Will a ‘virtual Christmas’ prove too much to handle?

Thanks to the restrictions imposed by Covid-19, consumers have been flocking online this year to do their shopping. That trend is set to be turbocharged in the run-up to 25 December as people look to have their Christmas presents and festive food delivered to their front door. Reports of a click-and-collect offering at Santa’s grotto remain unconfirmed. Delivery company ParcelHero estimates that UK consumers will splurge almost £40bn online this Christmas, with digital sales overtaking high-street spending for the first time. But will retailers and logistics companies be able to cope with a potential avalanche of orders?

Black Friday: Christmas comes (too) early for retailers?

For all the wrong reasons, this promises to be a Christmas like no other as retailers prepare to round off the year on a largely virtual basis. The build-up to the big day is traditionally a lucrative period for retailers, but over the past decade the Black Friday sale has stretched this window into late November, prompting many consumers to take advantage of discounts and conduct their Christmas shopping early. According to payments platform Yolt, over a quarter of British shoppers have said they are more likely to buy presents on discount days than last year. While this may reflect waning consumer confidence, retail sales increased for the sixth consecutive month in October, per the Office for National Statistics (ONS). Online sales accounted for 29 per cent of all retail trading last month, compared with 19 per cent in October 2019.

Some retailers have deployed early seasonal discounts to ease the strain on their supply chains closer to Christmas. This includes the mighty Amazon (US:AMZN), which launched its early Black Friday deals in October, encouraging consumers to “Shop early. Relax later”. “We rely on third-party shippers… and we know that their capacity will be tight, as will ours,” says chief finance officer Brian Olsavsky. “We'll all be stretched and it's advantageous to the customer and probably to the companies for people to order early.”

If this is a tactic to drive higher sales, it appears to be working. ONS data indicates online sales surged by 60 per cent year on year in October and, according to trade body IMRG, jumped by 61 per cent year on year in the first week of November as well. IMRG director of strategy and insight, Andy Mulcahy, believes this is “a clear sign that Christmas and Black Friday shopping has been pulled forward”.

Pre-Christmas markdown events such as Black Friday do pose problems for retailers. Discount too much and you risk transferring excessive value to shoppers, frontloading inventory for Christmas into November and cutting into December sales. “Retailers initially didn’t like it because you were effectively robbing your traditional Christmas peak but at cut-down prices,” says Ed Bradley, founder of supply chain software business Virtualstock. With non-essential retailers forced to conduct Black Friday completely online for the first time, they are exposed to further margin erosion from the additional costs of stock-picking and delivery. 

But opting out of the discount window – as Next (NXT) has done this year – risks sacrificing huge trading volumes. Asos’ (ASC) discounting powered a surprise 20 per cent lift to revenue in the final quarter of 2019, to over £1bn.

Marks and Spencer (MKS) hasn’t participated in Black Friday for a number of years, but has flagged the impact of competitors’ discounting in several downbeat January trading updates. The retailer is nevertheless expecting a bumper online Christmas, having expanded the workforce at its online distribution centre by nearly a third and almost tripled the number of stores facilitating click and collect and home delivery. It is also leveraging additional capacity for food sales through its partnership with Ocado (OCDO).

More shopping means more shipping

Mirroring the retailers, the run-up to 25 December is likely to be exceptionally busy for logistics companies this year. ParcelHero estimates that 592m parcels will need to be delivered this Christmas, up from 462m last year.

“There’s no hiding from the fact that this year is going to be like nothing we’ve seen before,” says Mike Hancox, chief executive of delivery company Yodel. “We’ve been operating at peak levels since March, with volumes up 20 per cent compared with a normal year and are forecasting Christmas 2020 to be another 20 per cent on top of that.”

David Jinks, head of ParcelHero’s consumer research, believes Black Friday will precipitate the “Mount Everest of Christmas peaks” for couriers at the end of November. With logistics demand already at elevated levels, Mr Jinks is predicting a potential repeat of the chaos of Black Friday 2014 when retailers and couriers were overwhelmed by the scale of online ordering. He is recommending that retailers extend discounting into early December to smooth out demand.

