Two years ago, the pandemic started a chain of events that would break the supply chain in various and sundry ways. The hits just kept (and still keep) coming, and in this episode, we dig into how this hit DTC brand owners and Ecommerce / Retail agency people. We'll look at what happened, why it happened, and how we can better prepare ourselves for continued supply chain difficulties.
In this episode, we interview four people who deal with this on a daily basis:
- Mike Beckham, CEO of Simple Modern
- Elizabeth Marsten, Senior Director of Marketplace Services at Tinuiti
- Sean McGinnis, President of KURU Footwear
- Chris Johnson, Director of Strategy at Common Thread Collective
And, make sure to watch for each of these interviewee's individual episodes, as these were masterclasses in ecommerce, thinking far beyond the supply chain!
Here is a list of resources we either consulted, or think would be helpful in continuing to inform your understanding of the things we discussed on the supply chain crisis.
- Covid-19 Timeline by the CDC
- Coronavirus: impact on U.S. e-commerce - statistics & facts by Statista
- Ten Most Significant World Events in 2021 by the Council on Foreign Relations
- Visual timeline of the day that changed everything: March 11 by ESPN
China Power Issues
- China’s Power Shortfalls Begin to Ripple Around the World by the Wall Street Journal (WSJ)
- Twitter Thread on China Power Issues by Mike Beckham
Supply Chain Disruption
- Why the Pandemic Has Disrupted Supply Chains by the White House
- How the Supply Chain Broke, and Why It Won’t Be Fixed Anytime Soon by the NYTimes (NYT)
- Here’s Why Supply Chains Are So Broken—And Aren’t Really Getting Better by Forbes
- Amazon’s 2020 Prime Day Is Full Of Unknowns. Here’s How Brands Are Approaching It. by Forbes
- Biggest U.S. Retailers Charter Private Cargo Ships to Sail Around Port Delays by the WSJ
- Twitter Thread on FBA Aggregator Struggles due to Supply Chain by Bill D'Alessandro
- Retail Brands Gear Up For Second ‘Shippageddon’ by Forbes
- ‘Like a Third World country’: Gov. Newsom decries rail thefts amid push to beef up enforcement by LA Times
- Where are all the containers? The global shortage explained by Hillebrand
- FACT SHEET: Lowering Prices and Leveling the Playing Field in Ocean Shipping by the White House
- Fewer boots, more slippers: How a shortage of shipping containers is changing what shows up on shelves by The Washington Post
- The history of the metal box that’s wrecking the supply chain by Vox
Kirk Williams (00:00):
It's March 11th, 2020. Does that date ring a bell? Well, probably not because we tend to forget dates unless they themselves are the name of the event like 09/11, but Wednesday, March 11th, 2020 may have impacted your life more than any other date up until this point besides perhaps 09/11. It's likely changed the way you work, eat, travel, attend school, interact with friends and family, make purchases, and so much more. Knowing that let's try again. It's Wednesday, March 11th, 2020. The WHO has just declared a pandemic. The NBA has just announced a season suspension and President Trump has just addressed the nation about the pandemic. The next day on Thursday, the stock market will crash in what will be the greatest single day stock market drop since 1987.
Mike Beckham (00:50):
For most people, COVID was not something that they thought about or talked about until late February, early March at the earliest. For us, we started hearing from our contacts in China in early January. Hey, there's something going on in a neighboring region that could be worth watching.
Kirk Williams (01:14):
Okay. So, technically March 11th wasn't the start of the pandemic, but it is a date we can point back to as when things begin to shift dramatically for the United States. That's the country where I currently reside.
Elizabeth Marsten (01:26):
I do like that you judge... You use when the NBA shut down as one of your key indicators. Sports are closed. Well, we better take this seriously.
Kirk Williams (01:37):
For another group of people, those working in e-commerce March 11th would signal a key shift in user purchasing, supply chain issues, inflation, worker shortages, and well, just a whole lot of fast approaching long stressful work days. I have to admit, as we were preparing this episode and drafting the timeline for everything at one point I remarked, how did any business survive everything that happened during this time period? It's really unbelievable, but businesses did survive. And some even thrive as consumers acted almost chaotically at times during the many upsets over that period. This podcast episode is our attempt to look back at the last two years within the framework of e-commerce. In some ways, to document it for posterity, but also to answer questions we've had in the midst of all of this. Let's look at at what drove supply chain disruption, how consumer purchasing changed rapidly, and most importantly, how e-commerce operators and agencies responded to all of this. We'll hear failures and successes as we strive to become more resilient in the face of certain change. So, let's rewind the clock to the beginning 2019.
