Small retailers and manufacturers, already crushed by large national brands during the pandemic, are being disproportionately walloped by delays, shortages and other supply chain disruptions ahead of the holidays. In many cases, they’re losing out to giants like Walmart and Amazon, which are spending millions to charter their own ships and planes to move merchandise. Independent shop owners, who have no such recourse, say they’re often the last in line for products because manufacturers prioritize larger, more lucrative contracts.
“The message in the toy business has always been: Walmart and Target first,” said Sean Maharaj, managing director at consulting firm AArete and a former supply chain analyst for Mattel. “As a toymaker, once you miss your opportunity with a large outlet or have an out-of-stock, you end up on their black list. That’s enough to sink your business.”
These challenges follow nearly two years of retrenchment for small retailers: Many were forced to shut down early in the pandemic, driving even more traffic to national chains. Walmart, Target, Costco and Amazon all reported record high sales and profits as Americans clamored for curbside pickup and free shipping. (Amazon’s founder, Jeff Bezos, owns The Washington Post.)
An estimated 800,000 small businesses closed permanently in the first year of the pandemic, roughly 30 percent more than is typical, according to a study by the Federal Reserve. More than three-quarters of small businesses tapped federal emergency assistance last year, according to the National Federation of Independent Businesses. But now, as those funds fade, owners say they’re having trouble keeping up.
For Mitchell, who owns Boing! Toy Shop in Boston, the challenges are twofold: She tends to buy from smaller manufacturers, which are having to compete with big-box stores for both raw materials and shipping containers; and once toys make it to the United States, her small store is often an afterthought. Only about half of her orders are being filled, she said.
“In general, I’m buying things in quantities of 12, 24, maybe 36,” she said. “But when I’m up against someone who’s ordering 3,600 toys — well, that’s going to be the priority.”
Even the country’s biggest toy companies are being impacted. Hasbro, which makes Monopoly, Play-Doh and Baby Alive, said supply chain disruptions delayed $100 million in orders during the most recent quarter. Its largest competitor, Mattel, said last month that rising freight prices were cutting into profits, and that it is “working closely with retail partners to meet consumer demand.”
At Lego, spokeswoman Jennifer MacDonald said the company is working “extremely hard” to keep up with strong demand. Most of its U.S. merchandise, she said, are manufactured in Monterrey, Mexico.
Mitchell says it’s become nearly impossible for small shops like hers to get those top brands. The largest toymakers have a $20,000 annual minimum, which is more inventory than she needs, so she buys items like Scrabble, Play-Doh and Pictionary from distributors that work with smaller quantities. But Mitchell says even they haven’t been able to secure product lately. It’s all crashing down just ahead of the crucial holiday season, which makes up more than 35 percent of her store’s annual sales.
“I will have things to sell,” she said. “But if a kid has their heart set on a particular item — and the holidays are a time when kids write fairly specific lists — I might not have it.”
The pandemic has reduced the global supply chain into a tangle of knots.
Smaller manufacturers contend they’re having a tougher time securing items like cotton, paper and LED lights than their larger counterparts. They also say short-staffed factories and months-long coronavirus-related shutdowns have led to a pileup of partial orders and cancellations just as they ramp up for the holidays.
“The factories are backed up and it’s a fight for capacity, with the bigger guys offering incentives and donations, saying ‘I’ll give you an extra $5 apiece to put my orders in front,’ ” said Kimberley Smith, chief supply chain officer for Everlane, an apparel company in San Francisco. “The norms are very different than they were six or 12 months ago.”
Even after finished products are set to sail, Smith said, they sometimes get knocked if another retailer is willing to pay more to transport their products from Asia to the United States. “Every step is a bidding war,” she said.
Holiday spending is expected to grow between 8.5 percent and 10.5 percent, according to the National Retail Federation, to as much as $859 billion. Economists say the bulk of that will flow into the nation’s largest retailers, which are better-stocked than they were last year. Best Buy has 55 percent more inventory than it did a year ago, while Target has 27 percent more, according to the companies’ most recent quarterly filings. Macy’s, Walmart and Home Depot are also reporting bigger stockpiles.
