While disruption in the region has been ongoing since last year, retailers will likely feel the impact most in the coming weeks and months ahead. Alexandra Leonards reports.

After the Iran-backed Houthis claimed another attack on British and US ships in the Red Sea earlier this week, it’s clear that disruption to one of the world’s most critical waterways shows no sign of slowing.

Geopolitical tensions in recent years have already had a significant knock-on effect for retailers, manufacturers, and their supply chain partners, many of whom have come up against stricter export control and sanctions regimes following Russia’s invasion of Ukraine. Over the past few weeks, we’ve also seen companies like Tesla halting production due to shipping delays triggered by the Red Sea attacks, while Adidas has warned that any continued disruption in the region is sure to make a dent in its profit margins.

Some industry experts say that the retail market hasn’t yet felt the full impact of this ongoing threat to global trade, with the real, longer-term consequences of the crisis likely to become clearer over the coming weeks and months.

Ex-head of logistics strategy at Marks & Spencer (M&S) and current partner at consultancy BearingPoint Emile Naus says that while delayed receipt of products has already been impacting the sector, the beginning of the year is a relatively quiet time for retailers.

“However, over the next few weeks you would expect to see the new season stock arriving – so the real impacts of the delays will be more visible,” warns Naus.

Roy Bridgland, senior industry strategies director at supply chain management company Blue Yonder, agrees that the impact of the Red Sea attacks will be “much more acutely felt” in the weeks ahead.

Currently around 12 per cent of global trade is estimated to pass through the Suez Canal – the waterway connecting the Mediterranean Sea to the Red Sea – with the alternative route around the Cape of Good Hope, the southernmost point of Africa, adding around 4,000 miles and at least 10 days to a ship’s journey.

Bridgland explains that, as it stands, the situation is manageable, but this could quickly change if the disruption continues indefinitely.

And this week has given us a further clue as to what the coming months might look like for the industry if the situation does remain ongoing, with Retail Week on Wednesday reporting that UK fast-fashion brands Asos and Boohoo are resorting to nearshoring – moving their manufacturing or assembly closer to their end markets – to alleviate these shipping challenges.

One of the most overlooked problems likely to be caused by this disruption is maritime sustainability, Bridgland notes.

“Shipping companies are caught between a rock and a hard place; meeting sustainability goals or supplying pre-agreed quotas of goods,” he warns. “Having their vessels rerouted round the Cape of Good Hope is going to burn too much fuel to hit any kind of target they are obliged to report, so many are drifting – lying stationary without using fuel – which is massively impacting stockpiles for retailers globally.”

He continues: “These sustainability targets aren’t just impacting shipping companies alone, but the retailers, manufacturing and other industrial companies that rely on them to reduce their own scope 3 emission targets.”

With constant pressure for brands to take ESG seriously, there is a vested interest from all parties to avoid overconsumption of fuel.

“With trading vessels being targeted in the Red Sea, the cost of transporting goods globally has increased and will inevitably trickle down to the end consumer,” says Nicole Hudson, director at supply chain software company e2open.“This is partially because the Suez Canal Authority as implemented an increase of five to 15 per cent in transit fees, and some companies are incurring ‘war risk’ premiums on the shipments moving through that region.”

Additionally, if goods are delayed and retailers don’t have knowledge of when a shipment will arrive, this can have an impact on promotions or where products are distributed in the country of sale. This is likely felt even more acutely by the fashion industry, with companies potentially losing out on sales for entire ranges or seasons.

Retailers therefore will have to be flexible in their approach, planning and booking well in advance to make sure their shipments arrive on time.

“The situation in the Middle East and the Red Sea has been developing over the last few months, and many businesses have learned valuable lessons in protecting their supply chain,” explains Dan Myers, managing director of XPO Logistics, UK and Ireland. “The cost increase will be unwelcome, particularly as inflation has begun to fall, and with subdued consumer spending, this is an additional headwind.”

Myers is largely optimistic about the ability for forward-thinking retailers and their supply chain partners to navigate these issues if the situation doesn’t deteriorate further. But ultimately, he recognises that significant uncertainly still exists regarding the crisis in the region.

Addressing these supply chain issues could prove to be a big challenge for some retailers. BearingPoint’s Emile Naus points out that many companies have been stretching their supply chains in search for the lowest unit costs, which he says has meant they have developed supply chains that are “inherently fragile”. He calls on retailers to be more serious about risk management and mitigation during this crisis.

“Business strategies that only focused on lowest unit costs have resulted in fragile supply chains, significant sustainability impacts and large working capital requirements,” explains Naus. “As the cost of capital is rising, and the long-term costs of sustainability needs to be included in the strategy, it is also important for businesses to include the cost of risks in their decision making.”

With Houthi leader Abdul Malik al-Houthi this week threatening to further escalate its attacks on shipping if the Israel-Hamas war continues, retailers and their supply chain partners must think outside the box to stay afloat and navigate the increasingly risky global trade landscape.

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