Chris Reeves (02:47):
Welcome to the ZATOWorks PPC Ponderings Podcast where we discuss the philosophy of PPC and ponder everything related to digital marketing. Our hope is that through these conversations with professionals in the digital marketing space, we can gain a better understanding of what is happening in the digital landscape and better prepare all of us for the future.
Kirk Williams (03:10):
In late 2019, something was quietly brewing that would change the world and interrupt decades of normalcy in things like the supply chain, education, work, habits, relocation, and so much more. I remember sitting in our home here in Billings, Montana in January and February reading the alarming news coming out of China. I read things like there are engineers building two completely new hospitals in under two weeks and telling my wife, "I think this thing might be worse than we realized." A more underrated statement would be difficult to find. I then spoke on Google shopping ads at SMX West in San Jose on February 19th, 2020, and that was to be the last marketing conference that I, and many along with me would attend for two years.
Mike Beckham (03:51):
So, by mid, late February I'm like, "I think it's coming here. I think we're going to have to go through lockdowns, and I'm the crazy guy, right?
Kirk Williams (03:59):
This is Mike Beckham, CEO of Simple Modern. I followed Mike's commentary on the supply chain for quite a while. And in fact, I've learned a lot from Mike's Twitter threads before I would even see some of this stuff hit the news.
Mike Beckham (04:10):
My role on the team is to be the forward thinker, be looking out on the horizon. I'm buying the multi-packs of macaroni and cheese and toilet paper on Amazon. I'm not a prepper, but I'm acting like a prepper.
Kirk Williams (04:26):
As we noted already, March 11th and 12th were the dates when well, everything hit the fan here in the US. It's like everyone looked around and said, "Oh, crap," collectively and financially on the same two days.
Elizabeth Marsten (04:38):
It was pure. Like, I don't know, during that at time. There was so many questions of do we stay open? Don't we stay open? Well, we're essential. What's essential. How often do I have staff? Do I have to... They were so concerned about how many people can be in a store at a time and do they have the staff to do it? And if the staff are protected and we didn't have testing.
Kirk Williams (04:57):
This is Elizabeth Marsten. She's the Senior Director of Strategic Marketplace Services, and I don't know of anyone who knows retail media better than Elizabeth.
Elizabeth Marsten (05:07):
I mean, I remember seeing folks stand in line at the Trader Joe. I was Google Maps stocking my local Trader Joe's to find out when in store traffic was the least, what day and what hours
Kirk Williams (05:20):
Nobody knew what it was going to happen, how bad it would be and how long it would last. And the response was to sell, sell it all.
Chris Johnson (05:27):
For all of us we were... I mean, no one had planned on a giant global pandemic.
Kirk Williams (05:33):
Here's Chris Johnson. Chris is Director of Strategy at Common Thread Collective, and Chris was just a fun guy to talk to. He's the Director of Strategy for a reason because his brain endlessly thinks at a strategic level.
Chris Johnson (05:45):
I was planning to go on vacation actually. I was like, "Hey, Q4 was always busy." I usually took Q1 to go take some vacation time. And so, I had a plan to go on a cruise to China, Korea, and Japan. So, clearly that did not happen. And so, personally I was thrown into, oh, we're not going, and we need to really figure out what this means for our brands.
Kirk Williams (06:08):
From mid-March on, many states entered what would become a familiar phrase, but was at the time reserved for something reminiscent of science fiction, lockdown. How would this impact user purchasing? What would this do to the supply chain? Some are already beginning to ask these questions.
Sean McGinnis (06:25):
I'm thinking back to the time in March of 2020 when COVID was just starting to get traction in the States.
Kirk Williams (06:33):
Here's Sean McGinnis, President of KURU, one of ZATO's clients.
Sean McGinnis (06:37):
And one of the things that we did at that point in time was I pulled together our senior leadership group, and we did a scenario planning exercise. Frankly, the impetus for that meeting was naively from my perspective, but I think it was a good exercise at the end of the day. But my question was, what happens if we can't get anything from our manufacturing partners in Asia?
Kirk Williams (07:02):
At one point I remember turning to my wife and asking her is this it? Is my business over. Consumers weren't buying. We weren't sure what our clients were going to do. Everything was shut down. We had no idea what was going to happen.
Chris Johnson (07:15):
If you were falling Twitter in the early days, it was just like e-comm apocalypse or the best thing ever for e-com. It was not clear in March what was going to happen.
Kirk Williams (07:24):
E-commerce itself went through quite the roller coaster. Put yourself back into March 2020 as a brand owner or manager.
