The global challenges caused by subsequent months of shipping delays have led to significant concerns in the UK retail sector, with further disruption caused by Brexit and the HGV driver shortage adding to a considerable supply chain headache for retailer operators.
While the recent sight of queues at petrol forecourts was relatively short-lived, for many consumers it painted a worrying picture of the UK’s resilience to global supply chain challenges. This concern would have been compounded by media reports of potential shortages of products and empty shelves in the run-up to the festive period. At the latest KPMG/Ipsos Retail Think Tank meeting, members discussed how serious the current supply chain crisis is, the implications for retail’s Golden Quarter, and what steps retailers can take to alleviate these problems in the future.
Background to the current crisis
Several complex and intertwined influences can be blamed for the current disruption to supply chains, including the long-term effect of the Suez Canal closure, a surge in the price of shipping containers, and the impact of cargo ships and containers becoming bottlenecked at ports around the world, including Felixstowe in the UK.
The factors behind the crisis are broad and complex and, while many people may think this is a UK-centric problem, similar newspaper headlines can be read across the world which emphasises the global nature of the situation. While this is a worldwide issue, UK businesses do not always have the scale or purchasing power of some of the big international players. Wal-Mart, for example, is hiring fleets of ships to ensure goods are continuing to flow.
RTT members agree that the lasting impact of the COVID-19 pandemic means that globally businesses are struggling with port and manufacturing closures and pent-up consumer demand being released around the world. However, members do expect to see disruption ease as the effects of COVID-19 reduce, and normal trading patterns return, but these factors will hinder the UK retail sector’s recovery.
Members of the RTT agree that, while the crisis is a global phenomenon, the UK was being hit particularly hard. International factors are clearly exacerbating the problems seen in the UK, but Brexit is a core factor that explains the UK-specific challenges around the supply chain. The reduction in European workers is hitting the logistics, fulfilment, and agriculture sectors particularly hard, combined with a significant increase in demand for products, energy, transport, and labour.
Jonathan De Mello, Equity Partner, CWM Retail Consulting, explains: “The crisis is being felt more acutely in the UK due to the additional disruption caused by Brexit, which has left one in six, or around 100,000, HGV driver vacancies unfilled. The pandemic is also somewhat to be blamed, but the shortage has been compounded by the departure of European workers.
“Elsewhere in the supply chain, warehouse roles are proving to be so hard to find that retailers are being forced to offer incentives to prospective workers including offers of £1,000 joining bonuses to new warehouse staff just one example.”
RTT members agree that a long-standing reliance on an abundance of cheap overseas workers has left the retail sector particularly vulnerable to the combination of HGV driver shortages and a significant uptick in the demand for labour.
Martin Hayward, Founder, Hayward Strategy and Futures, explains: “The current crisis was always going to happen, and the UK retail sector has had a long time to prepare for this. For too long the retail sector has lived off the seemingly inexhaustible supply of cheap foreign labour wherever and whenever it was needed. This, along with an expectation that the state should use the benefit system to top up low wages, has disincentivised UK workers from pursuing careers on the shop-floor or in logistics.”
Although the Government introduced a temporary visa scheme for HGV drivers to ease supply chain issues, RTT members feel it was unlikely that European drivers would be returning to the UK in great numbers. Nick Bubb, Retailing Consultant, Bubb Retail Consultancy, added: “Brexit has clearly resulted in the UK suffering the most from the shortages of lorry drivers seen across other countries. In light of the poor working conditions and facilities in the UK, Brexit red tape at the borders, and the increasingly hostile environment for immigrants, we should not be surprised that there has been no great rush for European drivers to return.”
These factors have combined to create a significant challenge for retailers ahead of their busiest quarter of the year and have raised doubts about their ability to guarantee levels of stock in the run up to Christmas.
Christmas outlook
RTT members agree that although the UK retail sector has seen strong growth over the course of 2021, the challenges around supply chains and wider structural changes are starting to impact growth at the worst possible time.
Paul Martin, UK Head of Retail at KPMG, said: “With Christmas trading representing such a critical period of the year for the sector, many retailers are understandably being very careful about their messaging. Getting this wrong could either trigger panic buying behaviours or consumers switching their retailers of choice. This should not hide the fact though that behind the scenes availability concerns across multiple categories are being vividly discussed. There has been widespread media reporting of various shortages over recent weeks and a number of product categories could be impacted in some way. It remains highly likely that shortages will be seen over the Christmas period and could continue beyond, most likely well into 2022.”
