Prices Keep Going Higher: What You Need to Know as the COVID-19 Pandemic Enters its Final Stages
A year has passed since the initial stage of the COVID-19 pandemic ground the United States to a halt. Its wide-ranging impact on commerce – both brick-and-mortar and online – is undeniable. While businesses have and continue to wrangle with stringent government restrictions, wildly vacillating supply and demand conditions, always-agile and increasingly desperate competition, and significant increases in expenses, the economy has rapidly shifted from boom to bust and back – all in a whirlwind span of less than 12 months. In this post, we explore the dramatic shift in prices which has and continues to complicate the eCommerce landscape:
Raw materials and finished goods
Estimates for growth this year are extraordinarily high for a mature economy (Goldman Sachs, for instance, is predicting an almost unparalleled 8% rebound), which is likely to put further upwards pressure on prices – and, as a consequence, on eCommerce sellers.
Price Increases and the eCommerce Space
As is generally the case across the economy, prices have and are continuing to go up in the eCommerce space – way up – since the onset of the COVID-19 pandemic:
Raw Materials and Finished Goods: Both internationally and domestically sourced raw materials and finished goods have and are continuing to go up in price. Internationally, much of the increase is due to the strengthening of the RMB relative to the USD. According to the Wall Street Journal, the RMB has appreciated roughly 9% since June, which means that Chinese goods are becoming materially more expensive for American companies. Domestically, price increases are also prevalent – driven by an array of factors ranging from a difficult labor market to an explosion in logistics costs and lingering COVID-related operating cost hikes.
Packaging Materials: During COVID-19, consumers placed an unprecedented amount of online orders – corrugated box shipments alone grew by 9% in the last year. As a result, the demand for cardboard boxes and paper-based mailers, void fill, and other packaging products has placed a considerable strain on paper mills, which are currently operating just about at capacity. In an opening salvo, paper companies pushed through a $50-per-ton increase in November (it works out to about a 10% increase in the cost of most paper-based packaging materials like cardboard) while also capping client orders amidst the highest level of demand relative to capacity seen since 1994. Industry experts are also projecting an additional $70-per-ton increase in the near future – with $20-per-ton announced just yesterday.
Shipping: COVID-19 has led to an explosion in parcel shipping and the Washington Post has predicted a 32% increase in e-commerce activity in 2021. All parcel carriers are currently at capacity and their prices are steadily increasing. While USPS has always been the low-cost parcel provider – especially via its parcel select services like FedEx SmartPost, UPS SurePost, UPS Mail Innovations, etc. – COVID-19-related precautions and illness have caused operational challenges, increased expenses, and a significant early-2021 price hike. UPS and FedEx have also presented a series of sizable rate increases over the last 12 months, driving shipping costs up throughout the supply chain.
Labor: Due to the pandemic, unemployment and the cost of labor have both been on the rise over the past year. Despite having plenty of job openings, however, many businesses across the country are unable to find workers. While state-level unemployment benefits and worker’s restrictions vary, some otherwise would-be employees seem to find that they are able to reap greater financial stability from remaining unemployed due to healthy state-level unemployment packages and additional money provided by the federal government.
Advertising: Advertising costs are materially up across many of the traditionally effective channels for e-commerce like Facebook, Instagram, and Google. Some of this appears to be related to the limiting impact that Apple’s iOS 14 changes are having on advertising effectiveness across social media platforms. As major players like Facebook work to defend personal advertising, businesses may notice continued degradation in performance for some time – and a corresponding increase in costs.
So, where are we likely headed from here? It’s hard to say; however, with costs seeming to be on the rise just about everywhere, concerns regarding inflation are becoming increasingly notable – with the likelihood of contractionary monetary policy and the resulting recessionary pressures increasing by the day. For a broader economic discussion, you may be interested in “Five Systematic Risk Factors Facing Small Business in 2021.”