Mike Beckham (07:31):
I'm kind of making fun of myself even with the team. I'm telling them, "Hey, I think this is going to be disruptive." We have this pond back of our office. I'm like, "When the apocalypse happens we can survive by eating the ducks in the pond for at least a couple weeks." And so, I'm making light of it, but I really seriously I'm telling the team like, "Hey, I think this is going to be disruptive."
Kirk Williams (07:53):
You don't know a stimulus is coming to encourage consumer purchasing again. You don't know that PPP is coming to help with your payroll. You don't know how long this whole thing is even going to last. You just know that right now things don't look good for the entire world. Then of course, reality kicked in as people realized, well, we still need to shop and we can't go anywhere. Brick and mortar took a nose dive and e-commerce headed up fast.
Chris Johnson (08:19):
We were talking to clients who they wanted to slow down because they weren't sure about how cash was going to look. So, the idea is this is really new. We don't know what's going to happen. We don't know if there's going to be customers buying. And remember, a lot of these brands were at the time trying to do some retail and expand into wholesale. So, that's really scary for them because they have a bunch of inventory sitting that's supposed to go to stores and none of the stores are open.
Kirk Williams (08:43):
Best place to buy things during a pandemic when you're too scared to leave your house. Well, believe it or not it's to have it delivered to you. Who knew?
Elizabeth Marsten (08:51):
So Home Depot was a really good example I would say of someone who was pre-pandemic preparing for this with curbside pickup and outside inventory and that kind of stuff. And Target was the other one with a big push towards curbside pickup, revamping of their app.
Kirk Williams (09:07):
One of the things non e-commerce people may not understand is that consumer buying surges can be as harmful as buying drop offs to business. It's the chaos that is the problem.
Chris Johnson (09:17):
The brands that were struggling had kind of overextended themselves,. They were running really thin already. And so, they needed to make a really critical decision about when to buy inventory and they maybe pushed it back too late. And so, they paid a premium later. And so, what we found was initially it wasn't that there wasn't any supply chain issues initially. It was later because people delayed that caused a bunch of issues for them.
Kirk Williams (09:42):
When people buy everything at the same time, it puts a strain on website resources, customer service, order processing, returns, and stock status among other things. It also makes inventory projections virtually impossible. Is this just a surge or is this a new normal? It's hard to tell when you're in the midst of it.
Mike Beckham (10:00):
If you had talked to me in April of 2020 it's like, how am I going to sell all this stuff? We've got all this stuff that we've built. We've got all this inventory that was built around this certain rate of growth. I have no idea how I'm going to sell it. Then as things start to open back up, all of a sudden you're like, "How do we get more stuff?" We missed production. We didn't order for a period of time. We really probably needed to and we've got to catch up. And I think that this is probably almost universally what inventory businesses went through during that period.
Kirk Williams (10:38):
One of the difficult things of the past two years isn't simply that there were times when a lot of people didn't buy it's that there were times when a lot of people did buy all at once and it was virtually impossible to identify when those different times would be coming.
Sean McGinnis (10:52):
We need to go get more inventory as quickly as we can. It wasn't quick enough. We have been inventory constrained in both of the last two summers for different reasons. One of which was the kind of spike in demand, and we couldn't get things here quick enough for July at the time. And the other one last year was the stimulus check. The stimulus check and the delays in supply chain and logistics meant that we were a little bit under inventoried coming into June, July, August last year.
Kirk Williams (11:27):
One brand in April, 2020 may have said, we don't know what will happen, so we should limit the stock we bring in for now. Only to then run out of stock when purchase behavior ramped up unexpectedly during those stimulus payments. Only then to order more stock for delivery based on that ramped up consumer behavior and have it finally arrive when consumer demand shifted back to a savings mentality and they stopped buying, leaving that brand holding the tab with even more products sitting in the warehouse than usual.
Sean McGinnis (11:55):
But when you put that much liquidity into the market and in and cash into people's hands, it changes behavior pretty dramatically. So, as you know, a number of e-commerce players saw a very dramatic spike in demand last Q1, Q2, and as we in spring.
Elizabeth Marsten (12:12):
Walmart was a big winner on the stimulus packages. People bought all kinds of things. Sure, they bought a TV or, or a blender, but also, a lot of them bought essentials. They bought groceries, they bought diapers, they bought formula. And so, we did see in those categories bumps. We did have advertising budgets trying to match, but it the same we didn't have to advertise as much because they knew what they wanted.
