The Supply Side: Retail supply chain braces for volatility amid Ukrainian conflict

by Kim Souza ([email protected]) 1,347 views 

According to Rabobank, a Dutch multinational banking and financial services company headquartered in Utrecht, Netherlands, Russia’s invasion of Ukraine is expected to create volatile supply chain implications for the retail supply chain.

Stephen Nicholson, a strategist at Rabobank, said during a March 1 press conference that the conflict has already produced uncertainty and higher prices in grain and oil markets. If the fighting continues, it will impact everything from food to cars.

Mondelez, Coca-Cola, Nestle, Coty, Kimberly Clark, PepsiCo and other retail suppliers have operations in Ukraine. The companies are seeing a direct impact on revenue. Oreo maker Mondelez said it paused plant operations in Ukraine. CEO Dirk Van de Pu said the safety of its workforce is the top concern. The international food company also provides humanitarian aid with rescue and shelter available at the border with Poland.

“We have big business in both countries,” Van de Pu said.

Mondelez has more than 4,300 employees in eastern Europe, and the company derives 3.5% of its sales from Russia and Ukraine, most of which revenue comes from chocolate sales in Russia. Mondelez said it also recently boosted its cybersecurity in the region to safeguard its information technology network against attacks. Van de Pu said the war might also be played out through computer viruses. He said the company is stockpiling ingredients so it can keep shelves stocked.

Nestle said it has temporarily closed factories, warehouses and supply chains into Ukraine, recommending that workers stay home.

“At this time, all our colleagues are safe, and we remain in constant contact with them and are doing everything we can to prioritize their safety, adapting our plans in line with the changing environment,” the company said Feb. 1. “We remain committed to continuing to serve the local people and have contingency plans in place to ensure we can restart the supply of our products as soon as safe conditions allow.”

Coca-Cola’s Swiss-based bottler, Coca-Cola HBC, said it gets about 21% of its volume from Russia and Ukraine. With brands like CoverGirl and Max Factor, the cosmetic company Coty receives about 3.1% of its annual revenue from Russia and Ukraine. Kimberly Clark, the maker of Scott toilet paper and Huggies diapers, garners about 3% of revenue from the region in conflict. PepsiCo said it gets 4.4% of its revenue from Russia and Ukraine, including about $3.4 billion in Russia in 2021. The company has 19 facilities in Russia, including potato and milk processing. Coca-Cola has also shuttered plants in Ukraine and asked employees to remain at home.

There are also concerns over the rising cost of freight in an already strained supply chain amid rising energy prices that are squeezing consumer budgets.

Soaring energy costs and supply chain disruption caused by COVID-19 have driven inflation to the highest levels in three decades. Economists with Wells Fargo Securities had hoped the cost-of-living squeeze would fade as pandemic restrictions were removed, but now Wells Fargo warns that the Russian invasion and western sanctions will add to inflationary pressures.

Jay Bryson, the chief economist at Wells Fargo Securities, said a $25 per barrel increase in crude oil prices would make U.S. GDP growth nearly flat this year, falling from an estimated 0.7% to 0.2%. He said if oil prices remain high, equity prices are also apt to decline by 20% this year which would erase some of the household wealth built up during 2020 and 2021.

Bryson said U.S. consumers have been resilient despite higher fuel prices and other core inflationary pressures, but he warns that the squeeze is likely to get worse before it improves.
Retailers from Apple to Walmart are also likely to feel higher supply chain costs resulting from the conflict. Shipping consultant firm FourKites recently noted that shipping rates could surge from $10,000 per 40-foot container to $30,000, while air freight rates could jump even higher.

FourKites notes that the shipping industry has not hit its peak season as companies are ramping up for summer volume. If the fighting continues, there will be a significant impact on the global retail supply chain by mid-summer. International shipper Maersk has temporarily suspended shipments to and from Russia and Ukraine. Three other large shippers also did the same, which is expected to impact 47% of global container shipping, according to FourKites.

While spot rates for container shipments had eased before the conflict began, across Europe, rates rose 16% following the invasion. Trade officials have said Russia accounts for just 1% of U.S. imports. China and Germany are large U.S. trading partners, and they have strong economic ties to Russia and Ukraine.

The International Monetary Fund’s World Economic Outlook pegged Russia as the world’s 11th-largest economy. The most significant areas of concern for manufacturers apart from rising oil prices are the production and export of industrial metals – primarily aluminum and palladium –which are used to produce U.S. finished goods.

Aluminum prices rose to a record-high $3,741 a ton. Russia accounts for about 6% of the world’s aluminum, used in everything from building cars, household appliances, packaging, computers, cellphones and containers for food and beverages.

Nickel prices rose 8% to an 8-year high following the invasion of Ukraine. Nickel is used to produce batteries, coins, cars, mobile phones and cutlery. According to the IMF, Russia accounts for about 7% of the world’s nickel mine supplies. Palladium prices are also rising as Russia accounts for 40% of global palladium output. Palladium is used in dental fillings, automotive and jewelry industries.

Wheat prices have soared to a 14-year high. Wheat futures rose more than 7% to $11.61 per bushel the first week of the conflict. According to the U.S. Department of Agriculture, Russia and Ukraine account for nearly 30% of the world’s wheat exports. Sunflower oil is also impacted as the countries at war account for 80% of the exports. Sunflower oil is used in cooking because it has a higher smoke level than olive oil.

Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.