“Quite honestly, we’re in a really healthy strong position [with inventory] and are preparing ourselves very, very, very well for the holiday season,” Matt Bilunas, Best Buy’s chief financial officer, said in an August earnings call. “That clearly adds to our optimism.”
Holiday sales are crucial for chains like Best Buy, which prepare year-round for the frenzied rush between Black Friday and Christmas. This year, Walmart, Target, Home Depot and others are going a step further, hiring their own cargo ships to fast-track seasonal merchandise across the ocean. But that comes with a hefty price: Chartering a container ship costs as much as $129,000 a day for the largest vessels, according to German ship broker Harper Peterson & Co.
Even without their own ships, major chains like Walmart — which last year imported 900,000 containers of goods — have long-standing contracts that guarantee low prices for ocean freight, said Jason Miller, a supply chain and logistics professor at Michigan State University. That leaves smaller importers to compete with one another for “spot rates,” which have jumped from $4,000 per container to about $24,000 in the past year.
Smaller manufacturers and retailers, many of whom have so far absorbed those rising costs in hopes that the spike is temporary, say they’re starting to wonder whether it’s time to raise prices. But they fear mark ups will send customers elsewhere.
“There is no question: Smaller mom-and-pop retailers without much negotiating power are being most impacted in every way,” said Miller of Michigan State. “They’re paying the highest prices and having to wait the longest.”
In Amarillo, Texas, Hey Buddy Hey Pal, a small business that makes Easter egg and Christmas ornament decorating kits, is scrambling to fill orders. Only half of its holiday inventory has made it to the United States — which means big names like Walmart and Target are generally getting first dibs.
Hey Buddy Hey Pal co-founder Curtis McGill says his Amazon storefront, which generates about one-third of the company’s sales, will be largely empty this year because he’s prioritizing other retailers.
“We’ve been fortunate to have the success we’ve had, but once you start selling to the big boys, you have to guarantee a price months in advance,” he said. “And if you don’t get things in within a certain date? It’s canceled.”
McGill recently doubled line of credit to keep up with expenses. Shipping containers that cost $4,000 a year ago to transport goods from China to his Dallas warehouse are now being auctioned off for six times as much. His annual freight budget — originally $180,000 — could easily balloon to $1 million, he said.
Every part of the process has become costlier. McGill recently marked up wholesale prices by 25 percent, though he says he’s still shouldering most of the new expenses. And domestic carriers like FedEx and UPS are charging more to transport items from his warehouse to stores, which prompted two small retailers to recently cancel their orders altogether.
“This has really put a lot of small businesses in a pinch,” he said. “It could literally put some of us out of business.”
Out There Outfitters, an outdoor clothing and gear shop in Wayne, Pa., is still waiting to receive one-fourth of its holiday orders.
“A lot of our products have already been canceled and there are significant delays on others,” co-owner Sarah McDonald said. “My store is full — I’m not going to say it’s empty — but it’s taking a lot longer to manage my inventory and fill holes.”
Shoe companies and brands focused on sustainability and fair trade are reporting the longest delays, she said, leaving her with few hiking boots and organic cotton shirts. A drinkware order she placed in March 2020 just arrived.
“We’re at the whim of a broken supply chain,” she said. “I spend a lot of time looking for fill-in products, saying ‘Since I can’t get A, will C suffice?’ That’s a risk, too. I don’t know if C will suffice for my customer.”
Back in Boston, Mitchell has been stockpiling toys since this summer. She’s filled her store’s basement and backroom, as well as the basement of her house, in hopes there’s enough to see her through the store’s busy season. Like many retailers, she typically keeps an eye on early sales so she can reorder popular products in early November. But with shipping times stretching to three months, that’s not an option this year.
“We hoped things would get back to normal this year, but if anything they’ve gotten worse,” Mitchell said. “If some of these smaller manufacturers miss the holiday season, 2022 is when you’re going to start seeing people go out of business.”