Sean McGinnis (12:36):
What you really want as an e-com operator is a steady increase in demand. The perfect thing is a low sloping growing curve, or regardless of how deep the slope is a consistent curve. And what we've had instead is these spikes and valleys. We've had spikes due to incentive checks and stimulus checks. We've had spikes due to increase in overall generalized e-commerce demand as a percentage of total retail spend. And then we've had other challenges operationally because the spikes in demand have created these pressures from a logistics and supply chain perspective.
Kirk Williams (13:18):
The ups and downs were aggressive, happened quickly, and were virtually impossible to see ahead of time.
Elizabeth Marsten (13:24):
We did have some advertisers pull back on their advertising because of supply chain. So, they didn't have the items. They couldn't get the items that are sitting on container ships, which is a later in the year thing, but we didn't know that. We just knew that with China, with all those factories shut down a lot of things just weren't coming out. And a couple of our clients were in the more cleaning spaces or health and wellness. And we just didn't need to advertise because we couldn't keep it in stock. I mean, if you sold cleaning supplies, you were doing gangbusters.
Mike Beckham (13:52):
You can imagine that what happened with COVID and so much work from home and everybody's patterns getting blown up is the mix of what they bought really shifted. So that was one thing that we saw right off the bat.
Kirk Williams (14:03):
While an e-commerce brand was trying to anticipate user demand amidst the chaos of COVID shutdowns, economic stimulus payments, and societal disruptions of 2020, an even greater storm is brewing, the supply chain.
Sean McGinnis (14:15):
We all know there's 100 plus ships sitting off the coast of California. And what used to take us 35 days to get product from our manufacturing partners in Asia to our warehouse in Kentucky now takes anywhere from 90 to 105 days.
Kirk Williams (14:30):
Let's put it like this. Even if people want to buy from you, you can't sell to them if you don't have anything to sell because it's sitting somewhere on that long journey between your international factory and your shipping department.
Mike Beckham (14:41):
The more optimized the system is, the more fragile it is.
Kirk Williams (14:46):
Okay, if you're like me, you're fully aware of the supply chain and the crisis, and you might even have your opinions about everything that went down, but how much do we really understand about everything that happened over the past two years in regard to the supply chain? I wanted to understand this a little better. So I dug into it in preparation for this episode. Many of the resources we used are shared in our show notes. It's important to realize the sheer mag of the supply chain disruption over the past two years because this was a worldwide event. It's not like a volcano exploded in one part of the world where the material for microwave glass or something is made. So, okay, things get a little expensive because darn it. Now we have to find another supplier in another part of the world. Remember the word global in global pandemic? It's literally everyone everywhere who's been impacted.
Mike Beckham (15:36):
If you've heard the term butterfly effect, I think that's a good way to describe what happened. It's a cascading set of consequences that's fairly unpredictable. When you walk through each thing that happened and why that happens it makes sense. If you know the second and third order effects of COVID, you're going to be a billionaire, but nobody knows what they are because it's just too impossible to really understand how this thing's going to ripple out.
Kirk Williams (16:00):
Think of it like compounding interest. The reason your invested money in 20 years is so much more valuable than it is today isn't simply because you're putting more money in. It's also because the interest itself is building on itself. In the same way, you're not just experiencing individual problems in a vacuum within the supply chain during a global pandemic. The problems compound on each other over time in the same way that an interest bearing account sits there growing larger over time.
Chris Johnson (16:27):
So no one knew that was going to be a big issue. Again, we look back, we're like, "Clearly that would make sense, right? If you have everyone stopping and starting at the same time, it's like traffic in LA. It's like everyone wants to be in the 405 at the same time. Of course, it's going to be slow.
Kirk Williams (16:42):
Let's consider a fictional story of a fictional person in Billings, Montana wanting to build a fictional home and desiring to purchase a fictional washing machine. This person says to the general contractor, "I'd like to purchase that washing machine. It's a very nice washing machine. I feel this particular washing machine would serve me well. How long until I can use my new washing machine?" To which the GC looks or notes and responds, "Well, if you want that particular washing machine, you're going to have to wait something like 37 months or longer." This soon to be home owner growls in frustration, blames the situation on some politician, any politician, and selects another model. But why the delay for that first model?
Kirk Williams (17:22):
Remember the analogy of compounding interest? You see in January, 2020 in our fictional story, the factory where the flux capacitor for that fictional washing machine is made in China was shut down due to COVID. The factory finally reopened its doors to churn out flex capacitors, but now they're behind from all the orders that were still coming in during the shutdown. So the delay begins as they work hard to catch up. By the way, this is also why they'll experience rolling power outages a few months later compounding the problem further as the Chinese government attempts to manage the increase in factory demand as everyone tries to catch up all at the same time.
