Episode 38:
What can we learn from previous recessions to ensure supply chain resilience?

Hi, everyone. And welcome to another episode of “Freight to the Point.” I am your host today, Alex Hersham, CEO and co-founder of Zencargo.

January 2023 is very different to January 2022. This time last year, it was all about getting inventory in as quickly as possible. Supply chain blockages. January 2023, however, after probably two quarters now, of destocking, a completely different world that we live in, a potential recession, shallow or deep recession. We’ll speak about that more. The world looks completely different. Supply chains look completely different.

And that’s why I’m so glad to be joined today by two guests, to discuss a broad range of topics. We have Richard Lim, who is the Chief Executive Officer at Retail Economics. Many of you would have seen his great posts and content on LinkedIn, which I follow avidly.

And we have Chantal McRoberts, who is joining us again. And just as a reminder, she’s the Head of Advisory at Drewry Shipping Consultants.

We’re going to be speaking about the economy. We’re going to be speaking about flows. We’re going to be speaking about destocking and we’re going to be speaking about the impact that’s going to have on container freight rates. And obviously, the subsequent feed through that has to the economy.

Richard and Chantal, welcome to you both. Thank you so much for joining us.

Thank you, Alex.

Yeah, thanks for inviting me.

Ah, pleasure. Thank you so much for coming.

Richard, I’m going to start straight with you. What has caused this sort of state of the world that we’re in, specifically the lens of Retail Economics? And how are you seeing this impact day-to-day consumer activity?

Yeah. Thanks, Alex. And I think, in your introduction, you’ve hit on something really, really important, which is that this time last year, the state of the economy and people’s expectations and business expectations were hugely different.

And actually if we wind back to this time last year, it was interesting to note that the Bank of England commentary, within their monetary policy report, in the February one, mentioned nothing about recession. It thought that inflation would peak at about 7%, compared to 11.1%, where it peaked a couple of months ago.

And so, throughout the last 12 months, we have seen quite a rapid deterioration of the economy, prospects of the economy, for a number of different reasons.

I think one of the main reasons is because of the Ukraine, Russia conflict. And that’s been a shock to global commodity markets. That’s had an impact on consumer confidence, on business confidence. It has put distress across a lot of different parts of the market.

And we’re also seeing a hangover from the impact of the pandemic as well. So businesses are still experiencing supply chain difficulties, albeit, of course, they’re a lot better than where they were this time last year. And I’m sure we’re digging into a bit more detail there.

But also in terms of monetary policy and the stimulus that the government used to make sure that the impact of the pandemic didn’t have really significant scars throughout the economy. All of this monetary policy stimulus is now beginning to normalise and that’s having an impact on the economy as well.

But overall, what we’ve seen, is we’ve had a huge impact from the pandemic. We’ve gone into one crisis into another, which is the cost of living crisis. People’s personal finances are under a huge amount of pressure. And what we’ve seen is that the prospects of the economy have really weakened. We’re expecting to go into recession at the beginning of this year, which is likely to persist for the rest of the year.

Consumer confidence remains near record low levels, deeper than they were during the depths of the pandemic, deeper than they were during the global financial crisis. So people are still worried.

And the UK economy in particular, two-thirds of the economies based on consumer spending. A third of that goes to the retail sector. So we’re really dependent on the strength of consumer confidence and consumer spending. And there’s really a challenging environment at the moment for the economy.

I love that you started with sort of rewinding to the February Bank of England forecasts. And one of my favorite quotes is that “The only function of economic forecasting is to make astrology look respectable.” So I think we have definitely seen that over the past year.

Quickly, before I come to Chantal, though. Richard, in some of your posts on LinkedIn, you have been talking about how perhaps the year ahead isn’t as bad as people are thinking it might be, and actually there are some green shoots and some positive signs that we are seeing. Do you want to build on that a little bit?

Yeah, sure. I think we’re in a different place to where we were at the end of last year. I think that is how I would characterize it.

