Unintended consequences, top line or bottom line, and what is the new currency in exports?

It’s interesting to read in the December Situation and outlook for primary industries (SOPI) report that export revenues for the food and fibre sector are forecast to hit a record $50.8 billion in the year to 30 June 2022, an estimated 6% increase over the previous year. It outlines ‘export revenue for dairy, meat, horticulture and forestry are looking bright, and our seafood exports have bounced back’ which is positive, as demand for primary products pushes up prices.

'Soaring' demand for beef leading to a 26 per cent increase in red meat exports in August 2021 has also been reported.

However, this led me to ask the question - how much of it is driven ‘ourselves’ or how much is associated with ‘organic’ market conditions? Is revenue even the right metric to assess? Should we simply celebrate revenue growth, or use this data to ask further questions of ourselves? Perhaps important to consider is whether a series of geopolitics related externalities or changes to procurement models from a ‘just-in-time’ model to a ‘just-in-case’ that is driving these increases in revenues or forecasts?

It asks the question if these ‘record revenues’ are tied to the attributes of our products and our efforts in markets or is it a wash-through of cost increases associated with the supply chain. Even then, surely these far exceed a 6% increase.

Our clients have advised us that freight rates have risen anywhere from 3-8 times that of recent years, ranging in dollar terms from $3,200 to over $15,000 per 40 ft container depending on the trade lane and destination.

In the last year, exporters have been dealing with an increase in complexity in export supply-chains. This complexity includes less availability of ‘equipment’ as containers sat on vessels outside ports waiting to land, with vessels losing 1-2 cycles per year out of their normal 6 according to one leading shipping line. Congestion at a national and international level on ports leads to additional detention and demurrage charges or surcharges or vessels having to omit ports altogether with containers pushed to the next available vessel as shipping lines look to make up time lost on cycles.

Supply chains are further constrained here in New Zealand and overseas as organisations in air, sea, road and rail (and ports) deal with labour shortages as workers isolate because of the effect of the pandemic.

This constrain extends again to changes with ‘trade lanes’ and ‘transit times’ between countries with an average increase from 42 to 60 days, which further increases costs, and these costs are eventually passed through to the customer and realised in revenues.

It is reported that other countries such as Brasil also experienced record ‘export revenues’, however, at an increase of 34%? If I think about it in this context it makes me wonder if the top line ‘record’ of $50 billion is really delivering bottom line profit for New Zealand exporters?

Utilising foresight

It is fascinating and impressive to observe how Amazon have used foresight in advance of the challenges now impacting global supply chains. They, identified ‘signals’ 2-3 years ahead of competitors which they have used to create plausible future scenarios and to make strategic decisions, which are mitigating the impact of 'Containergeddon' on them. It is reported that Amazon began leasing vessels, building their own containers, and even leasing long haul airliners to reduce the effect they could foresee with 'Containergeddon'. The result is that their average congestion time now is 2 days as opposed to the industry average of ?45.

It is reported Amazon have experienced an average of 14% rise in ‘stock outs’ even with these measures which makes you wonder what effect this is having on their competitors? Walmart, Home Depot and Costco are examples of organisations making changes to avoid further effects of 'Containergeddon'.

In a recent call with a retailer in China, we discussed these points and they outlined their needs have changed substantially and while they are seen as a ‘single channel’ per se, it is more a ‘3-in-1 channel’ now. In addition to this, while the retailer maintained their traditional ‘bricks and mortar’ stores, they have also converted some into ‘dark stores’ which are replenishment centres for their ‘ecommerce’ offering launched during the pandemic.

Leveraging today’s insight

These ‘unintended consequences’ lead me to think that the new ‘currency’ in exports is ‘surety’ and ‘consistency’, but the important question is whether we are pricing to realise the associated value or are, we wedded to our existing assumptions?

These considerations also prioritise a (re)assessment of markets, at least for me.

It is no longer a ‘sales price’ or ‘basic costing’ that determines the profitability of a market and the associated channels.

It is considering and combining signals that allow us to consider potential futures, and subsequently develop pro-active rather than re-active opportunities and solutions to ensure our businesses and our sector are resilient, sustainable and successful in the future. Direct signals can come from how supply chain partners are acting in the market or the actions of competitors. The more valuable signals are often those that are not as obvious, coming from other sectors or unconnected business models, but they highlight the disruption and reinvention that could be possible within a business. It is these signals that provide a window on the future and enable the creation of scenarios, that may seem ridiculous initially but with thought and shaping can become plausible futures for an organisation.

Undoubtedly, markets and supply chains have become more complex and require an assessment of how changes to ‘timing’, ‘frequency’, the probability or likelihood of ‘securing containers’ and ‘spaces’ on vessels and any extra ‘charges’ beyond a demurrage and detention may affect the profitability of the market.

It is also clear that cost-to-serve is considerably different between markets meaning these areas eat into any ‘premium’ a single market offered in the past. In its simplest form, the dramatic effect on cashflow alone is enough to (re)assess if markets are still a premium or not, let alone assessing the effect on productivity and throughput of any export operation.

As pandemic and conflict-disrupted trade flows continue to cause uncertainty, it is those peering beyond the horizon who will position themselves in the most advantageous way for operating in this ever-changing world.

Ngā mihi,

Andrew Watene

Director and Head of KPMG Propagate?

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