Mike Beckham (17:58):
What happens is you don't ship stuff for a while. Then China's inundated with orders. That incredible demand for orders leads to electrical shortages in China, it leads to supply shortages in China. You've got monetary impact happening where the US and China are doing different things with their currencies, which is messing with the exchange rate all of a sudden.
Kirk Williams (18:20):
Meanwhile, in a province down the road, the factory building that do [inaudible 00:18:24] part for that washing machine's motor shuts down as 10 workers test positive for COVID. The timeline for that second part pushes a new delay. As time goes on, parts continue to get made and shipped now delayed to the US. But as the parts make their way across the ocean, they arrive to a United States, which is now experiencing a wave of its own lockdowns. The ships can't even get into the ports because of the backlog of other delayed ships. Everyone's now arriving at the same time and the ports are experiencing their own worker shortages and lockdowns impacting their ability to unload as quickly as possible. This all means that those already delayed parts now sit in the port of LA for another three months.
Mike Beckham (19:03):
There were these pictures that just show a ship getting across the ocean, getting to the port, and then just going on some kind of pleasure voyage from hell around the West Coast where they're just going in figure eights and all kinds of because they can't dock, they can't unlock, can't unload. So, you can't get things off of ships often like the ships here, but it's been sitting in port for 45 days.
Kirk Williams (19:31):
Back to our fictional story based on true events. Three months later, our delayed washing machine parts are finally loaded onto a train that then offloads them at a distribution center in Nebraska where they sit another five weeks while the center then gets hit with its own wave of lockdowns backing up its own shipments and causing its own delays again. By the time the center is re it will take longer than normal. There are fewer drivers and a log jam of deliveries.
Mike Beckham (19:57):
As people have tried to fix it creates secondary breaks. So, okay, Long Beach is backed up. I don't want my ship to get stuck at Long Beach. I'm going to send it to Houston, but enough people say, "Hey, I'm going to send it to Houston." Then all of a sudden Houston's jammed up. Well, okay. You know what I'm going to do? I am going to take it through Long Beach, but then instead of trucking it because trucking's a nightmare I'm going to put it on a rail car and I'm going to take by rail. Now, all of a sudden, there's all these rail car robberies. So this is kind of, I think where we're living right now.
Kirk Williams (20:26):
Okay, shoot. Finally, the parts arrive in Ohio at the factory, hooray, where they're to be put together. They made it. And then the factory shuts down as four workers test positive for COVID. By the time they've opened back up again, they've learned that for this particular washing machine model, all those parts are in except some tiny, really important little chip required. I don't know, to notify the consumer of the open door sets. That happens to be stuck in Taiwan in a backlog because those also happen to be the same chips used in every car in the world, refrigerator, freezer, along with all of those washing machines. And that as Paul Harvey used to say is the rest of the story. I mean, considering all that in this fictional and yet based on really the reality of true events of the supply chain, we have to ask ourselves, how in the world is anything working at this point? I actually think it's pretty remarkable we've had anything delivered since this began, but all that to say retail and e-commerce is darn tough right now.
Elizabeth Marsten (21:28):
So you have forecasted a certain amount of inventory. It's come in off the boat. It's sitting in warehouses. You're sending it to your FBA warehouse. Maybe you're using some of the third party logistics like the Deliver Network or something. Product is you got it, and it's sitting out there in a warehouse somewhere charging you by the square foot. I didn't see as much of that with retail media in particular because those are the brands that tend to be endemic to a store. So they have some kind of store relationship usually.
Chris Johnson (21:56):
So one of the examples is we had a brand, this is more recent we're talking to them where in 2020 they sold through their bestseller. They were a dog product and kind of focused in the pet space. One of their bestsellers was kind of... It's like a chew toy kind of thing. So, they pivoted to another product and that product sold like pockets. It was amazing mainly because they didn't have their bestseller though. So the question comes, what do we buy next? Is this just because we didn't have our bestseller or is this the product we should continue to focus on?
Kirk Williams (22:29):
Now, before we move off of the supply chain, I want to spend a little time talking about your favorite topic in mind, shipping containers. Shipping containers, shipping containers. Back in the old days, like early 2020, it costs around $1,500 to send a shipping container from China to the West Coast of the US. Now it costs roughly 10 to $14,000 on average per container that remember only two years ago used to be $1,500 for the same journey. It's been hovering at that level for about eight months now. And those can even spike as high as $25,000 per container.
