INVERTO: Red Sea Crisis Forces Christmas Retail Rethink

The ongoing crisis in the Red Sea is forcing retailers to accelerate their stocking ahead of the busy Christmas trading period.

That’s according to INVERTO, the specialist supply chain management arm of Boston Consulting Group, which says businesses in the UK are among those having to ensure adequate stocking levels much earlier than usual. 

Already, the shipping industry has had to work hard throughout the traditional summer lull to move goods from China and other parts of Southeast Asia to the UK and Europe.

But retailers remain concerned that the traditional peak pre-Christmas shipping period could be disrupted as shippers attempt to mitigate Red Sea disruption.

“Supply chains still remain very brittle,” explains Patrick Lepperhoff, Principal at INVERTO.

“The prolonged impact of Red Sea disruptions is having knock-on effects across supply chains.

“Usually, the summer is a quiet time for shipping and warehousing. However, at present, the shipping industry is remarkably busy, as the complex process of getting shops stocked for the key Christmas period is moved forward by two months.

“This has put pressure on the retailers themselves as they take in more stock early, for which they may not have warehouse space. Instead, retailers will need to seek short-term storage back-up space, which can be very costly.”

Rate volatility adds to headache for retailers

While retailers would typically expect to receive goods for the Christmas period after September, demand this year has been high since July – putting pressure on suppliers to fulfil pre-agreed orders months in advance.

There is also a heightened sense of urgency among retailers given the volatility of shipping rates.

Houthi attacks on cargo vessels over the past 10 months have led to a a massive increase in shipping costs, with the Drewry World Container Index (WCI) up 270% since the start of the wider Middle East crisis from US$1,389.5 (Oct 5 2023) to US$5,182 (Aug 29 2024).

Further spikes could occur, with INVERTO analysts predicting that demand for shipping will remain high until at least February 2025 (following Chinese New Year).

Potential labour disputes on both the US East and US Gulf coasts could further disrupt supply chains and increase cargo rates.

Patrick adds: “Whilst freight rates have eased back a little in the last couple of weeks, firms can’t wait for further easing. They have little option other than to speed up the production and shipment of their goods. Doing so requires strong relationships with suppliers and carriers.”

How firms should respond to rate spikes

One way INVERTO recommends firms navigate these difficult shipping conditions is to engage in block-space agreements, where retailers and carriers negotiate a price for a future fixed volume/weight of cargo. 

This can help them secure some certainty over cost and guarantee shipping capacity, effectively hedging their price.

Patrick notes that block-space agreements could lead to savings on the current spot rate on routes from Asia to Northern Europe, with the potential of even more pronounced savings on transatlantic routes.

“Many retailers have responded to these shipping challenges by entering into block-space agreements,” he continues.

“Christmas is a crucial trading period for retailers, so it’s essential to have certainty on available stock and upfront costs.”

INVERTO’s other recommendations for retailers include:

• Establish a logistics taskforce to optimise costs by monitoring freight rates and lead times
• Implement AI solutions to determine optimal shipping routes based on real-time conditions and rate fluctuations
• Evaluate relationships between suppliers and procurement, with a view to exploring options for nearshoring so supply chains are more resilient to future supply chain risks

As tension in the Middle East looks set to continue, it’s high time for retailers to put in place longer-term plans to protect their fragile supply chains from disruption. 

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