And so we had a period in the final quarter where there was a lot of political instability and we had Truss come in and Kwasi come in. And the reaction to the mini budget was quite devastating across financial markets. We saw devaluation of the pound drop significantly. And so there was a period of significant instability.

But I think we’ve seen a lot of that certainty returning to the market. Sterling has recovered a lot of that lost ground during that period.

So I would say, towards the end of last year, the prospects for a deeper recession and longer recession were probably more likely than where we are today. So there is some room for optimism for sure. And I’m sure, again, I’m sure we will go on to this a bit later in podcast, but I’m a true believer that companies can make their own luck, in the sense that they really need to seize the opportunity of the disruption that’s going on and retailers and brands adapting well to the challenges that are thrown their way. But I’m more optimistic than I was at the end of probably November last year.

I’m very optimistic this year. I know that might sound completely crazy and I respect all the challenges that we’re going through at an individual level, community level, and an economic level. But when I look at this year, it really reminds me of past cycles, where we started with everything very negative.

And then, not that it normalised, but we learned to live with it and the economy rebounded sooner. That fed directly through to container volumes.

And Chantal, in on our last conversation, we spoke a lot about destocking, restocking, how to play this year, what does it mean as a shipper, how do you act, how do you react? Richard is giving us a little bit of cautious optimism moving into this year. Your conversations about procurement, and therefore about what do people think is going to happen this year, both on the shipping line side and on the BCO side. What are your clients saying? What are you advising them? And does it sort of align with what Richard is saying?

So it’s a very different situation to where we were last year, obviously. Everybody was just concerned about being able to get the space to move their cargo.

Clearly, as it’s happened in previous cycles, going into a global recession with a massive order book looming over our shoulders, it is perhaps more worrying if you’re sat in a carrier’s seat now, than if you’re sitting in a BCO seat because clearly there is cost savings.

However, it’s a double edged sword, really, because there is the group of BCOs who are dependent on consumer spending, who are impacted by a falling economy, or an unstable sort of GDP outlook.

Whereas we have the other BCOs, who are maybe more resilient in this market, where it’s a double opportunity for them. So food and beverages or pharmaceuticals and the things that people need. And if you’re lucky enough, you don’t need to pay for them. Thinking about pharmaceuticals and the NHS, they still need to move. So some, again, are impacted more than others.

However, what we are seeing across most of our clients, is they are totally shifting their focus now away from capacity and firefighting and they’re looking to cost containment and service predictability and quality.

So we had a situation where everybody cast a net really wide last year, to try and get space. This year, we are seeing people there, sort of narrowing down their provider base, trying to secure cost savings but alongside service reliability because what we are seeing, on the other end now, is we thought the carriers would do this sort of managed capacity strategy, which would have made sense, but they reverted to type. So they are now just chasing market share.

So it is now about finding the balance of are they blanking sailings because they haven’t got the demand to fill it? Or is it because of congestion? We can see congestion is easing. It’s not completely gone, particularly in some of the US West Coast ports. And obviously we have other issues hitting in Europe, labor strikes, and that has a knock-on effect.

So I think BCOs are really sort of looking at this as sort of the complete picture on ocean freight and really trying to cherry-pick their providers that will give them the lowest cost with the best service.

So I would say, last year we talked about shipper of choice, this year we’re going to talk about carrier or provider of choice and how they tick your boxes.

So these are the things that are changing. But in terms of relating back to previous cycles, we have come off such a different environment that I think people have just forgotten about them. So we are seeing slightly different behaviors and some of it is coming off the back of slight resentment. So yeah, it’s interesting.

I think, when I speak to CEOs, I get the consistent message of, something along the lines of, “We think we are back to decent inventory levels.” Obviously, some people maybe are a quarter away from that. There is still discounting going on in the market, maybe because of their inventory levels, or their ecosystem’s inventory levels.