Mike Beckham (23:03):
Shipping rates on containers go from... It might have cost us four or $5,000 to ship something from China to our 3PL. Now it's $25,000. I mean, we've seen literally 5, 6, 7X kind of increases.
Kirk Williams (23:18):
Yeah, you heard that correctly. It costs businesses five to seven times more just to ship the stupid thing from China on average. Okay, why? As I invest this two likely culprits rose to the top as the primary reasons as to why shipping container costs are as high as they are. Now, I'll note from the start, I don't have a strong opinion or insight as to which reason is correct. And a lot of that is just, I'm not able to see all of the details and all of the different things of what's happening other than I'll note that I've been kicked around in life enough to know that there are usually multiple things at play when something happens. So, I have a suspicion it's both of these, but let's start with the first one.
Kirk Williams (24:02):
The first reason given is that there's some sort of forced increase in pricing by the shipping companies primarily to make a profit. Think like price fixing at an international level. Now, in fact, while I was prepping for this session, the White House released a statement that they would be focused specifically on this. We're about to read a White House press release. So, to help with the boringness, I thought I'd make things a little more interesting by having two of my kids read this.
Speaker 7 (24:31):
Most traded goods, everything from the housewares you buy online to the agricultural products, American farmers market overseas are transported by ocean freight companies. These companies have formed global alliances. Groups of ocean carrier companies that work together that now control 80% of global container ship capacity and control 95% of the critical east-west trade lines. This consolidation happened rapidly over the last decade. From 1996 to 2011, the leading three alliances operated only about 30% of the global container shipping. Scientific consolidation... Significant consolidation occurred in the years running up to the pandemic.
Kirk Williams (25:24):
So, overall, basically the White House is saying, "Look, global container ship companies used to control around 30%, and now, especially these global alliances control around 80% of global container ship capacity." Okay, they go on here.
Speaker 8 (25:41):
Meanwhile, the ocean carrier companies are experiencing elevated profits and soaring fit margins. Estimates suggests that the container shipping industry made a record $190 billion in profits in 2021, a sevenfold increase from the previous year and five times what it made over the entire period from 2010 to 2020. Profit margins have increased by even larger amounts. In the third quarter of 2021, the average operating margin of the major carriers was about 56% compared to an average operating margin of 3.7% two years earlier.
Kirk Williams (26:22):
I don't have all of the details and all the data and stats in front of me that the White House is getting from there. I'll let you read the whole release if you want, and you can find it in our show notes, but it's not simply that the White House is concerned here that gross revenue has increased because we would expect that in the pandemic growth, right? What they're suggesting is that profit margins, the percentage have increased as well, and that's part of what they're concerned about.
Kirk Williams (26:47):
Okay, what's the other side? Well, in their article on the shipping container shortage, supply forwarder, Hillebrand weaves a tail of woo around the rising prices of containers that echoes the compounding interest frustration of shipping complexity at this time that we discussed already. First, pandemic lockdowns and factory closures reduce the number of vessels actually at sea. Okay, remember nobody's shipping anything. So ships aren't out there braving the high seas and typhoons and pirates and fuel costs and sunburns just to not have any stock in there. So, the ships are all at port. This in turn caused a pile up of empty containers in North America. North America, well, sure. Once we use the containers, we need to send them back to China to be filled again, but nobody's coming our way to drop new stuff off, remember? So nobody's there to take back these empties and they begin to pile up.
Kirk Williams (27:39):
Okay. So then China recovered before north America and they begin exporting again. Darn it. Lots of catching up to do on backlog of orders. Let's get to it. Let's roll. Well, not so fast. Now, North American and other nations begin going through their own waves of lockdowns and closures. Remember March 11th? We discussed that already. So now you have more containers coming to the US and not being unloaded quickly. And while that's happening, workforce to disruptions contributed to continued continental container accumulation. In other words, lots of containers just sat around in various places across North America never making it to the ports in order to then be taken back.
Kirk Williams (28:17):
So, let's pause to consider the math here. More containers keep coming. Not enough containers keep leaving. The article notes that at the of publication, 60 out of every 100 empty containers in the US were not being exported. Now, what happened next will shock you or not if you have a basic understanding of microeconomics. Shipping containers became harder to come by due to the above reasons so costs rose. Rising shipping container costs made ship captains, or at least their corporate lords more hesitant to remain at port to wait for loads of empty containers to return. Remember all those containers spread out across North America, making their way back to the coast? The ships didn't want to wait around. So they would leave the west coast of the US without those empties heading back then to China to get full loads to return because it was so profitable to the, to bring those full loads back and the cycle just continually repeated itself, building and compounding on itself.
