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In 2024: Three Issues That Will Define Commerce, I highlighted a critical intersection where three major influences: cybersecurity, shipping vulnerabilities, and geopolitical concerns —were poised to impact the global retail landscape. The analysis ended, “The flow of commerce faces further disruption.” This essay delves into what that could look like and why.

Let’s fast forward to mid-2024, these predictions have not only materialized but have also evolved, presenting an even more complex challenge for global commerce. This update revisits those projections in light of new data and insights.

In my December 2023 analysis, I covered the emerging intersection of national security and commerce, specifically in light of shipping concerns. The geopolitical tensions in the Suez Canal Zone were converging to create a multifaceted challenge for retailers. This convergence underscored the need for a strategic approach to safeguarding both national and corporate interests while maintaining a thriving global economy.

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A History: The Suez Canal Zone

The Suez Canal Zone held significant military importance between 1945 and 1956, serving as a strategic and economically vital route for Middle Eastern oil and trade with the Far East. British forces were garrisoned in the Canal Zone under the terms of a 1936 treaty to protect this crucial passage. Despite its strategic value, the posting was unpopular among soldiers due to the harsh climate, frequent diseases, and hostility from Egyptian nationalists.

British presence in the Suez Canal Zone was essential for maintaining control over the key maritime route that connected the Mediterranean Sea to the Indian Ocean, facilitating faster trade between Europe and Asia. However, Egyptian resentment towards British occupation led to increasing violence and unrest, particularly between 1950 and 1956. This period saw numerous attacks on British soldiers, escalating tensions, and significant casualties on both sides. The culmination of these tensions came with the disarming of the police in Ismailia in January 1952, leading to further violence and British casualties.

Negotiations led by Colonel Gamal Abdel Nasser resulted in the 1954 agreement to end the British occupation. By 1956, British troops had fully withdrawn from the Canal Zone, marking the end of an era of direct British military presence in Egypt. Despite the challenges faced, the military importance of the Suez Canal Zone during this period underscored its pivotal role in global trade and geopolitical strategy.

Today, the Suez Canal remains a critical artery for global commerce, but its management has shifted significantly. The Suez Canal Authority (SCA), an Egyptian state-owned entity, now oversees the canal’s operations. The SCA is responsible for maintaining and expanding the canal to accommodate modern shipping demands. The canal has undergone several expansions, most notably the Suez Canal Expansion Project completed in 2015, which aimed to increase the canal’s capacity and reduce waiting times for vessels. In December 2023, the U.S. Secretary of Defense Lloyd Austin announced a 10 country coalition to better protect the Suez route.

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The geopolitical importance of the Suez Canal persists, with Egypt leveraging the canal’s strategic location to bolster its economy through toll revenues and related services. The canal continues to be a focal point for international trade, handling approximately 12% of global trade and a significant portion of the world’s oil shipments. Recent missile and drone attacks by Houthi rebels along the canal have caused many shipping companies to avoid the route, leading to a 67% drop in container shipping as of late January 2024. In 2023, the Suez Canal facilitated the passage of approximately 23,851 ships carrying well over a billion tons of cargo.

In December of 2023, the Mediterranean Shipping Company (MSC) diverted its container ship traffic away from the Red Sea. However, it appears that MSC has returned to running some of its ships through the canal despite risk of attack.

In response to the same increased threat, global shipping giant Maersk began rerouting its vessels around the Cape of Good Hope in March, significantly extending transit times between the U.S. East Coast and regions such as India and the Middle East by one to two weeks. This diversion, along with disruptions in the Black Sea due to the Russian invasion of Ukraine, has caused shipping costs to rise. According to the United Nations, container freight rates on Asia-Pacific to Europe routes have surged since November, with rates from Shanghai more than doubling by early February 2024.

Ryan Petersen on Twitter: “Global containerized ocean freight prices are surging to levels not seen since the pandemic supply chain crunch. Some key trade lane rates are up 140% since mid-December and increasing by the week. What’s happening, why, and what it means for businesses needing products moved? 🧵 pic.twitter.com/YDPKeipbMz / Twitter”

Global containerized ocean freight prices are surging to levels not seen since the pandemic supply chain crunch. Some key trade lane rates are up 140% since mid-December and increasing by the week. What’s happening, why, and what it means for businesses needing products moved? 🧵 pic.twitter.com/YDPKeipbMz

As projected, global containerized ocean freight prices have surged to unprecedented levels. Key trade lane rates have increased by 140% since mid-December 2023, echoing the pandemic supply chain crunch. Several factors contribute to this surge.

