Jason Miller, Eli Broad Professor in Supply Chain Management at Michigan State University’s Broad College of Business, explains why small retailers are being squeezed this holiday season.
Jeffrey Snyder, Broadcast Retirement Network
Well, Dr. Miller, it’s great to see you. Thanks for popping by the program this morning.
Jason Miller, PhD., Michigan State University
Hey, thanks for having me.
Jeffrey Snyder, Broadcast Retirement Network
You know, holiday season’s coming up and I know that the targets, the Walmarts, I think they’re gonna be okay in terms of meeting their objectives financially. I’m more focused on smaller businesses. I guess before we kind of get into the supply chain and some of the challenges, how in general are smaller retailers doing?
Are they doing okay or is this a make or break season for them?
Jason Miller, PhD., Michigan State University
You know, the general data is suggesting they’re doing okay, but they’re certainly facing some headwinds, especially in the form of higher costs that they’re incurring. A lot of that’s due to higher transportation prices, not only to import goods, but also for domestic transportation and also higher product costs given just the general inflationary environment that we’re in.
Jeffrey Snyder, Broadcast Retirement Network
So we had a hot inflation number recently within this week, I think. You know, it’s a backward looking indicator, right? I mean, there’s no forward looking indicator other than maybe gas prices.
But when you look at the holiday season, you mentioned that there are some headwinds or challenges. One of them I believe may be shipping costs for what you mentioned, higher fuel costs, et cetera. How is that impacting retailers and will they pass that on to consumers like me and you?
Jason Miller, PhD., Michigan State University
Yeah, so what you can assume right now is a small importer that’s bringing goods in for the holiday season, they’re paying about two and a half to three times what they were paying to ship a container or product from Asia to the US. So they’re facing decisions on, do we pass some of that higher transportation bill onto our customers or not? You’re also paying about 40 to 50% more for the domestic truck transportation to get your goods to the final destination.
And so what’ll happen in many instances is retailers will partially absorb that higher transportation bill and they may pass a small share of that onto the consumer because they’re very worried that if I raise my price too much, I lose the entire sale versus losing just a little bit of profitability. And so that’s a decision they’re facing all over right now. Also, there’s been uncertainty about what would tariff rates be that then affects how much you bring in, where you source from.
And so there has been a lot of uncertainty, but the general, I’d say consensus is that imports for this holiday season are actually stronger than they were for last holiday season when we were facing much higher uncertainty about tariff rates.
Jeffrey Snyder, Broadcast Retirement Network
Given everything that’s gone on in terms of prices and grocery prices, et cetera, pardon me, do you think that consumers are a little bit more flexible and understanding when it comes to that? I mean, you always hear about supporting your smaller retailers, your smaller businesses in the community. Does that still stand or will that still stand even with maybe passing along some of these expenses?
I would have to think that consumers are gonna be understanding. I mean, they work, they produce, they do things, but so they have to be understanding, don’t they?
Jason Miller, PhD., Michigan State University
They are, but only to a limited degree. I know some research that the state of Michigan sponsored kind of focused on actually this question about sourcing locally versus from overseas. And really the numbers started to come down to once you got beyond five or 10% more, people started becoming very leery of that higher cost alternative.
So small businesses will be facing that challenge, but in general, for a lot of holiday items, it’s selection, it’s quality that may play a little bit more of that ultimate consumer purchasing decision. But with the recognition that financially for the average American this year, the budget’s a little tighter than what it was last year at this time due to higher energy prices and the fact that essentially inflation has been outpacing average wage growth.
Jeffrey Snyder, Broadcast Retirement Network
So would you anticipate just given the challenges that small business owners are facing, smaller retailers, does that give an advantage to the larger box stores, the Walmarts, the Targets? Are they actually set up to do better at the expense, pun intended, of these smaller retailers?
Jason Miller, PhD., Michigan State University
You know, anytime there’s some type of shock, be it energy, be it higher transportation, larger firms are better positioned to deal with it. They have more resources in order to absorb these higher costs. They can buy in greater quantities.
And so as an example, Walmart is not paying eight to $10,000 to bring a 40-foot container from Asia to the United States. They’re on a longer-term contract price that may be around $3,500. But that small importer, they are paying the 10,000.
And so if they’re selling a similar type of good, they’re facing a decision of either, again, accepting lower profit margin, which then means maybe I can’t hire as many workers, maybe I can’t spend as much on advertising, maybe I have to import a narrower assortment. And so any type of shock like this is always harder for the small businesses to essentially respond to compared to their large rivals.
Jeffrey Snyder, Broadcast Retirement Network
So what’s the, you know, forgive me, I’m coming at this as a layperson, but what’s the economic impact to communities, these smaller businesses, if they can’t generate the revenue or if they have to give up some of the profit as you’re suggesting, you know, 5%, 10%, whatever the number is, what’s the impact to hiring? You know, this is a time of year where people get hired to support greater sales. And small businesses, from what I’ve read, and I know this firsthand as a small business owner, you know, they have pressures.
I mean, small business owners are doing more with less. So they need to hire people.
Jason Miller, PhD., Michigan State University
Yeah, so the challenge is, is when you have, you know, these decisions to, okay, we’ll absorb some of this higher transportation cost as an example. That means there’s less money for marketing. So your local marketing companies now aren’t as busy.
