Will the chip shortage create a nightmare before Christmas?

Santa’s sleigh is skid­ding to a halt this Christ­mas. Thanks to the glob­al chip short­age, cou­pled with a lack of HGV dri­vers, gaps on shelves and items out of stock have become a com­mon sight in the lead up to the fes­tive peri­od. 

Chips are the brains behind prod­ucts like elec­tric tooth­brush­es, smart fridges and con­soles, so the short­age has been squeez­ing sup­ply from elec­tron­ics to white goods to toys. The sit­u­a­tion is com­pound­ed by com­pe­ti­tion for the lim­it­ed sup­ply between elec­tron­ics man­u­fac­tur­ers and automak­ers. 

“This is hav­ing some impact on retail­ers in terms of the over­all range of offers,” says Emile Naus, part­ner at Bear­ing­Point, a man­age­ment and tech­nol­o­gy con­sult­ing firm. 

“We’ve seen this with the reduced sup­ply seem­ing to lim­it tra­di­tion­al Black Fri­day offers to old­er prod­ucts and mod­els.” 

Sainsbury’s, which owns Argos, was forced to delay its pre-Christ­mas toy sale by a week due to such prob­lems. CEO Simon Roberts admit­ted to reporters in Novem­ber that cus­tomers will be see­ing few­er elec­tron­ics prod­ucts on offer than usu­al in the weeks before Christ­mas. 

Shop­pers usu­al­ly hunt for bar­gains at this time of year, but a num­ber of elec­tron­ics man­u­fac­tur­ers have even been hint­ing at price ris­es for con­sumers since the ear­ly part of 2021. Lap­top and TV mak­er Asus said on an earn­ings call in March that a com­po­nents short­age would mean “price hikes fur­ther upstream”. In Sep­tem­ber, Apple warned of “notice­able” ris­es for its prod­ucts. Mean­while, Sony expects the PlaySta­tion 5 to be in short sup­ply through 2022 as pro­duc­tion prob­lems con­tin­ue to bite. 

Toy man­u­fac­tur­ers will like­ly be at the back of the queue when it comes to sourc­ing chips, with foundries focused on sup­ply­ing the tech­nol­o­gy giants first, long-term clients that can afford to pay the ris­ing prices. The world’s biggest chip­mak­er – Tai­wan Semi­con­duc­tor Man­u­fac­tur­ing Com­pa­ny – has pri­ori­tised Apple and cars. 

Accord­ing to Naus, man­u­fac­tur­ers in all indus­tries are fac­ing long lead times. It’s entire­ly pos­si­ble that some low­er pri­or­i­ty prod­ucts are being mod­i­fied to remove chips and cer­tain smart fea­tures just to ensure there is at least some stock avail­able, he says.  

Bright spots

As demand for chips out­strips sup­ply, what impact is the short­age hav­ing on bot­tom lines? It’s prob­a­bly not as neg­a­tive as you’d expect. 

Take con­soles, for exam­ple. They’re usu­al­ly priced using what’s known as a loss leader strat­e­gy – prod­ucts are sold at a low­er cost than what they were bought for in the expec­ta­tion that it will encour­age shop­pers to spend more. 

A Microsoft exec­u­tive revealed ear­li­er in the year that the com­pa­ny nev­er makes a prof­it on the Xbox. Instead, it makes its mon­ey through sales of dig­i­tal and phys­i­cal copies of games, which have a sig­nif­i­cant­ly high­er mark-up, as well as sub­scrip­tions and pass­es. 

For retail­ers, that means con­soles are usu­al­ly low mar­gin items. They can even afford to sell the hard­ware at a dis­count because they expect to recoup any loss eas­i­ly, includ­ing through sales of high­er mar­gin prod­uct lines. 

“Some of the biggest retail­ers have always come to cosy arrange­ments with Nin­ten­do and Sony, sell­ing each unit at a loss and recoup­ing their mon­ey via mar­ket­ing deals,” says Ian Finch, founder of Click Europe, a UK sell­er and dis­trib­u­tor of toys, games and gad­gets.

Unlike the big retail­ers, small spe­cial­ists aren’t in a posi­tion to cut the price of con­soles. But the cur­rent short­age can actu­al­ly ben­e­fit the small­er play­ers, as Finch explains. 

“Under nor­mal cir­cum­stances, these large chains nev­er run out of stock and will always out­price us,” he says. “But these days, when hard­ware is like gold dust and the big stores have emp­ty shelves, cus­tomers are pre­pared to pay the rec­om­mend­ed retail price. This obvi­ous­ly works in our favour.”

In gen­er­al, Click Europe doesn’t stock many new gen­er­a­tion con­sole units, because “they rep­re­sent a high lay­out for their rel­a­tive­ly small prof­it mar­gin.” The com­pa­ny does, how­ev­er, sell plen­ty of games for old gen­er­a­tion con­soles. This too can work in its favour, espe­cial­ly if some of these titles are no longer offered by the big retail­ers. 

“Those cus­tomers that can’t get hold of the Playsta­tion 5 or Xbox Series X are choos­ing  instead to buy games for their exist­ing sys­tems [Playsta­tion 4 or Xbox One],” says Finch. “We’re able to offer real­ly attrac­tive prices on these because with games we have a decent mar­gin to play with.”

While Finch doesn’t go into specifics on how the chip short­age is impact­ing Click Europe’s pre-Christ­mas sales, he’s keen to point out that there’s been an “upside to the dis­rup­tion in the mar­ket”. 

Consumer appetite 

The short­ages that have been blight­ing the retail indus­try are set to con­tin­ue beyond the fes­tive peri­od, with no guar­an­tees on when the chip cri­sis will end. 

“Based on the typ­i­cal cycles in the chip indus­try – and the planned new [pro­duc­tion] capac­i­ty com­ing online – it’s like­ly that the sit­u­a­tion will get bet­ter through 2022,” says Naus. How­ev­er, he doesn’t expect the indus­try to return to over­sup­ply until 2023 or 2024.

What this means for retail­ers depends on the prod­ucts they sell and how much of a pri­or­i­ty they are for chip man­u­fac­tur­ers. While some retail­ers may not be enjoy­ing the usu­al sea­son­al boost in sales of con­soles and toys giv­en the lack of avail­abil­i­ty and prod­ucts on offer, con­sumer appetite won’t wane and pent-up demand will be high. Shop­pers will be eager to get their hands on a bar­gain once stock lev­els return to some lev­el of nor­mal­i­ty.