Global Factors (A-H)

A. Firstly, the demand for freight shipping remains largely inelastic as Peterson notes in his thread. Businesses do not significantly alter their shipping volumes based on freight costs, leading to price spikes when demand exceeds supply. This inelasticity has been a significant factor in the current price surge. Here’s some interesting data from Drewry:

Freight rates from Shanghai to Rotterdam, Shanghai to Los Angeles, and Shanghai to New York increased 12% to $4,172, $4,476 and $5,717 per 40ft container respectively. Similarly, rates from Shanghai to Genoa increased 11% or $481 to $4,776 per feu. Likewise, rates from Rotterdam to New York climbed 2% or $49 to $2,209 per 40ft box. […] Drewry expects ex-China freight rates to rise due to increased demand, tight capacity, and the need to reposition empty containers.

B. Beginning in December, terrorist activity in the Red Sea compelled global container ships to reroute around Africa. This change in route significantly reduced shipping capacity, as the journey from Asia to Europe now takes 30-40% longer to complete, effectively diminishing the overall throughput of the shipping network.  Consider this from IMF blog: 

This increased delivery times by 10 days or more on average, hurting companies with limited inventories.

C. Severe weather conditions in major ports such as Shanghai, Ningbo, Malaysia, and Singapore have exacerbated port congestion, further straining the already limited shipping capacity. The interplay of natural disasters, including droughts and heavy rain, has disrupted operations and increased delays​. The Journal of Commerce on this:

Fog is the main problem at ports in China, including Shanghai and Ningbo. […] The adverse conditions meant vessels could not berth even as more ships arrived at anchorage, leading to vessel bunching that exacerbated port congestion.

D. As the potential Canadian rail worker strike looms, U.S. West Coast freight facilities are under pressure as shippers divert containers to avoid disruptions. This adds to existing challenges like increased rates at the Port of Norfolk and container dwell issues in Los Angeles and Long Beach. The strike threatens to exacerbate congestion and equipment imbalances, affecting operations in Dallas and the US Midwest. ITS Logistics recommends strategies to mitigate delays, including terminating imports at ports and using transloading and one-way trucking.

Concerns over a potential Canadian rail strike have disrupted North American supply chains, compelling importers to reroute goods through U.S. gateways, adding to the congestion. This rerouting has caused significant delays and increased costs for businesses reliant on these supply routes​. From DC Velocity:

The impact comes amid additional supply chain impacts such as significant rate increases in dray and container storage capacity at the Port of Norfolk as demand shifts are spreading along the U.S. Eastern Seaboard to absorb Baltimore cargo​.

E. The U.S. East Coast faces a confluence of issues, including drought-induced capacity reductions at the Panama Canal and port access disruptions following the Maersk MV Dali incident in Baltimore. Additionally, the impending expiry of the International Longshoreman Association’s contract has fueled fears of delays during peak shipping season​.

F. The Asia to Europe trade routes have seen substantial rate increases, with the Shanghai Containerized Freight Index (SCFI) showing a 155% rise in prices since mid-December. Transpacific lanes are also affected, as carriers reallocate ships to cover gaps in Asia-Europe routes, causing a 142% rate increase for shipments from Shanghai to the U.S. West Coast​. You can view spot freight rates here.

G. Businesses face higher freight costs and potential delays, prompting them to expedite shipments, which can lead to panic bookings and further congestion. The introduction of Peak Season Surcharges (PSS) on fixed-rate contracts has compounded these challenges, aligning fixed rates closer to volatile spot market prices​. This November 2023 Supply Chain Dive report tuned me into the idea of this happening sometime in 2024 (before the actual peak season begins).

H. The high freight rates signal to carriers the need for increased capacity. New container ships, ordered since the COVID-19 pandemic, are expected to bolster capacity in the coming years, potentially alleviating some of the current pressures. Drewry’s World Container Index indicates a substantial increase in shipping capacity expected by the end of 2024​. In the meantime, companies may need to adopt premium shipping options to prioritize cargo, albeit at higher costs. Agility in logistics planning becomes crucial, as businesses must navigate unpredictable disruptions and maintain supply chain resilience​.

