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First Things First: The Fastest Five Recap – April 2022 Edition

First Things First

The Fastest Five Recap - April Edition

April 14th, 2022   ·   By Callum Berry

You might have watched the recent episode of the “First Things First” live show, where Mercado CEO Rob Garrison covered some of the top supply chain news stories from the past month in a segment called the “Fastest Five.”

If you missed out on the show, don’t worry – you can catch up here.

Before we go too far, we should explain a term Rob used on the show that we’ve had some questions about: “bulls and bears.”

It’s likely not a turn of phrase you hear every day. In short, ‘bulls and bears’ is a way of referring to different periods of time in relation to the economy and supply chain. For example, when you look back on the last two years, everyone in the industry has been operating in what we would call a ‘bull market’.

To put it simply, demand has outpaced supply. The challenges with this are numerous, and include a shortage of supply to keep up with demand, alongside a lack of container space for the transportation of supply.

A bear market is the exact opposite, and explains when supply outpaces demand—often caused by a slowing economy and rising unemployment rates.

Now we’ve covered that, let’s delve into the headlines Rob covered in a little more depth. So take a seat and let us give you the lowdown on the top stories from this week.

The Big Short

Gary Friedman, CEO of luxury home furnishing brand RH, on a recent quarterly call doubled down on supply chain woes, surging ocean freight rates, soaring inflation and a sudden plunge in consumer demand coinciding with Russia’s invasion of Ukraine.

Friedman disclosed that solely as a result of Russia's invasion on Ukraine, RH’s demand fell by 10-12% overnight and they haven’t seen a recovery since. In fact, RH’s company market value fell by $1 billion on Wednesday. “Everything is kind of happening at once” said Friedman.

“Everybody thinks supply chains are getting better. I don’t think they’ve gotten better at all, product is on the water for a long time, getting ships into port. We’ve got about five extra weeks in our supply chain right now. That’s a lot of time, a lot of money. And that’s the average. Some stuff’s coming on time and some are 10-12 weeks behind.”

Friedman went on to confirm that as a result of higher costs and lower demand, RH will be passing along higher costs to customers.

“Many of us thought we’d have been caught up by now. We’ll be lucky to be caught up by the end of the year,” he said, pointing to heavy omicron impacts on supply chains in China, Vietnam and other sourcing countries.

“I’ve never seen it so chaotic, honestly, from an execution point of view, whether it’s construction, sourcing, manufacturing, shifting supply chains or freight. Everything is a little out of sync in the world right now.”

Rob’s perspective

Wow, that really is crazy! A 10-12% drop in demand overnight isn’t something any business leader wants to see. Economists are really struggling to predict what’s in store for businesses and our consumers from an inflation point of view—some view it as a near-term consequence of high government stimulus injection alongside shortages driving prices higher and making the cost of living more expensive; whilst others see it as something that’s been building for a long, long time. Whatever the case, we are all going to have to figure out and prepare for this added layer of complexity in an already struggling industry.

Recession Risk Is Rising

Economists are concerned about the increasing risk of recession as the relentlessly strong U.S. economy whips up inflation, which will likely provoke a heavy-handed response from the Federal Reserve.

Economists surveyed by The Wall Street Journal this month put the probability of the economy being in a recession sometime in the next 12 months at 28% on average, up from 18% in January and just 13% a year ago.

Joe Brusuelas, Chief Economist at RSM US LLP said: “Risk of a recession is rising due to the series of supply shocks cascading throughout the economy as the Fed lifts rates to address inflation.” Economists have slashed their forecast for growth this year, as they see inflation-adjusted GDP rising 2.6% in the fourth quarter of 2022 from a year earlier—down a full percentage point from the average forecast six months ago.

The looming risk of a downturn alongside alarmingly high inflation (which hit 7.9% in February), captures the Fed’s balancing act: It is attempting to cool the economy enough to bring down inflation, but not so much that it spurs a pullback in spending and rising unemployment.

Rob’s perspective

Inflation often results in negative financial market movements—and recessions are natural consequences we’ve seen many times before in our recent history alone. Whether things balance out relatively quickly remains to be seen. It’s possible that as the cost of living increases, people buy less resulting in left demand and so price decreases—reflecting how a ‘bull market’ can just as easily turn into a ‘bear market’.

Container Conundrum

Increased demand for container capacity along with pending environmental regulations have been driving strong order volume for containerships.

Industry association BIMCO (Baltic and International Maritime Council) has highlighted the latest milestone for the container industry as its number of the week. By their calculation, the containership order book has now surpassed 6.5 million TEU (twenty-foot equivalent unit) which is the first time it has reached such levels in 15 years.

“In just eighteen months, six million TEU of newbuilding contracts have been added to the containership order book,” highlights Niels Rasmussen, Chief Shipping Analyst at BIMCO.

Last year, the shipping lines rushed to bolster capacity focusing first on the ultra-large segment of containerships. Major carriers including MSC, ONE, and Evergreen are all planning vessels near or exceeding the 24,000 TEU capacity mark, making them the largest container ships ever built.

Others, including Maersk, chose what they see as a more optimal and versatile size ranging around the 15,000 to 16,000 TEU level. More recently, carriers have turned to the smaller feeder vessels as they focused on their hub-and-spoke networks and the opportunities in smaller, niche markets.

Rob’s perspective

As supply chain professionals, we are now dealing with a completely different situation where we’re going from managing container-by-container and having to call people at three in the morning to see if things are going to move, to a situation where we’re having to shift our attention to price.

In terms of management, both are difficult challenges, but when you’re dealing with a recessionary type of situation on the supply chain, and there’s less demand, the pressure on your company's profit increases, and therefore there’s pressure on the supply chain to reduce cost. You go from basically borrowing and stealing to get containers, (paying really massive prices as you go), to potentially having to negotiate harder for everything.

Catch-up on the live show

To watch the full episode of First Things First, head over here.
To subscribe to the podcast (available wherever you listen to yours), click here.

We’ll be back for the next installment of the Fastest Five on Episode 2 of “First Things First-light” on Tuesday 12th April 2022. Sign up today over at The Lab.
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