Logistics challenges placing renewed pressure on the retail sector

Logistics challenges placing renewed pressure on the retail sector

The COVID-19 pandemic and Brexit have once again underlined the importance of the logistics sector as a critical, if often overlooked, aspect of the UK’s national economic infrastructure – supporting retailers to get their goods onto shelves and to consumers’ front doors.

In our previous feature, we looked at some of the wider structural changes that have been accelerated by the COVID-19 pandemic.  Yet recent reports of driver shortages is providing a significant, and perhaps more immediate, headache for retailers seeking a much needed post-lockdown boost. Managing supply chain issues and costs over the summer period is going to be critical as the economy seeks to fully reopen.

 

Finding the staff

Many logistics operators are experiencing serious challenges in getting hold of sufficient qualified drivers.

In 2019, labour shortages within the sector were already looming large. At that time, nearly half of the 300,000 HGV drivers in the UK were aged over 50, with much of the slack having been picked up by non-UK nationals predominantly from the EU.

Even so, the sector was still considered to have a shortfall of around 50,000 drivers causing wage inflation and difficulties retaining experienced labour.

With the number of newly-qualified drivers remaining well below the replacement level for several years and Brexit likely to discourage future EU migration in the same volumes, many of the indicators of a major industry-wide problem were already prevalent.

Fast forward two years and, notwithstanding the unforeseen pandemic, many of the issues anticipated then have come to pass - more rapidly and dramatically than anyone could have been envisaged.

The Road Haulage Association currently estimates that the shortfall of drivers has doubled to around 100,000. This has been driven by a combination of qualified EU nationals returning home, changes to rules around IR35 taxation and the cancellation of thousands of HGV driver tests as a result of COVID-19 restrictions.

With insufficient drivers to go round, wage inflation within the logistics sector has already been rampant. Andy Haldane, chief economist at the Bank of England, recently cited anecdotal evidence suggesting wages in the sector are up 20% year-on-year. The cost and operational pressure felt across the sector is unequal as larger players with deeper pockets outbid smaller operators with less financial muscle.

 

The impact on retailers

The operational challenge of finding drivers is unlikely to be one that can be resolved overnight. The Road Haulage Association has created a twelve-point plan to help the logistics sector recover, from the creation of a Seasonal Visa Scheme for non-UK qualified drivers (something which has been recently suggested is under active government discussion) through to adjusting resource for apprenticeship programmes to build a sustainable supply of newly-qualified drivers. However even if implemented immediately, the impact of these changes may take months or years to have any meaningful impact on the driver deficit.

For retailers, the impact is being felt right across the sector. Even the major supermarkets are not immune from  challenges of getting stock to stores in a timely manner. In June 2021, Tesco reported to ministers that nearly 50 tonnes of food is being discarded per week within its supply chain as a direct result of the driver shortage as deliveries are postponed or cancelled.

With an issue over which control is limited, retailers should focus on three key areas:

Managing stock – This is likely to be a major issue in the weeks and months ahead. When stock lead times are affected, retailers may need to make difficult decisions – for example, to invest in stock holding in the form of additional safety stocks to safeguard against availability issues in certain lines. This may need to be funded by improving working capital performance elsewhere.

Managing costs – Unsurprisingly hauliers are seeking to recharge some or all of their cost uplift - including a recent 20% increase in fuel costs - to their customers. This adds to cost pressures arising across the supply chain, from raw materials through production, shipping (where costs are up 300% in some cases) and operational costs resulting from managing COVID-19 guidelines.

Some of these costs are unavoidable but others may be mitigated through, for instance, changes in delivery patterns or focusing on a reduced product range. Otherwise it may be necessary to look at removing other non-essential costs from the business, releasing working capital and generating headroom elsewhere.

Managing pricing – with some input costs rising at their fastest pace in years, retailers will need to regularly review their pricing structure. A delicate balance needs to be struck between the twin objectives of maintaining and/or improving price competitiveness, whilst ensuring each SKU generates a positive contribution to the bottom line.

 

How Interpath can help

At Interpath we’ve helped retailers, both large and small, as they grapple with operational and financial performance challenges. We have worked to develop a market-leading economic profitability tool, which can help identify on a line-by-line basis the contribution each SKU makes to the bottom line. Our working capital work has supported retailers release cash without sacrificing operational business performance or financial resilience.

If you’re interested in speaking with us further about the issues affecting your business, please get in touch.


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