These heightened costs and delays are expected to eventually impact consumers and farmers, highlighting the far-reaching effects of geopolitical instability on global trade routes and the importance of the Suez Canal in maintaining efficient international commerce.

Best Practices Moving Forward

Businesses have to enhance their logistical agility and prepare for both anticipated and unforeseen disruptions. This involves diversifying supply chains geographically to reduce reliance on single points of failure. Investing in digital tools and technologies for better visibility and agility in logistics planning is crucial. The rise of smart containers and the standardization of electronic bills of lading are examples of how technology can enhance efficiency and resilience​. Eric Linxwiler, Senior Vice President of TradeBeyond:

If there’s one lesson supply chain managers have learned from recent disruptions, it’s to always be prepared for the unexpected. Ongoing disturbances in the Red Sea shipping lane are anticipated to extend well into 2024, with little hope for cessation of the conflicts, underscoring the critical need for agile, technology-driven strategies that can adapt to the unforeseen.

Furthermore, fostering collaboration between national security experts and commerce professionals is essential to develop comprehensive strategies that address both economic and security concerns.

The surge in global containerized ocean freight prices underscores the fragility and complexity of the global shipping industry. While capacity expansions offer a glimmer of hope, the enduring lesson is the necessity for resilience in the face of an ever-changing global trade environment. The effects of the forecast made in December 2023 have come to pass, highlighting the importance of foresight and strategic planning in mitigating the impacts of global disruptions.

In a world where the stakes have never been higher, the challenge posed by these disruptions is unparalleled. The events unfolding on the global stage in 2024 will undoubtedly be shaped by the continued, intricate dynamics of this changing geopolitical landscape, affecting not only the global economy but also the sovereignty of nations and its citizens. The insights and developments from the first half of 2024 reinforce the need for businesses and policymakers to remain agile and vigilant in the face of ongoing and future challenges.

Por Web Smith

Foxtrot Market’s failure stemmed from fundamental misalignments with the convenience store model. Initially, Foxtrot aimed to differentiate with a unique, upscale product mix and aesthetic appeal. However, their strategy overlooked the essential role of meeting everyday consumer needs which is crucial for driving frequent customer visits. Foxtrot focused on specialty items rather than staples like bread, milk, and convenient services, which are critical for repeat business in the convenience sector. What is Foxtrot? The neighborhood stop focused on locally sourced products, foodservice, grab-and-go item in a “cozy, upscale neighborhood market feel.”

While Foxtrot offered an appealing store design and high-end products, it failed to integrate essential convenience items and services that fulfill daily consumer needs and compete with traditional and app-based delivery services. The lack of basic convenience store elements, such as walk-in coolers and gas pumps, and the shift towards city center locations with high rents and declining foot traffic, further strained their operations.

Ultimately, Foxtrot’s business model was not sustainable in the highly competitive convenience store market. I believe that Foxtrot’s failure is a part of a much larger narrative that also includes the potential shelving of TikTok as an advertising channel, retail media’s increasing costs (96% of CPGs are managing spend on three or more networks), and the galvanizing of CPG distribution at the top of the market (Walmart, Costco, and Kroger).

But there is another valuable insight to consider here, CPG has abandoned affordability. And as a result, outside of closed circle of an exceptional food, drink, and snack food brands, the window is closing.

The landscape for CPG brands is undergoing a seismic shift, marked by increased challenges in distribution avenues, market consolidation by retail giants, diminishing venture capital interest, and heightened cost pressures. This confluence of factors is rapidly closing the window of opportunity for CPG brands to achieve widespread distribution and visibility. In the Argument for CPG Investing, I laid out the promising prospects for investing in the grocery, CPG, and meal delivery sectors, projecting significant growth and advising strategic investment.

By 2027, food and beverage are expected to constitute 21.5% of eCommerce, up from less than 14%, illustrating a major shift towards grocery and food CPG as smarter investments compared to the unstable fashion and accessory sectors. However, a significant caveat in the marketability of CPG products through major channels is the consumers’ overwhelming preference for purchasing groceries from established retailer websites and apps, as opposed to new-age online marketplaces or direct brand channels. This preference indicates a deep trust in traditional grocery retailers, which poses a challenge for new entrants or smaller brands in gaining significant market traction independently. I went on to explain that mega retailers like Kroger and Walmart lead in leveraging their established platforms for online grocery sales, illustrating the importance of these major channels in shaping the digital grocery landscape. This dynamic creates a barrier for new brands and underscores the critical role of strategic partnerships and platform choice in the success of CPG companies in the eCommerce realm.