Kirk Williams (29:14):
A savvy person might ask, "Huh? Why don't we just make new containers?" This is a good idea, but the funny thing is up until this point, shipping containers were a commodity. I mean, think about it. People are making homes out of the things because they're so plentiful. This has actually led to a drawback on container manufacturing and process leading up to 2020. So an influx of new containers hasn't been happening by any production to offset the empties waiting around in the US to be shipped back so they could be used again. What a mess.
Kirk Williams (29:45):
So, is it possible both of these things are at play? Well, like I noted before, that's my suspicion. There probably are likely difficult things that are forcing a rise in container prices at some point. But the flip side is there may be some concern and enough for the White House to involve the Department of Justice and the Federal Maritime Commission. There may be some concern that profiteering is occurring as well based on monopoly. So, regardless, container prices are still sky high. It's not back to normal yet, and it may not be for a while. So whatever the reason, this is the difficult reality for e-commerce and retail at this time.
Mike Beckham (30:25):
To me the biggest question is that I can't really anticipate is at some point when we do get that slow down and that normalization, what is the new normal and how does that work?
Kirk Williams (30:40):
Okay. So, how are different businesses approaching these problems? Well, some retailers with the cash are just buying their own cargo ships. It must be nice, huh? It's like Bruce Wayne. He gets into trouble into in the restaurant so he just buys the restaurant. By the way, Christian Bale will always be the best Batman. Others like IKEA are adjusting their product offering so as to maximize more expensive, but less in dimensional space. I mean, if anyone can solve that problem, it's IKEA. Am I right? Other SMP e-commerce people are just hanging on for dear life.
Chris Johnson (31:10):
One of the brands that had a good thread that will come kind of in this is a brand called BORN PRIMITIVE. It's one of the brands we love working with. They're in a CrossFit athletic space really focused on sports bras, but have expanded. They're one of our earliest clients. They did a thing called Back the Gyms because think the gyms closed down. So, early on a lot of CrossFit gyms were not open, and they were really hurting. And so, part of this was a question that came up of how do we help our brands beyond just ad spend? How do we think about moments and creating moments? And that was one that came out of it of how having BORN PRIMITIVE think about how do we take our sales and the momentum we're seeing in our category that's not really hurting. It's actually going up and support the industry that we're in that we need to be... It needs to survive for our brand to be able to thrive. And so, backing the gyms, taking a portion of sales and then giving them back into the CrossFit ecosystem became a massive moment for them. And they invented almost a new space in what should be a down moment for their brand. It was the kind of fuel that pushed them in 2020.
Kirk Williams (32:15):
Okay. Let's pause for a moment and zoom out. Why is all this manufacturing taking place over in China and not the US anyway? Why not just bring that over here?
Sean McGinnis (32:24):
The capability to make sneakers is all overseas in Asia. It's primarily in China and has been primarily in China for years and years and years. And there's definitely other places you can go get them made in terms of Vietnam or Indonesia a few other places, but it's all over there. All the chemicals, all the fabrics, all the performance materials, all that needs to come over here anyway. And so, now you're just shifting the supply chain demands to the front end of the system.
Kirk Williams (32:55):
In other words, the supply chain is a tricky complex organism that is easily breakable because it is so efficient.
Mike Beckham (33:01):
If you look at what has caused a lot of the outsourcing to the east of manufacturing, a lot of it is a product of two things. That number one, it's been cheap to move things around the world. And right now it's just not. It's not inexpensive to move things around the world, and maybe it gets inexpensive again, but at least right now, that's not the world we live in. And if tariffs stay high, then it'll always be expensive.
Mike Beckham (33:28):
The second piece of that is that most things that were made had a really high labor component and labor was cheapest in the east. So you have a high labor component you moved to or where labor is cheap and it's cheap to move things around and it works. As China develops, people are making more and they're no longer a low cost of labor and there will always be some country that's the low cost of labor. But I think my higher argument is just that labor is going to make up a smaller and smaller slice of the pie of cost of making things in the future.
Mike Beckham (34:04):
What will naturally happen is that things are going to be made closer and closer to where the people who buy them live. There's two main reasons for this. I mean, one is obviously it costs money to move things around and you've got political things like tariffs, but then the other dynamic is this inventory piece that when I have to move my product around, I have to carry more of my product and I have to put more of my capital as a business into product that's literally not doing anything. It's just there so that I don't run out when there's a lot better uses for that. I can give that to employees. They can go out and generate sales. I can put that into machines that can make product and whatever. So, in general, we are living in our lifetime this will be a major theme. I'm convinced of this is that the transition of where things are made closer and closer to demand centers.
