Retailers on the hook for ports logjam

Delays at Britain's main container ports could spell trouble for retailers and manufacturers, but do the problems simply reflect an industry in flux?

December 16, 2020

by Oliver Telling

and Mark Robinson

Christmas, coronavirus and customs have combined to put undue pressure on Britain's ports
The challenges might bring about changes in the way companies manage their supply chains

UK retailers and manufacturers are facing soaring trade prices and long delays as mayhem unfolds at British ports. Felixstowe has been handling 30 per cent more goods than usual, while 11,000 containers of government-procured PPE has constrained capacity. Ships are reportedly being sent back to Europe as the pressure has spread to the UK’s other ports.

On the face of it, you would imagine that maritime bottlenecks had developed because of the commercial damage wrought by the virus, together with a colossal increase in e-commerce orders and prevailing uncertainty over the shape of Britain’s future trading relationship with the European Union (EU).

But timing is an inescapable issue given that we are passing through the most important period of the year for retailers, many of whom rely on festive imports to stack their shelves. Even if they have purchased sufficient stock to cover an expected rise in seasonal and online orders, said stock may still be sitting in a warehouse for an extended period simply because of a shortage of land, sea or air cargo capacity. By now, many of our readers would have experienced the delays first-hand.

The problems have resulted in an upsurge in containerisation and shipping costs; a situation that was not helped by the high number of vessels that have been scrapped over the past few years to reduce excess capacity. Port operators have seen first-half earnings fall significantly from where they were projected to be before the pandemic regardless of high utilisation rates.

Several trade bodies, including the British International Freight Association, the UK Major Ports Group and the Road Haulage Association, have called on the government to intervene to ease the chaos at UK ports by taking a more flexible regulatory line, which would make acute freight congestion less likely in the future. In truth, long-term management of the situation will require a co-ordinated response by Whitehall, shipping companies, maritime insurers and port authorities, with greater consideration given to freight planning within both the governmental and corporate spheres.

Whatever the remedial measures needed, analysis from the Russell Group points to significant exposure, both in terms of import and export values, for a range of retailers and industrial companies which move goods and parts through the UK’s busiest container ports.

Which companies are being affected?

Facing a bottleneck of goods on the seas, one company looked to the skies for a rescue plan. Last week, Honda (JP:7276) was drawing up emergency measures to fly components into the UK, after congestion at the ports led the Japanese carmaker to halt production at its plant in Swindon.

It's not the only firm likely to feel the impact of logjams at the border. Carmakers in general are particularly exposed, with the UK vehicle manufacturing sector importing and exporting £51.4bn-worth of goods in 2018, according to the Office for National Statistics. This volume of trade is exceeded only by the wholetrade and retail trade sectors, which collectively imported and exported £357bn in goods that same year.

With shaky seas ahead for UK supply chains, carmakers and other manufacturers will likely be reconsidering their business models. Before this year, commentators were already questioning whether trade disruption brought on by Brexit could spell the end of just-in-time manufacturing – the process of only importing components as they are needed. Patrick Keating, the government affairs manager at Honda, is one of a number of business leaders to express concerns: “Outside of the customs union, there is no such thing as a frictionless border. I wouldn’t say that the just-in-time manufacturing model wouldn’t work, but it would certainly be very challenging.”

But it could be even harder for retailers to reset their sails, as they largely depend on the trade of finished products, rather than components. Many of these items, such as food, will be unsalable if they face prolonged delays reaching their final destinations.

Like manufacturers, retailers will find it more difficult to respond to consumer demand if they have to replace just-in-time inventories with larger stockpiles of products. After depending on the rapid movement of goods across the EU for decades, both sectors will have to rethink how they operate outside the free trade area. In 2018, retailers and wholesalers exchanged 60 per cent of the total value of their imports and exports with the EU, while vehicle manufacturers did 50 per cent of their trade with the region.

Purely in terms of the volume of goods, big companies have the largest exposure to congestion at the ports. According to data firm Russell, supermarket giants Asda, John Lewis and Tesco (TSCO) are the leading importers into Felixstowe, while manufacturing giant Rolls-Royce (RR.) is the biggest exporter, followed by followed by Diageo (DGE), Bodycote (BOY) and GlaxoSmithKline (GSK).

Perhaps these companies are partly to blame for the current disruption. At the start of December, Tesco’s chairman admitted that the company had stockpiled long-life goods in preparation for possible supply disruption at the end of the Brexit transition period. The company also said that it had spread its imports across UK ports to avoid reliance on a few points of entry.

But it’s the smaller firms which seem to be struggling the most amid the turbulence. Retailer The Entertainer said it was facing soaring import costs as it attempts to stock its shelves with Barbies and Lego sets in time for Christmas. Chief executive Gary Grant said imports were now costing the company more than $6,000, up from $1,000 only a few weeks ago. Builders have also reported higher prices of tools and materials.

The longer-term disentangling of supply chains could also fall heaviest on smaller firms, who don’t have the spare cash to build up large inventories. From January, for the first time, a large number of these businesses face the prospect of filling out customs forms to trade with the EU – this will also require additional investment in training and employing staff.

Many have reportedly not made this investment. Last month, Investors’ Chronicle revealed that a government-backed scheme had trained a fraction of the estimated number of border agents needed post-Brexit. As further disruption looks set to arrive at the ports, Honda won’t be the only firm turning to blue-sky thinking for a solution.

Pandemic precipitates change

The disruption brought about by Covid-19 has laid bare the fact that security, rather than flexibility, is now the greater priority in supply chain management. At the height of the pandemic, many of the world’s largest food, beverage and household goods companies took the decision to reduce their product ranges to ensure supply for core brands, and today many companies have admitted to building an inventory buffer. The fact that more capital might now be locked up in inventory should be a key consideration for investors.

The changes under way are creating opportunities for companies engaged in the fintech space, a point brought home by Alessandro Zamboni, chief executive at Supply@ME (SYME), an London-listed platform designed to “ease the pressure brought on by temporarily immovable stockpiles, turning dormant goods into equity, to help alleviate immediate cashflow problems without generating debt”.

A spokesperson from Danish cargo heavyweight A.P. Moller – Maersk (CPH: MAERSK-B) agreed that “businesses have tended to prioritise the technological development of their core business and the evolution of their supply chains has often played second fiddle to more crucial planning or production systems”, before adding that “things will be different after Covid-19”.

The push to truncate supply chains – or build inventory levels – was in evidence long before the response to Covid-19 started to dominate government policy-making, particularly in relation to manufacturing companies. The fear of a no-deal Brexit may have been central to this process, but business surveys in this area suggest that companies are not only intent on reducing the links within supply chains – though not necessarily complexity – but also increase digitalisation to increase understanding of the supplier network. It is as much about companies having the flexibility to meet changing consumer demand – particularly e-commerce – as it is about insulating themselves from supply-chain disruption.