- Allen Czermak
Is Supply Chain Inflation Getting Any Better?
Americans have become more guarded lately keeping their hands in their pockets at the supermarket and department store and thinking carefully before picking up an item that holds a higher price tag than previously. A recent CNN report explained that American consumers are getting more cautious in their spending habits. The Feds are actually positive about this trend since they want people to cut back on borrowing to stop inflation with so many people buying on credit and not cash. The Feds purpose in higher interest rates is to slow down consumer spending not only at the stores but in new homes and auto purchases. These factors should cool down the economy and ultimately cause prices of goods and services to decrease.
There is confusion because we get conflicting reports from the media and the President of the United States of America. The economy is growing, says one outlet. No, people are decreasing their spending, says another. The President boasts how the economy is swinging back and you almost don’t know who to believe anymore. However, all we have to do is look at our own pocketbooks and bank accounts to see what is going on in our own personal lives.
Folks tend to call the retailers the “bad guys” and will blame them when they see their bills at the cash register growing. However, unless their vendors are prepared to negotiate lower prices, the prices will not go down. Large retailers have the option of pulling name brand products off their shelves and advocate their own in-house brands which are generally less costly. This is true as well when it comes to pharmaceutical products. People are getting treated with the generic brand as opposed to the original and more expensive brand. They can also change the placement of their high-cost vendors’ products to less popular areas in their stores. This punishment is called putting the higher priced products in the “penalty box”. Walmart tried this in 2018 with Campbell's Soup Company. Walmart was trying to negotiate a price freeze on this company’s cans of soup, and the company would not agree so Walmart's “penalty box” led to a 2% drop in sales for the Campbell's Soup Company.
Another negotiating store with clout is Whole Foods since it is owned by Amazon it can afford to have power over its vendors. Also, some of Whole Foods suppliers are smaller brands in the natural food sector who must rely on Whole Foods to give them quality shelf space and advertising. Stores such as Whole Foods are showcases for new and interesting types of foods, especially healthy snack foods. (I was there several months ago and noticed an appealing display case from a small private company selling macaroons. These small delicate cookies were selling for two dollars each presented in different colors with contrasting cream inside. This was quite a steep price for a product of unknown origin even though they looked thoroughly delicious).
During the past year, retailers have passed on the increasing vendor prices to their loyal customers. It’s true that during the pandemic retailers were having a problem stocking their shelves and dealing with hardships with the supply chain, paying their workers more for them to agree to stay on the job, and all dealing with all those crazy safety requirements to keep the doors of their stores open. Stores like Whole Foods (owned by Amazon), Target and Walmart for example, have enough leverage to demand that their suppliers give them better deals.
Consumer product analyst, Mike Graziano, believes that now is the right time to be strict with the vendors. Instead of the retailers taking all the blame for inflation pricing, vendors no longer need to charge such high scaled costs to the retailers since freight charges have gone down and the plastic used in packing, polypropylene, has gone down almost fifty percent. A reliable indicator of consumer spending habits is the conditions that were present during the past holiday shopping season. Shoppers looked for discounts and waited more this year for items that they wanted to go on sale.
From November to December of 2022, consumer shopping (according to Reuters consumer spending accounts for over two-thirds of the U.S. economy) fell 0.2% and was also adjusted to show a fall of 0.1% from October to November showing that consumer spending was the weakest in two years.
One of the ways that retail chains are managing costs is by agreeing to place their orders to their vendors earlier so that the vendors will be confident of their confirmations and they in turn can order earlier from their foreign suppliers giving them time to find more economical transportation and logistics handlers.
Just as retailers are having their problems, so do the wholesalers. Although the lines at the supply chain ports have improved, severe weather conditions and the war in Ukraine are still problems that shipping, and logistics companies must contend with. Add to that the ever-present truck-driver shortages and we can better understand the vendors point of view.
Another complex issue for the vendors is warehousing. Even though ocean freight charges have decreased, the fact that inflation has caused consumers to be cautious in spending has led to the development of warehouse issues and the lack of enough of them. Since vendors have already ordered their products way in advance, if the retailers are not accepting the products the vendors must pay storage fees to the warehouses. Shippers are given a certain amount of free warehousing time to hold their shipping containers but after that they must pay charges for each container each day.
Paul Brashier, vice president of ITS Logistics, an intermodal drayage company, explains that when containers are left on chassis, they cannot be used for the newly arriving containers. With both storage and chassis costs adding up, a wholesaler can end up with penalties of tens of millions of dollars. Charges that shippers must pay for out of use containers are passed on to the consumers which is one of the reasons why the prices for products are not decreasing as rapidly as they should.
Even though inflation has been falling for seven months, food is still one of the items that has not come down yet. According to the Labor Department statistics, just last month, January prices for food for the home, not bought or restaurant food, but food bought to prepare home cooked meals, escalated a whopping 11.3%. Senior citizens specifically are suffering as they scan the aisles of their favorite supermarket. Seniors who get social security have been granted an 8.7% increase for 2023 which is the largest increase since 1981, yet this still doesn’t cover the increase in their supermarket totals.
For example, thirty ounce off brand jars of light mayonnaise have jumped from $1.99 to approximately $3.99 in supermarkets. My friend stocks up on these off-brand jars but told me that she did not pick one up the last time she was in the supermarket because she was shocked by the huge price increase. Since she still has stock at home, she’s hoping for the prices to fall before she runs out of stock. This is what happened in the egg crisis with eggs selling upwards from $5.99 a dozen for many weeks. Excuses were given ranging from a virus that required farmers to kill off millions of chickens to chickens who would not lay eggs. Interestingly, just last week I was fortunate to buy two dozen for five dollars, meaning $2.50 per dozen. I’m wondering how all those eggs magically appeared to be sold with no limits. Other products such as airline fees and used cars have decreased but these aren’t as necessary as food. Senior citizens may not appreciate those decreases since they may have passed the age of driving and traveling.
Americans are learning to shop with caution despite the fact the inflation is easing for many items except for groceries. According to a study by Shopkick, 83% of those surveyed said they would be spending less in the next three months by (the survey was conducted from January 21-23). Some examples are, less trips to the store to save gas (49%), buying canned food instead of fresh food (19%) and shopping in volume (31%).
There is an important role that retailers must play in solving the supply chain inflation crisis. By offering to establish the kind of contracts that are win-win for the suppliers, retailers and ultimately the consumers they are helping to reignite consumer confidence in the supply chain keeping it in limbo by offering fair pricing for all. By presenting equitable pricing which includes foreign shipping, logistics and drayage of the products and ultimately the retailers enabling themselves to give the consumer the best products for their buck will keep everyone satisfied. This is no small feat but as inflation lessens and consumers become smarter by looking for quality in their purchases we can once again become a country that works on the belief in capitalism and free enterprise. The government can then take a step back and meddle in agendas that are in their domain such as war and crime.