Balanced Out

Anyone interested in the direction of business in 2012 should spend some time walking the aisles of Home Depot’s financial reports.

That’s not because Home Depot will tell you very much about the eurozone debt crisis, China’s rising labor costs or even terribly much about the way the U.S. economy will perform in the coming year.

But the financial performance of the company, a foundation of the American retail world, provides a window on how disciplined companies are responding to the uncertainties that confronted business in the second half of 2011 and are sending many operators into paroxysms of insecurity heading into 2012.

Amid what a couple of our essayists said was a roller-coaster year in 2011, Home Depot reported a 13 percent increase in its profit in the nine months ending Oct. 30, putting $3.1 billion on the bottom line. The company did that in part by holding less inventory on its balance sheet at the end of October than it had at the same time the previous year.

“Well, we are thrilled with our inventory performance,” Chief Financial Officer Carol Tome said.

For Home Depot, financial performance is all about achieving equilibrium in the market; finding the balance, in other words, between how the market is behaving and how Home Depot responds to the consumer demands and the competition that make up the company’s market.

Or, as Sandy Kennedy, president of the Retail Industry Leaders Association, writes on page 138 of this issue: “Supply chain optimization is the bread and butter of America’s most successful retailers. Their ability to move goods efficiently has changed the retail landscape.”

For transportation operators, the results in finding that balance in 2011 were very much a mixed bag.

For the trucking and railroad industries, last year provided an opportunity to show discipline on capacity and, as a result, pricing. The result was that for all the talk about economic uncertainty, earnings and even traffic in the U.S. shipping market remained relatively strong. With many trucking companies already talking about driver shortages, there’s no reason to expect operators in the U.S. won’t maintain their balanced performance.

The real cloud is over international shipping, of course, where the delivery of larger vessels last year and in the next couple of years already is capsizing market pricing.

“The planned increase of vessel supply will remain a great burden to the market in 2012, with vast majority of capacity growth to come from upsizing of the operated vessel class,” Hanjin Shipping’s S.Y. Kim writes on page 100.

But 2012 already is looking like a transitional year. The sense we get from a couple of carrier comments is that the only thing worse than ordering the new, larger vessels would be not ordering them. The purchase costs simply are too low and the operating efficiencies too great to ignore.

It may take a couple of years before global trade catches up to the new container shipping capacity. But carriers and their customers are adjusting in the meantime. The growing use of multiyear contracts is one way both sides are trying to find equilibrium, and Hanjin’s Kim also sees more and deeper carrier alliances on the horizon.

“These relationships will take on a variety of forms that will move beyond the current carrier and alliance composition, shaking up the service offerings to the end-users in 2012,” Kim writes.

In choppy waters, in other words, there will be a premium on maintaining equilibrium, and the story of 2012 will be how transportation companies meet their long-term goals in a market where supply and demand seem so fundamentally out of balance.

Paul Page is executive director of The Journal of Commerce. He can be contacted at 202-355-1170, or at ppage@joc.com. Follow Paul Page on Twitter, www.twitter.com/paulpage.

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