And so we’re cautious on Q1. And that always gets me quite interested because that means that you’re going to again be cautious on Q1 and not have it all in. Your warehouse might get even a little bit more normalized in terms of the inventory levels.

But then what does it mean for Q2? What does it mean for Q3? Where is the risk here? Is the risk now that you enter Q2, Q3 as a retailer with too much inventory? Is the risk too little? How should we be thinking about it? Because this obviously comes back to the point around allocations, commitments, et cetera. What are businesses saying from that angle?

So the ones that we are dealing with are continuing as normal. They are factoring the impact of Chinese New Year. I would say their biggest concern, actually, is that the China zero COVID policy. We can see that starting to impact on the manufacturing side. So I think there is a little bit of concern that disruption is coming again. And that will come even more to the fore, during Q2, towards the end of Q1.

But a lot of our clients are not talking about completely destocking. I think that they are balanced. They are more concerned now about reliability, moving the cargo where it needs to go, maybe thinking about newer markets, or if there is an opportunity, or thinking about consolidation or thinking about where am I best to move my volume through from my import or export? But also, I think refocusing on strategic initiatives because they completely went out the window.

So I’m going to say origin management, again, I think is going to come back. How do you use the best provider? How do you select them? How do you work together to provide a sort of harmonious supply chain as well?

And because all of that went out the window, I think that is going to start to come back. And I think those industries that aren’t so impacted by consumer demand, will focus greatly on those. And the ones that are, are going to sort of still be focusing on where is disruption? What can I do to mitigate this? And where do I peak in the market? If you are a toy manufacturer or retailer, maybe January isn’t your best month anyway, and you are going to start thinking about Q3. So does Q2 matter to them?

And it goes back to a point about forecasting. So again, that was something that we would definitely say people should look at, during the course of this year, even in an oversupply market.

I love that every time you come on this show or speak at one of our webinars, you’re talking about origin management. And I know that’s something that’s near and dear to your heart, but it’s also near and dear to our heart. So it feels like paid promotion that we’re doing on your side, but I know this is genuine.

No, I know. And I think it is just because it’s just been completely forgotten. And now we’re seeing some of our clients who have complex regional volumes really needing to focus on that, to refine their supply chain and make it more efficient, because they’re getting the cost savings on the ocean freight side. They now need to look at the other ends, which is the right thing to do.

A hundred percent.

And Richard, the question that I was asking is, when I’m speaking to CEOs, it’s cautious for Q1. And then not really sure where Q2 and Q3 are going to head. And I’m wondering whether that needs them having too little inventory? How do you see things? What are you hearing when you are speaking to CEOs up and down the country?

I think what we are seeing is actually quite a mixed picture. And I think that there is going to be parts of the market that will be quite defensible. I think Chantal pointed to this earlier, where if you look at food and groceries, for example, we’re seeing lots of behavioural change. We’re seeing people trading down to the discounters. We’re seeing people shifting their spend to private label and those kinds of behaviours. We’re even seeing people shifting more of their spending towards stores and away from online, in some parts of the market.

So we will see these kinds of recessionary behaviours, at least, I think, at least for the first half of the year, continue to intensify from what we have seen over the last few months. And that involves things like trading down and delaying spending in some areas and shifting more of their spending towards physical environments.

But I think we’ll see some parts of the market that are relatively well protected. So the luxury end of the market, we expect to hold up relatively well.

Ultimately, what we’re expecting, though, to see, is this kind of squeezed middle. And there will be parts of the retail sector that will suffer from consumers cutting back more than other areas. And that is typically around more discretionary spending areas, typically around areas that are more susceptible to changes in people’s incomes.

So it’s kind of not a kind of straightforward picture.

So I think what you were saying there is, we are seeing some trading down happening. We are seeing a movement back from online to offline, in some circumstances. The middle, as always happens in recessions, get a little bit squeezed, because luxury tends to hold up a little bit better.

