At Ports, a Sign of Altered Supply Chains
Flat import activity indicates how retailers are adjusting as customers shop online
|Photo: Patrick T. Fallon for The Wall Street Journal|
By ERICA E. PHILLIPS and ROBBIE WHELAN
This summer, dockworkers, truckers and railroads geared up for a surge of retail goods passing through U.S. ports that hasn’t occurred.
Imports are flat at major seaports on both coasts heading into peak shipping season, the stretch in late summer and early fall when retailers usually load up on imported toys, clothing and other merchandise to sell to holiday shoppers. If the trend holds, it will be the second year in a row without a traditional peak.
Economists say subdued activity on the docks is a sign of how retailers are slimming down their supply chains as more of their customers shop online. Companies such as Target Corp. , Lowe’s Cos. and J.C. Penney Inc. are pivoting away from maintaining stores brimming with merchandise. Instead, they are housing more goods in warehouses where they can quickly ship to stores or fulfill online orders.
It is a shift that has caught the transportation sector off guard. Ports from New York to Georgia to California have spent billions of dollars to upgrade equipment and deepen harbors to handle an expected flood of imports that has yet to materialize. Shipping lines are scrapping vessels and cutting back service on unprofitable routes. Trucking companies bought tens of thousands of new big rigs as recently as 2015, many of which sit idle today.
“My drivers say, ‘Boy, we’ve never seen it so slow,’ ” said Fred Otterbein, who heads the Savannah, Ga., office of port trucking company First Coast Logistics Inc. “It may be the new normal.”
U.S. ports are on pace to handle 2.2% more imports this year, the slowest rate of growth since 2011, according to Hackett Associates LLC, a consulting firm. In July, when shipping volumes typically start their peak-season ramp-up, imports fell at the nation’s two busiest port complexes, in Southern California and New York. The National Retail Federation estimates that August and September will continue the trend, with import volumes down slightly for both months from the same period last year.
The slowdown extends to the nation’s highways and railroads. Freight carried by road and rail fell 2.6% in July compared with the same month in 2015, the 17th consecutive month of year-over-year declines, according to data company Cass Information Systems Inc.
“The running joke going around is that flat is the new growth,” said Jett McCandless, chief executive of transportation-technology startup project44.
Freight volumes are stagnating despite strong consumer spending, which rose for a fourth-straight month in July. The problem for traditional retailers: More of those dollars are being spent online, or on entertainment and services such as health care.
Many retailers are stuck with large amounts of unsold goods as a result, reducing their need to import more merchandise. Even after a year of attempting to slim down inventories, retailers’ ratio of inventories to sales, a measure of excess stocks, touched 1.5 in June, close to a seven-year high, according to the Census Bureau. In their most recent earnings reports, Target and Lowe’s reported inventories up more than 4% over the same period last year.
J.C. Penney is placing “slightly smaller orders…or holding back quite a bit” to reduce inventories, Mike Robbins, J.C. Penney’s executive vice president for supply chain, told investors in June. The company has reduced the size of some orders at the beginning of major shopping seasons by as much as 70%.
The focus on reducing inventories is proving to be a drag on growth because it signals that businesses are spending less, and might be pessimistic about future demand. Inventory drawdowns cut second-quarter growth by 1.26 percentage points, to just 1.1%.
Shipping lines are struggling to plan their routes as order volumes become more difficult to predict, said Niels Erich, spokesman for a group of 15 major shipping lines known as the Transpacific Stabilization Agreement. In the past, carriers could count on the peak summer months to make up for slower winter trade.
“Now that doesn’t exist in the same way, it’s all kind of flat,” he said.
Some analysts expect retailers to place last-minute orders closer to the holidays, which could make up for some of the softness in imports that ports are experiencing now. J.C. Penney, for one, expects to place smaller orders for certain products that typically sell strongly throughout the holiday shopping season, Mr. Robbins said.
If those orders materialize, they could come in via air, usually the fastest mode of freight transportation, analysts say.
Long term, retailers will need to step up imports as they run through inventories, particularly if consumer demand stays strong. But a return to double-digit percentage growth at the ports appears unlikely, said Jock O’Connell, an international trade economist.
“What’s really going to drive import trade is simply the domestic demand for goods,” he said.
Write to Erica E. Phillips at firstname.lastname@example.org and Robbie Whelan at email@example.com