Retail executives from sea to shining sea are not sleeping as well as they used to as we hurtle headlong toward September. In any other year their purchase orders would be placed, Chinese factories would be humming and the container ships would be lining up at Hong Kong, Chiwan and Shanghai. The retail execs would be working on the details of their ad campaigns as they head into the holidays – the time that makes or breaks the retail year.
But the orders haven't even been placed yet for many of the big retailers. The Chinese factories are still waiting, and the container ships are in no particular hurry to get anywhere. That may be something of an overstatement – but not much of one.
The big systems with their mathematically elegant forecasts are fine, so long as there is not much downside to error – whether they will sell 10,000 or 11,000 rolls of Charmin three months out, or if the summer weather will be good, driving demand for barbecue paraphernalia up 8% over last year. But forecasting the holidays is very high stakes poker – and they know all too well the forecasts are nothing but GIGO machines – manipulators of historical data and human assumptions; and they have nothing but garbage and irrelevant history to feed them.
Nothing is particularly hot this year. Consumers have become value driven and uninterested in the latest artificially created demand for fashions, toys or much of anything else. There are always a few electronic gadgets that are hot, but beyond that it gets pretty thin.
But the Chinese manufacturers need 60-90 days and that window is closing fast. They don't know what to order, or how much, but to order nothing is to walk away from 20%+ of their annual sales and all of their profits.
And waiting is getting more expensive. Inflation in China is running at 6 – 6.5% that they admit to. The reality is undoubtedly much higher. If that weren't enough, the currency rates are also working against the retailers. This is not a coincidence – the Chinese are having to play it straighter with their currency to try to get inflation under control.
As the chart below indicates, the rate corrections add another 5%+ to the cost of everything coming out of China.
Between inflation and currency, the stuff the retailers buy is better than 10% more expensive than it was last year – but US consumers have not been willing to cover the increase lately, and in light of the current economy, it does not seem likely that they are going to start this Christmas.
So while the retail execs fret, the cost of goods from China is going up a percent per month or better.
And just to pour salt on the wounds, oil prices are a good 25-30% higher now than they were going into the last holiday shipping season.
Many folks don't know that, while the big retailers negotiate pretty good contracts with the shipping lines, the folks driving the big boats reserve the right to tack on a fuel surcharge … and they are waiting for the big orders to come in so they can pounce with that unpleasant bit of news for the retailers.
The underlying cause of much of the impending retail disaster is an utter disregard for the economic significance of lead times. Traditional accounting doesn't know how to quantify it, so, by definition, it is not important … or so they told themselves. Only now those long lead times are driving retailers to make 'bet the ranch' decisions in the face of huge uncertainty. Right about now I am sure they would give quite a bit to have a few of the American manufacturers they beat into oblivion back, with their short lead times.
The bigger issue is that the chickens are coming home to roost – as they always do. China has been playing games with its currency to keep Chinese prices artificially low. Naive western economists saw this as good for America as we benefited from those low prices. Finance Minister Guido Mantega President of Brazil, however, is a litttle bit more street smart than the typical economic genius. He describes China as "predatory". The Chinese set out to take over the world's manufacturing base, and willfully ate the cost of currency manipulation to do so. Their accomplices in this effort are the big American retailers - unwitting to be sure, but lack of wits is not an excuse when the unwitted are paid the sort of money the execs are. Now the string has run out.
Whether the Chinese can consolidate and hold onto their ill-gotten gains remains to be seen. The big retailers, however, are left high and dry. They reaped the benefits of artificially low Chinese prices for years and ignored the very important matter of lead times, and now they are paying the price. What is certain is that retailers will measure success this year in very different terms. The big winners will be those who survive.