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Freight Rebound Hopes Are Fading Under an Inventory Glut

Freight companies are dialing back expectations that demand will recover strongly in the second half of the year amid growing economic uncertainty and signs retailers are growing more guarded about placing big orders in 2023.

“There was more optimism a few months ago than there is now,” said Paul Svindland, chief executive of Bensenville, Ill.-based logistics provider STG Logistics Inc.

Logistics executives say the volumes of goods moving through supply chains have tailed off more than anticipated to start the year, while broader indicators such as retail sales figures are raising concerns about the direction of the economy.

”As we’ve progressed through the quarter, I’m slightly less optimistic than our customers,” Shelley Simpson, president of U.S. freight bellwether J.B. Hunt Transport Services Inc., told a March 14 investor meeting.

Freight demand started slowing midway through 2022 as consumer spending pivoted from goods to services and big retailers found themselves overstuffed with inventories following a pandemic-driven rush to fill store shelves. Transport companies from truckers to container shipping lines have pointed to an anticipated rebound in the second half of this year, saying they expected companies to return to more typical, prepandemic ordering patterns after working through excess inventories.

That prospect has looked more questionable as retail sales have declined and more retailers and their suppliers display caution as they remain focused on keeping inventories in check.

Nike Inc. said on Tuesday it would continue its reduced purchasing from suppliers after the sports apparel maker reported that it had cut inventory growth to 16% in its most recent quarter from 40% in each of the previous two quarters. The company slashed its merchandise inventory level by about $400 million from the previous fiscal quarter.

Nike Chief Financial Officer Matthew Friend said on an earnings conference call that strategically managing excess inventory was a “top priority” this year.

U.S. retail sales have been volatile in recent months, and a 0.4% pullback in February was the third decline in four months, adding to uncertainty for retailers and their suppliers.

“It’s better to understand what the customer wants and go after it than to buy it all upfront and hope it sells,” Thomas Kingsbury, chief executive of Kohl’s Corp. , said on a March 1 earnings call. Kohl’s said it is planning to hold less merchandise this year after the retailer’s inventories were up 48% in the second quarter of 2022 year-over-year.

Smaller companies are also working through big stockpiles while they navigate shifting demand as people return to the office and turn away from the comfortable leisurewear that they favored while working from home during the pandemic.

Boston-based apparel maker Ministry of Supply Inc. found itself whipsawed by the shift in demand last year after ordering big numbers of dress pants with elastic waistbands only to find customers switching to more formal clothing.

Ministry of Supply went from selling about 2,500 to 3,000 pairs of the comfortable pants during the pandemic to about 250 a month now, even as sales jumped for a zippered version of the pants more appropriate for the office, said Aman Advani, the company’s co-founder and chief executive.

“What was three months of demand is now 30 months of demand,” Mr. Advani said.

Shipping figures are showing signs of weakening demand as companies hold back new orders and global trade volumes falter.

Container imports at the ports of Los Angeles and Long Beach, the nation’s busiest port complex, plummeted 38% year over year in February.

U.S. freight rail volumes were down 5.2% in the first 11 weeks of 2023 compared with last year, according to the Association of American Railroads. The intermodal truck-rail business that includes a large share of retail traffic was off 9.6% in that time, including a 15.2% year-over-year slide in the week ending March 18.

DAT Solutions LLC, which matches trucks and available loads in the truckload spot market, said the number of available loads in February was about 70% behind the same month in 2022. The company said spot prices have dropped to the lowest levels since mid-2020, a sign that more trucks are chasing fewer loads.

Jack Atkins, a transportation analyst with investment bank Stephens Inc., in a March 17 note compared the environment to the period after the 2007-2009 financial crisis. “Whatever your macro outlook was a week ago, it’s lower today,” he said, adding the prospect for a recovery in the second half of the year “is looking increasingly less likely.”

Still, some freight companies remain optimistic that demand will recover in time for the traditional fall peak shipping season.

Darren Hawkins, chief executive of Yellow Corp. , one of the largest U.S. operators in the less-than-truckload market, in which truckers combine shipments from several customers in a single trailer, said its customers project that orders will climb in the second half of the year, although “they’re still taking a cautious approach.”

Mr. Svindland of STG Logistics said he expects freight volumes to rebound from today’s low levels later this year, although not as strongly as some of the company’s customers are predicting. “I’m not convinced there’s any data or merit to support that outside of hope,” he said.
Source: Wall Street Journal

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