Why war in the Middle East could raise costs for retailers, even without major factory shutdowns

Retailers around the world have been on a rollercoaster since the beginning of the Covid-19 pandemic when it comes to dealing with the global supply.

While the Trump administration’s tariffs have forced them to either pay exorbitant costs—which may now be subject to refunds, following the Supreme Court decision in February—or rethink and overhaul their supply chains, the ongoing war in the Middle East has only made matters more complex.

Although most goods aren’t manufactured in key parts of the Middle East, the region sits along some of the world’s most critical shipping routes, such as the Red Sea and the Suez Canal, which is responsible for 12% of the total global trade of all goods, according to the World Economic Forum.

Still, retailers may feel the conflict’s impact less through direct supply disruptions and more through rising energy and freight costs.

According to Marc Palazzolo, a principal in the strategic operations practice of consulting firm Kearney, about 20% of global oil passes through the Strait of Hormuz—a critical shipping chokepoint in the region—meaning any instability there can push oil prices higher and increase logistics costs across the supply chain, from ocean freight fuel surcharges to trucking.

“The current conflict will impact rising energy or oil prices, which drive higher costs through the supply chain,” he told Retail Brew, “whether it be freight on the actual ocean itself or even over the road freight or round freight.”

The war has also temporarily tied up a portion of global shipping capacity, creating some network uncertainty. Still, freight markets remain relatively favorable for shippers because global capacity continues to outpace demand, though carriers may try to use disruptions as leverage to push rates higher.

It isn’t the first time in recent years retailers have come up against something like this. Many businesses found that supplier diversification was a valuable lesson from the Covid-19 shutdowns. But will those learnings be helpful this time around? Kind of.

Per Palazzolo, while all companies are vulnerable to geopolitical shocks, there have been some “big learnings” that many brands have “taken to heart.” The biggest one is a lesson in resilience.

“Supply chains are recognizing the need to take faster action to increase flexibility,” he said. “Seeing what’s on the forefront and delaying decisions, it is becoming clear that it’s going to embed costs in terms of locked rates, locked capacity commitments, [and] inventory positions. That has been something that is at the center of this; that is a big learning.”