Or that means, you know, every, you know, once a month you order food in for the office, you know, and like the last Friday of the month and have, you know, kind of an office lunch that’s the company’s treat. You stop doing that this year. Well, that means there’s less business for the local restaurants.
And so one of the challenges is, is local businesses tend to, you know, buy services and source from a very sort of local environment. And so you start losing that multiplier effect compared to a larger national chain where things are more centralized. The sourcing may not be quite as local to the same degree.
And so you start to lose that multiplier effect.
Jeffrey Snyder, Broadcast Retirement Network
And thanks for that explanation. I actually understood that. So that’s, I’m sure the audience did as well.
They’re a lot smarter than I am. But, you know, I have seen here in Charlotte, gas prices have come down. I would think that diesel prices will start to follow through as well.
Will those reductions be in time for the holiday season or are we really looking for lower prices maybe into 20, assuming things continue to trend? And I’m not asking you, I’m not trying to put you on the spot so that you’re prognosticating, but would you anticipate that there’s a lag between some of these lower prices to actually what you see on the shelves and what you see in the store?
Jason Miller, PhD., Michigan State University
So typically what we’ll see is, you know, so on energy prices, we always have a statement, you know, essentially prices go upright like a rock and come down like a feather. And so depending on the trajectory, you know, we just got gas below $4 a gallon nationally for the first time since I believe July as of just a couple of days ago. And so we’ve been making some progress there, but what will often happen, and we’ll see this with a product like lubricating oils as an example for the car folks out there, is when the price of making those lubricants, when this thing called base oil goes up as much as it has, the lubricant producers like, you know, Shell as an example, they have to raise their selling price because their costs go up, but they actually don’t raise it anywhere near proportionally. And what’ll happen then is once the price of that input comes down, what they do is they just basically start holding their prices constant. And so as that price comes down of their input, their margin gets back to where they want it.
And so my general sense is that even once this energy shock, you know, if it gets itself resolved, you’re not gonna suddenly see a deflationary environment because instead in a lot of cases, as an example, these retailers that may have been absorbing a lot of these higher transportation costs, they’re now gonna keep their prices where they’re at to try to make up for some of that loss margin.
Jeffrey Snyder, Broadcast Retirement Network
That certainly makes sense. Is there anything that consumer could do other than be judicious with their dollar to get the best deal? Obviously they can go out to the Amazons and Walmarts of the world, but as you said, you know, holiday gift selection is actually really personal and people are looking for higher quality.
Is there anything we can do as consumers that maybe is to our betterment, but also doesn’t negatively impact the smaller retailers?
Jason Miller, PhD., Michigan State University
So what I’d say is this year, one thing you’re going to want to be really careful of is reading, especially if you’re shopping online, are you gonna get free delivery or not? We’re likely to see many smaller merchants are not gonna be able to offer that given the fuel surcharges that UPS, FedEx and the post office have had to apply because of higher energy prices. You also may be in a situation where the minimum order quantity, it’s now no longer buy 50, get free shipping and maybe buy 75 or buy a hundred.
So that’s just gonna be one thing to monitor very closely this year is going to be that. In that regard, almost the irony is going out to the store. You know, one of the things we always teach is when energy prices go up, you actually tend to push inventory closer to the customer to economize on transportation costs.
And so that may be a situation this year where it actually makes a little bit more sense to go out to the stores as well. The other thing that this year differs certainly compared to two years ago is you’re very low cost, buy from Shen, buy from Timu, have it sent from China to the US, that’s no longer there. And the same manner that it was because the de minimis exemption that essentially precluded those goods from being subject to tariffs, that no longer applies.
So that’s the other thing as well is shopping this holiday season, be very careful if you’re ordering something where it is going to be coming from overseas because you should expect essentially a tariff bill attached to that.
Jeffrey Snyder, Broadcast Retirement Network
So do you think there’ll be more gift cards as opposed to buying goods? You know, let someone, how do I say this? Let someone buy something that they want based on, a gift card is essentially just the cost of the card.
You can send it electronically. There’s no shipping involved unless you actually get the fiscal card. But do you think more people will do that in a way to reward somebody with a gift, but in some way actually pass off, let them pick what they want and let them pick how they wanna receive it?
Jason Miller, PhD., Michigan State University
I think you could see a little bit of that. And I think the other thing there as well is if somebody wants to be able to allocate that to buying essentials, you know, you typically aren’t gonna be handing somebody for Christmas, pasta sauce or peanut butter or things like that. But the gift card gives that flexibility in order to do that.
So that would not surprise me. That then creates actually an interesting logistics challenge for the retailers because they now have to anticipate, if that were to come to pass, that would suggest a little bit more sales in January than what you’re normally used to.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, and you know, gift card. And not that I’m, I would take a gift card. Mom, dad, my brother, my wife, I’ll take a gift card, but you know, it’s a little impersonal.
You know, I like someone to pick something for me personally. Dr. Miller, we’re gonna have to leave it there. Excellent conversation.
Thanks so much for joining us. And we look forward to having you back on the program again very soon, sir.
Jason Miller, PhD., Michigan State University
Thanks for having me.