The Retail Dominance of Major Players

Recent data by Supermarket News reveals a significant concentration of CPG spending, with Walmart alone capturing over 21% of all U.S. CPG expenditures. This dominance is closely followed by Costco and Kroger, creating formidable barriers for smaller CPG companies seeking shelf space. The retailer preference is regional, according to data found on Numerator:

Food and mass retailers capture over half of all CPG sales across the country, but channel preferences differ regionally. Shoppers in the Western United States spend significantly more at club retailers, Midwesterners favor mass merchandisers, Southerners have slightly less distinct preferences, but over-index at dollar stores, while shoppers in the Northeast spend more at traditional grocery stores.

Across the U.S., the top five retailers for CPG spending are Walmart (21.2%), Costco (7.8%), Kroger (6.9%), Amazon (5.3%), and Albertsons (4.3%). The dominance of these retailers not only limits the visibility of smaller brands but also dictates the terms of market engagement, often favoring established brands with proven sales records. One great example of this is electrolyte-based CPG brand LMNT:

LMNT has exemplified how a strategic combination of native eCommerce and broad distribution through giants like Walmart and Amazon can catapult a CPG brand to profitable, enterprise-level growth. Initially leveraging its direct-to-consumer model, LMNT established a robust online presence that facilitated direct relationships with consumers, fostering brand loyalty and collecting invaluable customer data. This strong foundation enabled them to expand into extensive retail distribution channels effectively.

The introduction of LMNT-based sparkling waters is a calculated move to capitalize on their established market presence and the operational synergies provided by Walmart and Amazon. These platforms not only offer massive visibility but also ensure streamlined logistics and distribution, crucial for meeting the demand spikes typical for successful CPG products.

With a potent mix of strong brand identity, high consumer awareness, and a passionate fanbase, LMNT has crafted a winning playbook for CPG growth. This strategy is particularly effective in today’s competitive market, where establishing a significant retail and digital footprint is essential for long-term success.

The Impact of Venture-backed Retail Closures

The closure of Foxtrot market highlights the volatility and uncertainty facing new market entrants reliant on such platforms for growth. Foxtrot was instrumental in testing and promoting innovative CPG products like Graza, giving nascent brands crucial consumer exposure. According to a recent AdExchanger article and described by Paul Voge, CEO of Aura Bora, “There are very few retailers willing to roll the dice on a new brand with unproven sales, track record, margins etc.” The loss of such an incubator platform exacerbates the challenge for emerging brands to find supportive retail environments conducive to growth and experimentation. The retailer was ideologically aligned with many of the DTC brands that it was known to feature:

Foxtrot was of the same age and temperament as its digital-native brands, says Becca Millstein, co-founder and CEO of the DTC darling tinned fish brand Fishwife. “It shared our mindset of real nimbleness and creativity and fast growth, which is somewhat unique to startup culture.”

The marriage between VC and DTC brands has faced significant challenges in recent years primarily due to a shift in the economic landscape and evolving market dynamics. Initially, DTC brands thrived, leveraging VC funding to grow rapidly without the immediate need for profitability. This strategy capitalized on low digital marketing costs and the novelty of direct online sales, which promised higher margins by bypassing traditional retailers.

However, as interest rates increased and the economic environment tightened, the sustainability of these DTC brands came under scrutiny. Investors, who were once content with growth at any cost, began demanding viable paths to profitability. Simultaneously, the cost of digital advertising surged, diminishing the return on investment for customer acquisition and inflating the cost of maintaining growth.

This influenced the growth of retail media as a pathway for growth.

These factors, combined with a realignment of consumer spending away from non-essential purchases, led to a recalibration of the value of DTC brands, many of which saw their market valuations plummet or had to revert to private ownership to restructure away from public market pressures. This reality check marked a significant downturn in the VC-DTC relationship, highlighting the need for DTC models to adapt to a more financially sustainable approach.

