All signs point to a muted retail peak outlook for 2023, with many shippers booking later sailings than in the past as they continue to burn through inventory, figure out demand signals and determine what new products to introduce for end-of-year holidays, Seko Logistics executives said on a media day call.
While trade with China has been reduced as manufacturing there has slowed along with demand, and many companies diversify sourcing to several near-Asian markets, the world’s second-largest economy remains a major trading partner.
“I really do caution as far as comments around China losing ground quickly to other countries and supply chains over the next five years,” said James Gagne, CEO of Seko Logistics. “The U.S., for example, remains extremely dependent on China.”
At the end of 2022, Gagne noted, 33% of U.S. imports came from China, which today it still represents more than 30% of global manufacturing. “They still have the infrastructure to get its goods out to the world and its own economy,” he said.
Gagne said he is seeing “green shoots” of optimism for the retail peak outlook reflected in shippers executing more purchase orders from overseas suppliers, as inventory overhang finally runs down and they look ahead to second-half demand. Both Target and Walmart signaled in Q1 earnings calls last week that inventory levels have been substantially reduced year over year, and new merchandise is being ordered, even as demand remains uncertain.
“Compared to the end of 2022, we’re expecting to see something short of a disruption-led peak, more like a pre-pandemic, conventional year,” he said. “We’re not expecting (Q4) demand to be pronounced.”
Gagne noted that even though the Federal Reserve has hit pause on a year-plus of incremental rate hikes to slow the economy and cool inflation, they have still had a cumulative damping effect on consumer demand, negatively affecting the retail peak outlook.
Even with big box retailers noting inventory levels reduced, Hans Hickler, president of Seko Logistics U.S., said the picture remains “bloated.” The U.S. Census Bureau reported March inventory levels were down 0.1% from the previous month but still 6.5% higher than March 2022.
“The pig in the python has not gone through yet,” Hickler said. “The attraction of inventory on the water is staying for a while vs. air. The ambition of customers to convert to air is dialed down until they know about consumer demand. They’re not keen to sit on inventory, and air freight tends to be a lagging environment.”
Asked if carriers are keeping enough planes in reserve to handle any near-term surge in air freight demand, Gagne said he’s seeing some of that play out. Both FedEx and UPS have been reducing their air cargo fleets as demand has shifted to ocean freight, and to economical, better-performing ground delivery vs. next-day air on the domestic side.
“We are seeing with some airlines and other players a focus on keeping some of their freighters in operation, even though the load factor is miserably low,” he said. “With time-definite air, the only thing that’s definite is that it’s gone down in terms of volume in a freight recession.”
Gagne added carriers need to keep enough “wide-body lift” in service, given the difficulties involved in quickly reintroducing it, especially re-securing airport landing rights and permits.