Shippers, supply chain providers, and carriers are pinning their hopes on a stronger second half of the year with expectations of a pick-up in imports, improvements in consumer spending on goods, and inventory levels back to normal.
Year-over-year import declines began late last year as retailers hit the pause button on inventory replenishment and manufacturing slowed. Consumers also hit a pause button on spending on goods and shifted to spending more on services.
Year-over-year import volumes continue to decline into 2023 as the market normalizes after two and half years of pandemic mania of record US imports. However, green shoots are appearing as increases in month-to-month volumes are occurring through April and tracking close to 2019 levels.
While many retailers noted their inventories were in good shape, retail inventory levels ended the first quarter up 8.4% from March 2022. The increase could probably be attributed to seasonal and new product inventories.
Meanwhile, overall consumer spending appears to be slowing down. Consumer spending on services rose 0.4% in March, driven by housing, utilities, and healthcare. Consumer spending on goods fell by 0.6%. Tighter credit conditions, stubborn inflation, and the threat of a recession hanging over the US economy are causing many consumers to become more cautious with their spending.
Kent Says... |
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| This year shippers and carriers will manage what they can and focus on cost containment by investing in network optimization and automation to improve cost efficiencies and the customer experience. |
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The Last Mile
Expectations of lower import demand for the rest of the year and retailer cautiousness will not bode well for the last mile.
"In US domestic, we expect full year volume to decline around 3% versus 2022 with revenue per piece growth yearly offsetting the decline in volume," UPS CFO Brian Newman told analysts in April.
FedEx and UPS expanded capacity throughout the pandemic to capture the record-breaking volumes. Now, however, faced with too much capacity, both last-mile carriers are reducing their networks to match the lower volumes and costs while protecting revenue per piece growth. This will likely continue throughout the year and perhaps into 2024.
Shippers' response to carriers' reduced networks and higher shipping costs is to mitigate their shipping costs – Curbside pick-ups, Buy Online, Pick Up in Stores (BOPIS), ending 'free shipping' and 'free returns' and opting for lower priced shipping options and service levels.
Some shippers reoptimized their networks to reduce last-mile costs. "Transportation costs per shipment continue to benefit from at-home pick-up…where the delivery and return happened simultaneously, the transportation savings are higher," Co-Rent the Runway founder, and CEO Jennifer Hyman told analysts during the company's Q1 earnings call on April 12.
"We are continuing to get better at cartonization, meaning we can fit more of an order into a single package and, therefore, lower our freight costs… we do that because we're expanding our network and because we're just getting better and better at inventory placement," Chewy CFO, Mario Marte said during the company's Q4 earnings on March 22.
Indeed, automation is driving a number of cost benefits to both shippers and last-mile carriers, and this trend of automation will continue for both the shipper and the carrier.
Chewy's CFO noted that the company's variable fulfillment costs declined due to productivity gains and continued volume shift into its automated facilities, collectively driving a 13% year-over-year reduction in system-wide variable fulfillment cost per order. "Additionally, our improving in-stock position, supply chain initiatives, and technology deployments across our customer care organization have improved overall customer experience, resulting in fewer customer contacts," Marte told analysts in March.
"Our predictive anomaly detection will improve revenue quality in the coming fiscal year. We have already built infrastructure that helps us identify instances when we have overbilled our customers. We will use those same capabilities to manage customer performance and contract compliance better," FedEx Chief Customer Officer Brie Carere told analysts in March.
This year shippers and carriers will manage what they can and focus on cost containment by investing in network optimization and automation to improve cost efficiencies and the customer experience.
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