Riding the Wave of Increasing Operating Costs

| 8 minute read
Ian Blackhall
Author Ian Blackhall
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The cost of doing business for the consumer goods industry is steadily rising. Like a giant wave rushing toward land, business owners can see it from shore but do not have time to get out of its way. Operating costs for brick-and-mortar stores increased pricing from Asian Pacific (APAC) suppliers, and an upturn in shipping and distribution expenses are behind the surges.

Whilst the pandemic played a small role in driving expenditures upwards, COVID cannot bear the full brunt of the responsibility for the current market status for this industry. The trend towards higher overheads started several years ago and has steadily picked up the pace. In this article, we explore the core reasons and take a closer look at market trends moving forward into 2021.

 

Brick-and-mortar stores outlook

From the mid-1950s through the early 1990s, malls and other brick-and-mortar retail centres were all the rage. Not only were they the go-to for all clothing and other consumer goods needs, but they also were a social hub of sorts. Friends would meet to shop for the latest fashion trends or to just hang out. Shopping centres developed quickly because they offered access to a variety of retailers in one convenient location.

Fast-forward to 6 August 1991, when the World Wide Web made its grand debut, and the love affair with physical shopping spaces began its downward spiral towards a slow and agonising death. Whilst brick-and-mortar shops have not completely gone the way of the dinosaur, they are becoming scarcer (and emptier). People no longer flock to these large gathering spaces because they now have the convenience of everything they need online. The COVID-19 pandemic only served to worsen an already existing downward trend in popularity as people avoided large gathering places as part of mitigation efforts.

Revenue for the department stores industry is expected to continue to decline globall in 2021, as most retail spending has shifted online. A 36 per cent jump in online retail sales occurred in 2020 because of the pandemic. Whilst revenue gains for online shopping are not expected to surge to those levels in 2021, Colliers is predicting they will remain somewhat robust at 16.3 per cent.

By the end of 2020, 17 major retailers in the US filed for bankruptcy or liquidation. Australian retailers were not immune to the financial slump. Some of the major brands bowing out in 2020 included:

  • Collette, an accessories and handbags chain
  • T.M. Lewin, a shirts and accessories retailer
  • Seafolly, a leisurewear group
  • Mosaic, the parent group of retail brands Noni B., Katies, Millers, Rivers, and Rockmans
  • G-star Raw, a jeans retailer
  • Meridith and Moore, a Melbourne-based fashion retailer
  • Tigerlily, a women’s clothing and swimsuit retailer
  • Ishka, a family-owned homewares chain

Department stores already experiencing a downturn in sales are most likely to continue to lose out to online sales in 2021.

 

Increasing prices from Asian Pacific (APAC) suppliers

Another contributing factor to rising costs for the consumer goods industry is the increasing prices from Asian Pacific (APAC) suppliers. China serves as a manufacturer to the world and has long been a source of deflation. All that changed in 2020, thanks to disruptions in the supply chain and the growing cost of raw materials used in manufacturing many of the products China exports. In response to the pressure, Chinese manufacturers have begun to raise prices, prompting fears of triggering global inflation.

There are other reasons why APAC producer prices are jumping at such a frantic pace.

  • Logistics are a prime reason for the rising costs. It extends beyond the supply chain disruptions sparked by the global pandemic last year. Thanks to an increase in oil prices, shipping costs have soared. During the height of the pandemic in 2020, oil prices plummeted due to decreased demand. At their lowest point last year, OPEC pricing hovered around US$41.47. The oil market has since recovered and is showing strong gains. As of 9 March, the price of a barrel of oil was at US$57.72. Predictions have the price per barrel quickly escalating to around US$$70 a barrel.
  • Raw materials are pricier, including metals, which are used in the manufacturing of many APAC products. After months of declines, raw materials are rebounding at a 2.9 per cent increase. Right now, the price of steel is soaring. However, the rally is expected to be short-lived. Copper prices also are on the rise, with increases likely to continue in 2021 due to low inventory.

 

Increasing costs of shipping and distribution

Container freight rates from Asia surged to new highs in recent months. Both the Shanghai Containerized Freight Index (SCFI) and the China Containerized Freight Index (CCFI) reflect the fluctuations of spot freight rates on the Southeast Asian export container market. Current figures indicate a 167 per cent increase in container shipping rates over last year. Some rates are even higher, depending on the point of origin for shipping. The good news is, the unstable prices are considered unsustainable and should level out later this year.

 

Competing with the ‘big boys’

Coles and Woolworths are two of the biggest fast-moving consumer goods (FMCG) retailers in Australia. To say they dominate the Australian supermarket industry is a mild understatement. Each attracts a 30 per cent share of a market worth around AU$90 billion. Their stranglehold on the market is restricting profits for other consumer goods manufacturers and retailers without the same size advantage. These smaller retailers are unable to offset higher operating costs due to lower profits.

 

Survival of the fittest

The consumer goods sector must hunker down and brace for some of the biggest waves yet in the early part of 2021. It is looking like it will be a 'survival of the fittest' scenario. Whilst the fluctuating shipping prices are unsustainable, higher oil prices and consumers’ change in habits are likely to stick around for a while. In our next instalment, we will discuss strategies to help ride out the storm, including maintaining product pricing.

 

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