For logistics companies, managing higher volumes requires adjusting the three elements that dictate capacity – people, transport and warehouse space. Hiring more warehouse staff for Christmas is usually relatively easy – Amazon has added 25,000 seasonal positions in the UK this year and Royal Mail (RMG) has recruited 33,000 temporary workers. But these costs can eat into any uptick in revenue from parcel growth.

On the transport front, delivery drivers can be harder to find as they need more qualifications than warehouse pickers. There could be a shortage this year amid outsized demand and the departure of European workers. Berry Recruitment – one of the UK’s largest temporary worker suppliers – estimates demand for delivery drivers is running 30 per cent above supply.

Still, finding people is a simpler task than acquiring additional warehouse space at short notice. As its capacity is stretched to maximum, Next is guiding to flat sales at best in its final quarter. The pandemic has brought home to some retailers that their supply chain did not have sufficient buffers to cope with an upsurge in delivery demand, says Richard Moffitt, chief executive of warehouse landlord Urban Logistics (SHED). “We are seeing occupiers come to us and say, ‘we just can’t afford to be caught out again’,” he says. 

According to data from Colliers International, the national vacancy rate for industrial assets stood at just 6.2 per cent in November – well below the 10-year average of 8.3 per cent – and industrial take-up activity in the first nine months of the year is already ahead of the 2019 total by just over a tenth.

Unsurprisingly, the rent growth and collection rates reported by UK-listed logistics landlords, including Segro (SGRO) and LondonMetric (LMP), have outpaced peers in the office and retail sectors. Colliers International forecasts that the rise in estimated rental values for distribution warehouses will be the second highest within the commercial real estate market over the next four years, behind only standard industrial assets.

Despite these pressures, logistics group Wincanton (WIN) is confident it has sufficient capacity as it can use under-utilised space from industries where demand is quieter at this time of year. It also set up a digital marketplace last year that enables companies with spare warehouse capacity to sell to those needing space.

Business as usual or Christmas chaos?

After experiencing peak volumes for months, can the UK’s delivery network really cope with additional seasonal demand? “It's a bit of a crystal ball situation,” says Mr Askew. “Nobody knows exactly how much capacity there is, in particular in the private delivery systems…The million-pound question is, how many retailers got it right with their forecasting and securing demand with these carriers?”

There is an additional complication as the UK’s busiest port, Felixstowe, is coming under pressure from Brexit stockpiling and a backlog of imported PPE. Retailers could therefore see delays in receiving their stock. Felixstowe handles 40 per cent of British container traffic and has warned that high volumes could extend “at least into December and possibly through into the New Year”. Rod McKenzie, managing director of policy at the Road Haulage Association recently told Sky News: “If your items are coming on a shipping container from abroad and it is delayed [because there is no space in the port], it is possible you are not going to have it for Christmas.”

Tony Mannix, chief executive of Clipper Logistics (CLG), is optimistic that chaos will be avoided. “As much as the demand is significant, I do think there’s enough capability in the industry to manage it,” he says. While consumers are coming to see next-day or same-day delivery as the norm, Mr Mannix believes retailers need to be upfront about what is actually possible. “It’s about managing expectations and delivering against the promise you give the customer,” advises Mr Mannix. “Just don’t give them ridiculously demanding promises to begin with.”

So, how can investors capitalise on the Christmas logistics boom? The listed couriers' shares have been rising as e-commerce approaches its annual zenith, although Wincanton has lagged behind peers. While its digital and e-fulfilment division is charging ahead, there are worries over cyclical exposure to industries such as construction. Royal Mail’s second wind may look tempting, but it is facing higher costs this year and will continue to be weighed down by a reliance on manual sorting. With over 50 per cent of its revenue derived from e-commerce, Clipper Logistics is perhaps the best long-term structural growth play. On the back of strong e-fulfilment momentum, sales for the six months to 31 October are guided to come in a fifth higher than a year earlier.