As the cost of goods rises and supply chains face bottlenecks, retailers are considering the sort of end run that might help boost the bottom line: using nearby suppliers.
A shift appears ever more likely toward the practice of onshoring, bringing a company's manufacturing that was moved overseas back home, as well as nearshoring, shifting operations to a nearby country instead of a nation farther away, real estate executives said at the ICSC 2022 conference in Las Vegas.
That conclusion has been reached as faraway supply chain disruptions keep troubling retailers both large and small in the United States, and from what commercial real estate executives are seeing their clients do to avoid problems. While the fallout is expected to be felt in manufacturing facilities in the United States, the biggest winner for business may be Mexico, where labor costs are lower, Greg Maloney, president and CEO of retail property management at JLL, told CoStar News at the conference.
"We're going to see it ramp up quite a bit," Maloney said. "I think this pandemic has opened our eyes to the challenges to what people say is a global economy. It's great to have a global economy, but you've got to have other ways to get products that you can depend on day to day so we don't go through the same shortages that we've had here."
David Gabbai, executive managing director of retail services in Colliers' Orlando, Florida, office, said at the conference that some of his restaurant clients have already had to create makeshift warehousing and assembly operations in the United States, something that's come after supply chain delays.
One of his clients has preordered parts for electrical panels and just assembled the panels rather than wait for a factory to do the job, he said. Another is preordering steel and dropping it off at future properties, with the landlord's permission, before construction permits are issued rather than risking placing an order once they have the green light to build.
"They're afraid of what's going to happen with the supply chain," Gabbai said.
Producing Costly Items
John Albright, president and CEO of Daytona Beach, Florida-based Alpine Income Property Trust, said more onshoring may occur for high-value items such as semiconductors but not so much for lower-value items such as light fixtures, chairs and tables.
"I'm not sure onshoring of that will ever make sense," said Albright. "The savings are too great."
That said, the world may have a short memory when it comes to the supply chain, Hessam Nadji, president and CEO of Marcus & Millichap, said in an interview at ICSC. Nadji said he doesn't anticipate a major, long-term change in the globalization of manufacturing and distribution, but he does expect some new demand for space in or near the United States.
"There are a lot of reasons why offshoring happened to begin with. Those reasons haven't gone away," Nadji said. "When the world is back to normal, it'll be very quick to forget the fact that at this particular moment it feels better to have had a domestic alternative than a global one."
Lasting or not, the anticipated shift in the transfer of manufacturing operations comes as major retailers reported in May that higher costs and supply chain woes hit the bottom line. That reduced profits and sent stocks tumbling for companies including Target and Walmart.
At the same time, these companies reported strong sales and consumer spending remained robust. U.S. consumers spent 18% more in March than they did two years earlier, according to a McKinsey study published in May. That's in part because consumers had $2.8 trillion more in savings than they did in 2019.
Small Business Challenge
That desire to spend can be seen among consumers who want to support small businesses, particularly in the wake of a pandemic that shuttered many of these shops and restaurants.
The sentiment remained strong in May when an ICSC survey found that 9 in 10 U.S. adults shop at small businesses and that nearly 8 in 10 small-business shoppers agree that these businesses are crucial contributors to the local economy.
Some smaller retailers, like Gabbai's clients, lack the supply chain support systems of larger chains that would allow them to brace against shortages. Bringing materials, whether for building new stores or stockpiling inventory, closer to home could help alleviate that.
Still, the onshoring-nearshoring shift remains on the horizon, and it's not clear when relief will be felt. Meantime, U.S. ports handled 3.2% more containers year over year in March, which saw a record-setting amount of cargo processed, according to a May 6 report by the National Retail Federation.
The increase in cargo is occurring as one-fifth of the global container ship fleet is stuck in a bottleneck at major ports, according to a Royal Bank of Canada study reported by Reuters.
Putting a fine point on Maloney's observations, the report found it takes 74 days longer than usual to ship something from a warehouse in China to the United States.
"Just as we’ve seen new store formats or logistics solutions in response to the pandemic, businesses are becoming more adaptable and flexible overall in response to a new normal," said Tom McGee, president and CEO of ICSC. "Those that are prepared to make the most of this will benefit in the long run if any other supply chain issues arise."