And so you have these sort of winners and losers dynamics, both within the sort of spectrum of the market, but then also within segments. And I think we have seen that quite a bit this year.

I want to sort of move on to the last topic, which is around how do businesses stay agile in this environment. Richard, maybe starting with you, what sort of strategies are available to businesses for getting through this environment?

The conversations that we are having with our clients, at the moment is that, of course, from a consumer perspective, everything is around value. And so people are really focused on value and they are prioritising value above other attributes, in terms of how they decide to make purchases.

So they’re trading off value potentially for lower quality. They’re trading off value for a lesser experience. Or value for a kind of more inconvenient experience.

And so the key, in terms of the strategies for retailers, the key things around getting across that message of lower costs and value for lots of parts of the market. And really getting across that empathetic communication as well. Of course, the issue of that is investing in price. And investing in price in an environment where operating costs are rising, input costs are rising, and profitability is being eroded.

And actually, if you look at profitability, if you look at pre-tax profits for the retail sector over the last eight to 10 years, they have pretty much halved. They’ve gone from about eight and a half percent to about four percent, over the last decade.

So there is a real squeeze on profitability. And what that means is that retailers and businesses are taking a forensic view on their costs. They are, line by line, looking at where they can reduce costs, looking at where they can improve operational efficiencies, and looking at how they can build up cash reserves to try to weather the kind of recession as effectively as possible.

So I think these are, if you like, the practical areas, where we see lots of retailers dedicating a lot of their attention.

But in other areas, I think just more intelligent use of data is a key area. Using AI, for example, to try to have dynamic pricing, to really try to segment customers in a really, really intelligent way. And using that as a means to really drive a better communication and better engagement with their customers.

And Chantal, for you, in terms of thinking about the supply chain strategy to support this, what are some of your key insights for businesses to stay agile through their supply chain this year?

I think that’s a really important thing, is being agile, but also being agile, but being prepared.

So what we are saying to people is be cautious on your contractual commitments. Don’t over-commit on your volumes or your allocations, particularly if you do feel that you are going to be further impacted by any economic downturns.

Benchmark your freight rates and take advantage of the costs when they’re falling, to help your businesses get through the recessionary period, if you’re one of those customers, well, one of our customers, that is impacted more than, say, others.

Consider more flexible, shorter term contracts. Think about having review clauses in your contract, particularly on the freight rates. Think about going back to looking at your KPIs. Look for operational security.

Consider shifting from air freight to ocean freight, if it’s going to give you a cost saving. Again, there is space out there to be able to do that.

And then closely monitor the market trends. And look for reversals because we talk about recession, but certain regions in the world will come out quicker or not be impacted as much, or will just reverse.

So we will get this situation where we start to see different things happening. And I know everybody looks at the US and the UK, but ocean shipping is global. So that is what our clients need to do.

So we are talking to them about this. We are talking to them about the importance of still maintaining a rolling forecast. Think about your provider mix.

Clearly, last year, everybody was about direct carrier relationships. Personally, I think the forwarders are in a great position this year, that they are going to be key to helping support the carriers. So hopefully, they will be a bit more open to agreeing allocation with the forwarders.

Think about where they can help you on your supply chain. A lot of them can give you some really valuable insight at origin and destination and on your ocean freight.

And think about back-to-back agreements. Think about making sure that your forwarders are maybe passing on any cost savings they get through the year.

So I think there is lots that people can do to be agile. And I think it is learning from before and tracking the market, which is key to all of this. If you don’t track the market and you don’t know what it’s doing, then you can’t react or you can’t plan to react. So I think that’s really important.

Well, thank you, Chantal, thank you, Richard, for a really riveting episode of “Freight to the Point.” Thank you all very much at home for listening, or at work, I should say, for listening. Please remember to like and subscribe. I hope to see you all soon. I know, Richard and Chantal, we’ll be having more events soon, together, to talk about the state of the world, the state of supply chain, and the state of the economy. I thank you both very much and thank you all listeners. Have a good one.