Beauty won’t be spared by supply chain disruptions this holiday season, though there are some silver linings for big companies, experts say.
A months-in-the-making mixture of coronavirus-related shutdowns, unpredictable — and fatal — weather conditions, a dearth of shipping and transport capacities and a steep escalation in demand for goods have come to a head, resulting in a global supply chain that is utterly overwhelmed. The outcome is unprecedented congestion at North America’s largest ports and inventory shortages that experts say will drive up prices throughout the holiday season.
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“Demand for goods in general is up, and it’s problematic because the first three months of COVID-19, demand dropped,” said Ed Anderson, professor of information, risk and operations management at The University of Texas at Austin’s McCombs School of Business. “Ships to transport raw materials from Asia to the U.S. were scrapped, so we ended up with less of a transportation capability than we had prior to COVID-19. Now, we’re in this situation where items that are being produced in sufficient quantity are being delayed. Normal shipment times are assumed to be about six weeks across the Pacific. Now, they’re running about 10 to 12.”
There are 10 percent fewer truck drivers this year than last, Anderson estimated, citing high turnover within truck driving and a coronavirus-related lack of training new drivers in 2020. Simultaneously, the cost of ocean transport has “jumped by a factor of eight,” he said.
As a result, product prices are likely to rise about 20 percent this holiday season, according to Anderson. That is, however, assuming product will make it to retailers’ shelves in time.
Stephanie Wissink, analyst at Jefferies, told WWD via email that while most beauty products in the U.S. are produced in the U.S., packaging, containers and components are often sourced overseas and are “subject to cost increases and inventory fluctuations we are observing across the supply chain currently.”
Nick Benson, founder of Atelier, a company that aggregates supply and demand within beauty, said factors such as rolling blackouts in China have caused production delays that cannot be anticipated.
“Some factories are at a 15 percent capacity, some even less,” Benson said. “Glass factories, plastic factories and chemical factories are affected by that. We’ll contact the factory and they’ll be, like, ‘Sorry, we can’t send you a photo because we can’t get into our factory today. Maybe tomorrow.’”
Benson said while some factories are responding to power shortages by installing photovoltaic cells, which operate on solar power, the overall reliability of factories overseas is currently nebulous.
Still, beauty companies may be better positioned than others to respond to shipping and transport challenges because of their high-profit margin.
“Airfreight is in the cards for beauty,” Benson said. “You might have a margin sacrifice, but at the end of the day, you can still airfreight to a point.”
Anderson said beauty companies that “have brand power are going to be in better shape.”
“Products that will get some advantages are those that are sold by Walmart and Target,” he said. “[These retailers] have so much market power, they’re contracting their own ships out of Asia and shipping them to ports that aren’t clogged.
“The nice thing about beauty products is the volumes are relatively small, as far as space,” he said. “That gives you an advantage in being able to pay more money for space on cargo ships. Also, it gives you more money to be able to pay for trucks to do shipping in the U.S. It doesn’t help the ports, necessarily — although if you have enough of a margin and you’re buying enough products, you might be able to make special contract arrangements.”
Anderson predicts that transport issues will continue throughout 2022.
“You may be looking at 2023 before things settle down to something pre-COVID-19-like” he said.
Some beauty companies are turning to technology, such as augmented reality, to solve for challenges like travel restrictions. Laurent Mialhe, senior vice president, global brand supply chain, The Estée Lauder Cos., said via email that Lauder’s global supply chain and IT teams are able to perform “remote factory acceptance tests; help with onsite vendor installations while avoiding travel, and assist our commercialization teams check new product launches without physically being onsite through the use of AR.”
“Beyond the pandemic, it is a sustainable, agile way to move the business forward and partner with colleagues around the globe — especially during high consumer demand during the holiday season,” he said.
Large retailers and beauty corporations may have the resources to work around some supply chain disruptions, though small businesses will inevitably be disproportionately impacted.
Wissink of Jefferies noted the integral nature of small businesses to the beauty ecosystem. Emerging brands “lack scale to absorb elevated costs, labor inflation and the risk that gaps in sales put on working capital and cash flow needs,” posing a need for support from partners, including retailers.
“Given the importance of small brands to the pace of newness and innovation in the beauty category, we expect retailers to work closely to support these brands during this transitory period of risk,” Wissink said. “Ultimately, the beauty industry benefits when small brands flourish — they foster a degree of excitement that the industry relies upon to grow engagement and they provide for compelling future acquisitions for large multinational companies looking to augment organic growth.”
Generally speaking, Wissink said she has yet to observe “significant inventory disruption” within beauty, though she anticipates constraints “as consumers return to stores to shop for holiday gifts.”
Inflection points to watch throughout the holiday season include gift-giving and “return to socialization activities,” which spur spending on makeup, fragrance and hairstyling products, Wissink said.
“We will be closely monitoring availability of key gifting items, recognizing that the upsized volumes in the fourth quarter tend to be from gift-giving,” she said. “Typically by this point, we start to see inventory on selling floors that is a nod to holiday gifting. We will be keeping our eye on gift sets [and] how deep retailers buy into inventory to support gifting in beauty this year versus prior years.
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