James Sawley Head of Retail & Leisure, HSBC UK, agrees, adding that a number of retailers are only achieving an intake of around 60% of their budget ahead of the peak Christmas period which could put profit margins under pressure.
“There is some evidence that peak disruption is behind us with Chinese manufacturing and freight starting to move again. Shipping cost indices such as the Shanghai Containerised Freight Index (SCFI) and the Freightos Baltic Index recently declined slightly following 20 conservative weeks of growth, so the movement of goods and costs are improving. In the long run, in the capitalistic world we live in, companies will tackle the turbulence – prices of goods will rebalance when there is money to be made.
“However, I cannot see these issues being resolved in time for Christmas. Strong demand from consumers who are sat on pent up savings are keen to enjoy a more normal festive period after last year’s hiatus will place even greater strain on availability.”
In the food sector, retailers have performed above expectations with boosted at-home consumption due to COVID-19 restrictions resulting in year-on-year sales growth. However, both the rising cost of living and unexpected supply shortages could have a significant impact on buying behaviour over the Christmas period.
Mike Watkins, Head of Retailer and Business Insight UK, NielsenIQ, explains: “Food sales have seen a growth of 1.8% year-on-year, but the NielsenIQ OSA (on-shelf availability) monitor for the ‘big four’ supermarkets shows that ‘out of stocks’ are now twice as high compared to the same time before the pandemic, which follows a loss of more than £2billion in sales from product availability issues during the first nine months of the year.
“Some consumers are already buying ahead for Christmas and retailers will be prioritising categories, creating a perfect storm over the next couple of months and with food sales growth now slowing at the end of October, availability will be key to keep sales momentum in Q4.”
The idea that a “perfect storm” has hit retailers ahead of the coming quarter is shared unanimously by RTT members. Rising energy bills, inflation and supply chain delays have compounded the challenges faced over the last 18 months to threaten serious disruption at a time when operators in the retail sector had hoped would be start of the sector’s post-pandemic recovery.
What are the potential solutions?
While the immediate focus around the supply chain crisis was on the festive period, RTT members agree that it could take some time for the complex circumstances to be resolved, adding long-term concerns to what could have been a very strong end to 2021.
RTT member predictions with regards to the time it will take for retailers’ performance to return to a level of normality range from between 12 and 18 months. However, members suggest that the current crisis could be the catalyst for a long-term restructuring of the sector.
A new approach that puts localisation and a stronger boardroom understanding of retailers’ supply chains, combined with investment in automation and staff development, could help the industry to regain control of its manufacturer and supply and reduce its reliance on overseas workers.
1. Localisation
As the current crisis has highlighted UK retailers’ exposure to the instability of international markets, RTT members agree that a greater emphasis on localised supply chains could stimulate UK manufacturing and supply chains.
As pandemic-enforced lockdowns forced consumers to shop closer to home, alongside a wider re-evaluation of values and lifestyles, it has been suggested that mass consumption and globalisation has reached a tipping point. However, it is important to note that, at a time of inflation and a sudden surge in energy prices, increasing costs due to localisation could hit the living standards of many UK families.
Maureen Hinton, Group Retail Research Director, GlobalData, said: “It was only a few decades ago that M&S had carrier bags proudly stating that 90% of its products were made in Britain. However, we have seen a shift in consumer expectations, with much stronger demand for more choice combined with an ongoing search for cheaper products resulting in sourcing moving offshore and globalisation now being highly prominent in retail. If the UK government can get a grip on localisation, the sector could gain greater control of its manufacture and supply.”
2. Improving boardroom understanding
Although the current supply chain crisis has pushed the issue of logistics and fulfilment up the list of priorities at board-level, there is agreement among RTT members that the issue has been overlooked for too long and needed to be at the top of the agenda in order for the sector to develop effective solutions.
For business leaders in the UK retail sector, visibility, board decision-making, a better understanding of data, and improving workplace culture are the four key strategic levels that can be utilised to mitigate against the worst disruption and limit future impact.