Kirk Williams (34:58):
Okay. So, let's bring it home. The past two years have been traumatic for businesses. E-commerce grew like never before, but not without its own difficulties. And while we don't want to discourage optimism, it's pretty clear those difficulties aren't going away anytime soon. At the time of finalizing this draft after we had interviewed our guests, Russia invaded Ukraine. Both countries being significant contributors to the world air cargo market and a cyber attack hit a massive logistics and freight forwarding service, Expediters International. In fact, over the time of even editing this episode, oil prices have began to skyrocket because of the sanctions on Russia. And the next wave of supply chain difficulties is becoming pretty clear with sky high fuel prices. It's just not getting any easier.
Mike Beckham (35:46):
The other piece of the supply chain complexity that you really can't understand as viscerally, if you haven't actually run an inventory business is so much of your capital when you run an inventory business is in your inventory. Like for us, at this scale for us to sell 11 million units this year, we might need to have somewhere between $20 million and $30 million in inventory at any given point in time, which is obviously a material number. Well, we went from feeling like, "Hey, you've got to have five months or four and a half months of inventory in the supply chain." To we might need nine months in the supply chain because things are just taking so long.
Mike Beckham (36:30):
So, it's pretty easy to understand how that plays out. Like for a brand our size, that could literally mean you've got to get another $20 million into inventory or $25 million, and just take that, and there's brands way bigger than us. You can kind of extrapolate it out that the fact that things were taking so long and were so unpredictable, it has caused brands to have to put so much more of their available capital into their inventory just to try and stay in stock.
Mike Beckham (37:02):
And if you look at GDP and what GDP's doing over, especially recently, a lot of the GDP growth is just inventory growth and that's not necessarily sustainable. So, anyway, we'll see how that happens. So, yeah, so we get to maybe May or June, and I think with everybody else it's like, "Oh gosh, we've got to catch up. We've got to be building." And I think by the time you get to July, August, September, everybody starts to kind of clue in on, we're going to have a real problem here. Everybody kind of hit the exits at once, and everybody tried to come back in at once and we've got this massive bottleneck and we've been dealing with it really ever since. So I guess we're a year and a half in and we're still dealing with it.
Elizabeth Marsten (37:43):
Do I see that we're still going to have the exact same problems with shipping and FedEx and UPS and everything? Oh, yeah. I don't think those problems went really away, and I don't think we really came up with a good solution other than to hire more people.
Kirk Williams (37:57):
The supply chain hits to e-commerce keep building up. So, having your ducks in a row in regards to your product supply is I think even more important than ever before.
Chris Johnson (38:06):
You have as well like the margins in terms of the general cost of the actual product being made, the cost of deliveries going up not down. So that decision of do I invest on this category moving forward is a massive decision. Before it would be like, "Let's just hedge our bets. Let's do both." They don't have that option. They need to choose which one they think they're going to scale. Buy too little they're going to miss out on opportunity, and there's not enough time to get it back here to sell more. Buy too much, you're sitting with that inventory, and it really constrains the cash flow for all the other things you want to do this year. So, it becomes really, really complicated.
Kirk Williams (38:44):
Consider this, brand may matter less in the coming days than stock. After all, it's hard to be loyal when you can't even get the products you want delivered. So, in my opinion, the brand who focuses on solving their supply chain difficulties right now just may find themselves leaping forward in this era in the area of loyalty.
Sean McGinnis (39:02):
Yeah, the team has heard me say 1,000 times and they're probably sick of saying e-commerce does not have to be hard. We've invented this world and this ecosystem, and this thought game where we just, oh my gosh, we've got to think of this and this and this and this. It's like, man, it just doesn't have to be complicated. It's not rocket science.
Kirk Williams (39:22):
So I hope this episode has given you a better understanding of the challenges faced by e-commerce over the last two years. And perhaps even some ways to strengthen your own business moving forward. E-commerce isn't going anywhere and it's worth pointing out neither is retail. For now, I'm Kirk Williams, and may the options be ever in your favor.
Speaker 9 (39:41):
Chris Reeves (39:59):
This podcast was recorded in the ZATOWorks Publishing studio in Billings, Montana. ZATOWorks Publishing is a subsidiary of ZATO, a paid search agency focused on e-commerce brands owned by Kirk Williams. We look forward to seeing you again next time.
Speaker 9 (40:49):