The Supply Side: Retail suppliers, manufacturers expect continued challenges in 2023

Retail suppliers expect many challenges from 2022 to persist well into 2023, with slower growth predictions that could lead to continued price inflation. Suppliers continue to face logistics disruptions despite a recent labor agreement to avert a railroad strike.

Donald Broughton, a transport analyst and consultant with St. Louis-based Broughton Capital, said the transports do not have the pricing power of recent years due to increased capacity, yet diesel prices remain elevated. He and other analysts predict shipping costs will continue to decline in 2023 with little hope of a turnaround until mid-2024.

Lower shipping costs can benefit retail suppliers, but overall inflation with ingredients, raw materials and rising labor and storage costs threaten to crimp profits further.

Tyson Foods, a major retail supplier of fresh and frozen meats, expects lower profits in 2023, despite taking some hefty price increases in 2022.

Stephens Inc. analyst Ben Bienvenu expects the Springdale company’s net income to fall 14% in fiscal 2023 from 2022. Tyson Foods CEO Donnie King has forecast record top-line revenue in 2023 but said challenges continue from the inflationary macroeconomic environment and persistent supply chain problems, particularly pronounced for pork products.

Snack giant Mondelez recently reported a declining gross profit margin due to higher raw material costs, increased transportation costs and weaker sales. CEO Dirk Van De Put said input costs for 2023 will be up as much as 7%. He said that while transportation costs are coming down, he cites energy costs in Europe and elsewhere that continue to escalate. He said consumers will see additional price increases for Oreos, candy and other snacks in 2023.

Mondelez and other companies with international operations also see the rise of the U.S. dollar undercutting the top-line revenue with an additional impact on net earnings into 2023.

RJW Logistics Group CEO Kevin Williamson described 2022 as an interesting year as many food and consumable companies ramped up production and decided to store more inventory than usual. RJW warehouses and hauls freight for roughly 500 consumer packaged goods companies. Based in Chicago, RJW has approximately 2,000 employees, adding 500 people and 1.8 million square feet of warehousing space in the past year.

Williamson said labor has not been tight in his market, and the company has been able to hire throughout 2022 with no real constraints.

Williamson said the market has now transformed into a just-in-case scenario. He said the product shortages from 2020 and 2021 surprised companies using a just-in-time inventory system. In some cases, he said cancellations from retailers and a decline in consumer spending hastened the inventory buildup.

“About 85% of our customers are CPG manufacturers, and they have been coming to us seeking more warehousing space as they need to hold inventory longer. The warehouse industry has very tight capacity at this time because so many are holding excess inventory, and that comes at a cost,” Williamson said.

Williamson said demand for freight and services has continued to soften in 2022, and he expects the trucking industry to see a rate-increasing power in late 2023 or early 2024. He said many CPG companies will need to reevaluate their inventory by item as some products are still selling well. He said things not moving will have to be discounted or discarded as suppliers must rightsize their overall inventory.

“We are in a freight recession at this time, and it will be with us for several more quarters until capacity tightens from more trucking bankruptcies and further truck and trailer rationalization,” he added.

Concerning CPG challenges, he expects competition for shelf space to be fierce in 2023 as retail buyers add more new products. He said suppliers that can provide good in-stocks for fast-selling items and replenish quickly would be the biggest winners in 2023. He said packaging costs might have hit the high mark this past summer as prices for shrink-wrap and corrugated paper products have eased in recent months.

Williamson said container costs have come down from Asia but remain elevated out of Europe. He said more suppliers seek nearshore production out of China into Mexico, and that will be an exciting trend to watch in 2023 and beyond.

Jack Murders, vice president and plant manager at toolmaker Marshalltown in Fayetteville, said he sees plenty of uncertainty.

Marshalltown sells tools into retail that serve the construction market. He said that, like the CPG companies, his inventory remains higher than usual for raw materials bought during the pandemic when there was a time of scarcity. He said the company could store 97% of the excess inventory in-house, and only a small portion is stored in rented space.

Murders said every manufacturer he knows is sitting on excess inventory of some sort, and those who can store it themselves have an advantage over those who must pay for warehousing. He said manufacturers deal with inbound and outbound freight, and those costs are still two times higher than they were pre-pandemic. He said they have come down, but they remain elevated above the norm, which will likely be the case for the next 18 months.

While Murders said he could hire hourly and salary workers without issue during 2021, the company has vendors not as fortunate in other markets.

“I know some of our suppliers have expressed issues with hiring that have persisted since the pandemic, and that continues to create supply chain disruptions,” Murders said.

He said there has been some demand softening in late 2022 relating to the slowdown in the housing industry but said the plant in Fayetteville is still running 24-hour shifts five days a week.

“We expect some [type of] recession in 2023 and a possible contraction in sales, but we think it will be short-lived as the housing shortage in this country remains. Our business saw a sharp contraction between the housing crisis of 2008 and 2013, and we are nowhere near that level of concern as we look into 2023,” Murder said.

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.