Most organisations don’t understand the range of their supply chains – including the product flows between suppliers, as well as the suppliers to their suppliers. It’s essential to get a better understanding of the whole supply chain from end-to-end.
It will also be vital for retailers facing availability pressures to be honest about the profitability and size of product ranges. While the largest retailers will be better placed to get through this, thanks to their scale and spending power, the mid-market retailers could be hit hardest. Gaining access to good data will help retailers to decide which orders to prioritise. Ultimately, the supply chain has to become a C-suite level topic.
3. Investing in the retail workforce
The retail sector also needs to invest more time and money into making a career in retail a more attractive proposition, with hopes that the current ‘war for talent’ could help the sector move beyond the gig economy model and develop more long-term career options.
The current crisis has emphasised the importance of the retail workforce and RTT members agree that this is a great opportunity for the sector to rethink its employment model and value proposition to ensure it can attract and retain staff.
It is accepted that, while the sector is facing the huge cost of failing to build long-term career paths – instead of relying on cheap labour – the industry should look to develop better jobs and careers. Putting greater emphasis on customer service skills in the education system, alongside the current focus on developing skills for manufacturing or professional industries, would also help to upskill the retail workforce.
While this investment in staff would cause some short-term discomfort, retailers would benefit from improved retention and more streamlined succession planning, as well as the bonus of potentially increasing sales because of better customer service.
4. Automation
Alongside making the industry a more attractive proposition for workers, automation is highlighted as a key area to help the industry reduce its reliance on cheap labour and free staff to focus on more productive activities than shelf-stacking or stock checks.
Martin Newman, The Consumer Champion, said: “Frontline workers have been treated very poorly for so long, with a lack of succession planning, inadequate training and fire and re-hire policies just some examples. What’s more, the staff that are working on the shop-floor are spending most of their time doing manual or administrative tasks, such as filling shelves, rather than focusing on customers. Automation will help staff to focus on what they used to do, which is selling.”
Historically, the availability of cheap labour has reduced the requirement of the industry to invest in the automation now increasingly prevalent in other sectors, such as manufacturing. However, the RTT agrees that the subject now needs to be revisited to future-proof retail against future crises.
Andrew Firth, Insight Director at Ipsos, added that the retail sector was starting to adopt an approach to other sectors. He said: “We are seeing parallels in retail to what other sectors have been doing for years. Contact centres are one example where automation has played a key role in reducing the reliance on human operators for simple tasks, allowing them to focus on delivering a great customer service. Ocado, for example, has invested in a UK start-up that develops autonomous vehicles, with the aim of introducing AI-powered, self-driving systems which can work across its fulfilment warehouses and the last-mile, delivering groceries to customers’ doors.”
Conclusion
The supply chain crisis is being felt across the world as bottlenecks at major ports and shortages of shipping containers combine with upticks in demand for products, labour energy and transport. While many countries are feeling the effects of these challenges, there is no doubt that UK retailers are being hit particularly hard due to their lack of scale and buying power. This is further confounded by the Brexit reducing the number of European HGV drivers and other workers in the logistics and fulfilment sectors.
RTT members also point to UK retailers’ reliance on cheaper overseas labour resulting in in the sector becoming an unattractive proposition for domestic workers. This has meant UK retailers and hauliers starting to offer new incentives to help attract workers in the ‘war for talent’.
Although increasing energy bills and inflation are expected to hit consumer confidence over the coming months, high demand is expected in the build-up to the festive period. When combined with the supply chain crisis, RTT members agree that we could see significant stock shortages over Christmas.
It is hoped that the current crisis could act as a catalyst for a major restructuring of the sector. A move towards localisation could help to drive the expansion of UK manufacturing and supply, while the current focus on the retail supply chain should elevate the issue to become a key consideration in boardrooms.
Ultimately, the retail supply chain faces uncertainty in the short and medium-term and UK retailers are particularly exposed to the impact of any additional challenges. However, RTT members agree that the situation does provide an opportunity for the sector to reconsider the status quo and help to place UK retail on a more solid foundation in the long term.
NAM Implications:
- This says it all: Walmart, for example, is hiring fleets of ships to ensure goods are continuing to flow.
- i.e. Size counts, globally…
- For firefighters in need of a break, and some insight…
- …worth a read.
