oak said.
Here in Canada, Indigo Books & Music Inc. has adjusted how it orders. Not only is it flying in more products, but it has also “gone for bigger, deeper orders” from suppliers, president Peter Ruis said.
About half of Indigo’s business is in “branded” products, while the rest is in its own house brands – and it has less control over supply chains with the former. For some key toys, “I do think it’s going to be a Christmas where consumers need to come early,” Mr. Ruis said.
Customers at Mastermind Toys seem to be getting that message. The retailer has already sold four times the number of advent calendars compared with this time last year, and had customers asking for holiday-themed gift wrap as early as August.
Because Mastermind anticipated the high demand, and placed overseas orders six to eight weeks earlier than usual, the company is in a better inventory position right now than it was last year, according to CEO Sarah Jordan. But it has not been immune to supply chain issues.
“Placing our orders early helped mitigate many of the delays, but in some cases we have gotten more creative and at times used air freight to get those key items in store in time for holiday shopping,” Ms. Jordan said.
Cole Burston/The Globe and Mail
The industry is facing pressure from both sides, as shoppers are planning to spend more, and buy earlier, than last year. Canadians on average are planning to spend $792 this holiday season, roughly $100 more than last year, according to a Retail Council Canada survey of more than 2,500 people. And 30 per cent of them planned to begin their shopping before Nov. 1.
Mountain Equipment Co. (formerly Co-op) has noticed that customers are already buying the kinds of products – such as skis – that they may have missed out on last year, when demand for outdoor gear spiked and stores were cleared out. In general, MEC is in a good inventory position for fall and winter, CEO Eric Claus said. However, it’s tough to feel fully confident.
“I’m a little more concerned about six weeks from now, because it’s hard to have 100-per-cent visibility as to everything that’s coming in,” he said.
Montreal-based e-commerce company Altitude Sports – which sells sportswear and outdoor equipment from hundreds of brands, and makes some of its own clothing – is finding that suppliers are falling further behind on orders.
“The problem is just getting worse,” co-CEO Maxime Dubois said. “What I foresee is at least another year of turmoil, because that’s what I’m hearing from all of our brand partners.”
The company has capitalized on the outdoor sports craze during the pandemic. The trouble is that it could be doing even better. “We could have tripled the business probably, if we had all the products we wanted,” Mr. Dubois said.
The feeling is similar at Aritzia. Though it’s enjoying a banner year – the company’s stock price has roughly doubled since January – there’s also a sense that supply woes are holding it back.
“Every week, we’re leaving money on the table. And it’s meaningful,” Mr. Hill said. “Truthfully, based on our sales, we’d probably rather have north of $100-million – maybe closer to $200-million – more inventory right now. And we don’t.”
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Cole Burston/The Globe and Mail