Consumer Dynamics and Economic Pressures

The current economic climate further complicates the landscape. While some premium brands like Unilever and Reckitt Benckiser are experiencing growth, others face stiff resistance. Nestlé, for instance, reported a decline in sales volumes, which the company attributes to “weak US demand as well as intense price competition in the frozen food category” (eMarketer, 2024). This bifurcation in consumer behavior reflects a broader trend where a segment of the market gravitates toward premium brands, while a larger and far more substantial portion continues to favor private labels and discount alternatives amid ongoing economic uncertainties and inflation.

Foxtrot Market’s failure stemmed from fundamental misalignments with the convenience store model but also, larger economic pressures contributed.

In today’s economic landscape, rising cost pressures are heightening the demand for affordable products over luxury goods, a shift driven by several compelling factors. First, inflation rates have surged globally, significantly impacting household budgets. In the U.S., the Consumer Price Index (CPI) rose 6.5% over the past year, marking a substantial increase in the cost of living and squeezing consumer spending power (U.S. Bureau of Labor Statistics, 2023). As disposable incomes shrink, consumers are increasingly seeking value-driven purchases, rather than premium, high-cost options.

Moreover, wage growth has not kept pace with inflation, effectively eroding real incomes. This disparity between wage increases and inflation rates compels consumers to prioritize essential and budget-friendly goods. According to a Pew Research Center analysis, about 70% of Americans consider inflation a major threat to their financial well-being, influencing their shift towards more economically priced products.

The economic uncertainty spurred by these trends has led to a cautious consumer approach. Luxury goods (to include CPG), often considered discretionary expenditures, are among the first to be curtailed in times of financial strain. In contrast, affordable products are perceived as both necessary and prudent choices in uncertain economic times, supporting the need for companies to adjust their product offerings to meet the increasing demand for affordability.

Waning Investment and the Need for Marketing Innovation

With cooling interest from venture capital and tighter debt markets, the financial squeeze forces CPG companies to rethink their strategies and seek out new methods for consumer engagement and product launch. Innovative marketing and product diversification are becoming critical as brands navigate the complexities of a market where traditional advertising costs are escalating and traditional retail platforms are becoming less accessible.

The potential ban or divestiture of TikTok in the U.S. could also significantly disrupt the marketing strategies of many brands, particularly those that have leveraged the platform’s unique algorithm for product discovery and customer engagement. TikTok has become a vital tool for reaching younger demographics, who often discover new products through viral content and influencer collaborations. The platform’s highly personalized content feed effectively captures user attention, making it an invaluable asset for brands aiming to introduce new products or reinvigorate interest in existing ones. According to a recently published report on Consumer Goods:

According to a TikTok CPG Insights survey conducted last year, 79% of millennials and 75% of Gen-Zers discover new CPG products more often after joining TikTok, and 3 in 4 make the majority of their household purchase decisions right on the platform. Of all CPG products being marketed on TikTok, the top three categories are Food & Beverage (91%), Personal Care (80%), and Household Care (73%).

Permanently losing TikTok could stifle these brands’ ability to reach large audiences quickly and cost-effectively, as no other platform offers the same level of organic reach and engagement. Consequently, brands might face higher marketing costs and lower efficiency in their campaigns elsewhere. This could hinder not only discovery but also repeat purchases, as TikTok’s continuous engagement keeps products top of mind among consumers, encouraging them to come back and buy again.

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DTC investment in 2021 reached $5 billion. By 2023, that number fell to $130 million. Meanwhile, Walmart has launched its proxy to the luxury CPG brands that rely so heavily on Foxtrot, Thrive Market, TikTok and retail media: it’s called BetterGoods.

While Walmart executives said they weren’t marketing Better Goods specifically to higher-income consumers, they acknowledged that the assortment might appeal to those shoppers.

Looking forward, the ability of CPG brands to thrive will hinge on their adaptability to these evolving market conditions. The consolidation of retail power, changing consumer preferences, and economic pressures demand a strategic recalibration from CPG brands. Success in this new era will likely depend on leveraging digital marketing channels, understanding nuanced consumer behaviors, and delivering innovative products that resonate with a diverse consumer base. The path forward for CPG brands is fraught with challenges but also ripe with opportunities for those that can navigate this complex landscape with agility and strategic insight.

Por Web Smith