How a Cooling Housing Market Affects Retailers
Lowe’s CEO Marvin Ellison had a lot to say about the housing market coming off red-hot levels during the company’s recent earnings call.
The market dynamics that pressure the home builder are not necessarily the same market dynamics that pressure the home improvement retailer. At Lowe's, the three highest correlating factors of home improvement demand are home price appreciation, the age of the housing stock and disposable personal income. While housing turnover is important, it does not index at the same rate as home price appreciation, housing age and disposable personal income. And while housing turnover has slowed, home prices and home equity remains at record highs, which gives customers confidence that they will get a return on the investment that they make in their homes.
In addition, homes keep getting older. More than half of the homes in the US are over 40 years old and millions more built at the peak of the housing boom in the early 2000s are now starting to turn 20 years old, which is a key inflection point for big ticket repairs.
In terms of disposable personal income, household wealth is still at an all-time high. Consumer savings are roughly $2.6 trillion higher than they were pre-pandemic. And 75% of that excess savings is concentrated in middle-income and high-income households who are more likely to be homeowners, which highlights another key benefit of the industry: the core customer is the homeowner.
In addition to having significantly more disposable income, most homeowners are benefiting from lower fixed mortgage rates. As low housing supply and high interest rates make moving less desirable, homeowners are motivated to invest in their current homes to fit their needs. This is one of the key reasons that home improvement can win in markets when housing turnover is strong and also when it slows, as was evident in the mid-1990s when home improvement spend grew despite rising interest rates and a slowdown in housing turnover.
Amazon Out to Control the Supply Chain
The pandemic caused the price of shipping containers of merchandise to soar. One company that was being quoted prices of $25,000 or more to haul a shipping container of products from factories in China to its shoppers in the United States was quoted $30,000 for a shipment that typically costs about $3,000. Amazon heard about their dilemma (maybe Alexa was eavesdropping) and stepped in and offered to piggyback product on Amazon’s container ships for a much lower fee.
Amazon's ocean freight service is not new, but it became more relevant as global shipping went haywire this year. Amazon has also added new options to what is still a relatively small service that's available to few merchants. It's a good example of Amazon’s growing network of warehouses, package hubs, trucks, airplanes and delivery vans that demonstrates Amazon is trying to own the product cycle from factory to homes.
Amazon has the money and the heft to arm-twist ocean cargo companies so their merchants can send their products at an affordable price. The ocean freight service is one of many options that Amazon offers the millions of merchants that sell products to Amazon shoppers. For added fees, they can store their inventory in Amazon warehouses, ship their products through the Amazon delivery network and pay Amazon for more prominent online displays.
This rapidly expanding Amazon logistics machine is a superpower for the company, and figuring out transport from Asian factories is a logical next step. Amazon-watchers are wondering if they might operate their own US commercial port or ocean shipping fleet. Amazon declined to comment.
Shipping Grinch May Steal Christmas
Amazon will charge an additional fee to certain sellers during the upcoming holiday season to offset rising costs of labor and logistics. A fee of 35 cents per item will be charged on goods sold via Amazon's warehouse and logistics network in the United States and Canada from Oct. 15 through Jan. 14.
The US Postal Service will add surcharges to packages shipped between Oct. 3 and Dec. 26 to help offset higher shipping costs. Expect to pay anywhere from an extra 25¢ to $5, depending on the size of the package and the distance it needs to travel. The extra charges will apply to both individuals and corporations. The USPS rolled out surcharges last year for commercial customers.
FedEx has already announced what amounts to about a 10% surcharge on most classes of shipping for the holidays. UPS introduced a zip code based surcharge of 9% to 11% that went into effect earlier in the year and is expected to impose holiday surcharges as well. Both companies state that they have to hire more drivers and have more overtime hours during the holidays in order to meet customer expectations.
Shipping Supply Chain Still Clogged
Walmart said during their earnings call that they had canceled billions of dollars in orders to help align inventory levels with expected demand. Target disclosed that they had canceled over $1.5 billion in orders, and revealed that they had shipped in much of its back-to-school goods early. Nevertheless, US import activity keeps chugging along near all-time highs.
Despite rapid unprecedented throughput at US terminals there are still more than 130 container vessels waiting off North American ports. According to newly released numbers from Descartes, US imports totaled 2.53 million twenty-foot equivalent units (TEUs) in July. That’s up 3% year over year and 15% from July 2019 prior to the pandemic; it was the fifth-highest monthly volume ever recorded by Descartes.
US imports from China rebounded in July and were up 6.9%from June and 6.3% from July 2021. The McCown Report analyzes overall volumes at the top 10 US ports and found that July imports were up 0.7% year over year. Imports at the leading East Coast and Gulf Coast ports rose 6.6% and imports at West Coast ports fell 4.9%.
With consumption levels and imports still well above pre-CV19 levels, the U.S. port system is pushing its maximum throughput; monthly import volumes might be near capacity. Descartes says that as long as monthly US container import volumes are above 2.4 million TEUs, port congestion will continue until infrastructure changes are made.
Shipping analysts say that new container terminals and even entirely new container ports will be needed to efficiently handle container volume over the ensuing decade, which will require significant infrastructure investment. Without these steps, disruption will become the norm as volume grows over time.
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