US retailers paying premium to place big bets on holiday sales

US retailers are shrugging off a tripling of spot freight prices, rushing to ship holiday goods earlier than expected as they bet that robust consumer demand will offset higher shipping costs.

Attacks on ships in the Red Sea have forced carriers to take longer transit routes, injecting unpredictability into global supply chains that has increased port congestion from Asia to the US east coast.

The latest disruptions to supply chains have strained container capacity and revived fears of empty shelves that retailers confronted during the coronavirus pandemic.

To circumvent delays and get ahead of rising freight costs, retailers have brought their peak shipping season forward, moving goods for the December holidays as early as April and May instead of the July to October increases that were typical before the pandemic.

The combination of supply chain disruptions and strong shipping demand has caused the composite spot rate to surge more than 200 per cent since November 2023, according to the World Container Index from Drewry Supply Chain Advisors. Carriers including Maersk have warned that freight rates may rise further.

“While it makes sense at an individual level, any herd behaviour can overwhelm the liner network and create a vicious cycle whereby extra demand causes more congestion, leading to higher rates,” added Simon Heaney, a senior container shipping manager at Drewry.

Big importers such as Walmart and Target have locked in multiyear contracts with carriers below spot market prices, but smaller shippers and freight forwarders are disproportionately affected by market volatility and must pay higher prices to receive goods earlier.

The fixed rates that smaller players negotiated last year for the 2024 season “never really saw the light of day” because of the Red Sea crisis, according to Michael Short, president of global forwarding at logistics group CH Robinson. “If you’re comparing the increase to those rates, you’re looking at a 75 to 100 per cent increase.”

“Clearly, it’s a better problem to have to overpay and have the shelves full for the holidays, a cost that may be passed fully or partially to the consumers, than to having to explain to the shareholders the empty shelves and lost sales,” explained marine shipping expert Basil Karatzas. “Playing probabilities, the former is a scenario with better odds, which of course has a disproportionate impact on smaller shippers and companies.”

However, optimism about consumer spending has helped drive cargo owners’ decisions to ship earlier despite current market conditions.

Retailers were “surprised how healthy the demand is”, said Marcus Reimann, head of sea logistics for global freight forwarder Kuehne+Nagel. “We heard from a couple of customers that they didn’t expect to ship as much volume as they’re shipping right now.”

The National Retail Federation expects US imports to rise to their highest levels in two years this summer, following a 12 per cent decrease in 2023 that brought volumes close to pre-pandemic levels. American port cargo volumes increased by 13 per cent year over year in April, according to the NRF’s Global Port Tracker.

The forecasts suggest the drastic changes to consumer spending patterns seen in recent years continue to reshape retail. Disruptions to supply chains early in the pandemic prompted consumers to start holiday shopping earlier, and more recent inflationary pressures fuelled the trend of spreading out purchases over a longer period of time leading up to the peak shopping season.

“We are buying earlier,” said Daniel Hackett of trade logistics firm Hackett Associates, which produces the Global Port Tracker with the NRF. “We’re seeing retailers have to account for that and bring cargo in earlier.”

The NRF projects retail sales to grow 2.5-3.5 per cent this year, slightly below the 2023 rate. Total US retail sales in May were up 2.3 per cent year on year, according to the US Census Bureau.

“Consumers are continuing to spend more than last year, and retailers are stocking up to meet demand,” said NRF supply chain vice-president Jonathan Gold in a June press release. “The high level of imports expected over the next several months is an encouraging sign that retailers are confident in strong sales throughout the remainder of the year.”