Before gifts can make it under holiday trees this year, they are going to have to pass through one of the largest-scale traffic jams modern supply chains have ever experienced.

In the U.S., the industry is not fretting over customer demand headed into the shopping season. Deloitte estimates holiday sales could increase this year by as much as 9%, which would come on top of relatively strong growth last year that surprised pretty much everybody. AlixPartners is even more optimistic, forecasting 10% to 13% sales growth.

But to state the obvious: Before retailers can make their sales, they need stuff to sell. That's where the trouble is this year. Container ships are packed, ports are clogged, contracts with carriers are falling to the wayside. And the rush to ship goods for the holidays is only adding traffic to what was already intense congestion.

"There aren't enough containers. There aren't enough ships. There aren't enough trucks or trains. There is more volume now than any part of the supply chain pipe can adequately handle," Burlington Stores Chief Financial Officer John Crimmins told analysts in late August. Trying to accelerate and pull forward orders "even further increased the pressure on the supply chain, helping to drive even higher rates," the executive added.

So not only are retailers competing with each other for sales, they are competing just to get cargo space to ship goods into the country. Freight has skyrocketed as a result, and shipments still lag or even fail to materialize. Many of the bottlenecks are tied to the unexpectedly swift surge in consumer demand in the U.S. this year, combined with capacity shortfalls at numerous points along the supply chain.

Those reductions stem from COVID-19 outbreaks at ports and factories, as well as capacity taken offline last year as demand plummeted and retailers and brands canceled orders. In a study by FTI Consulting, 67% of retail companies agreed that supply chains have been permanently disrupted from COVID-19.

"It's going to be a rough holiday, and I think it's going to be a holiday unlike anything we've seen before," Matt Garfield, a managing director in FTI's retail and consumer products practice, said in an interview. "We're going to see a lot of bare shelves."

A 'perfect storm for empty shelves'

Even stocking holiday decor could be a challenge for retailers. Chris Butler, CEO of decoration wholesaler National Tree Company, sees a "perfect storm for empty shelves" come Thanksgiving when holiday decorations often go up.

Butler cited custom research for his company showing 80% of surveyed consumers expect more parties and decorations this year compared to 2020. At the same time, fires and drought have hurt the supply of natural Christmas trees, and all the supply chain issues facing other categories are slowing the shipments of artificial trees into the country.

Where last year National Tree Company was paying $2,000 to $3,000 for ocean-bound shipping containers, now the rates have hit as much as $25,000. The company opted to pay those rates and ship most (90%) of the inventory it expected for the season.

Some competitors, according to Butler, held off shipping, hoping for lower rates only to find rates still high. Yet carrier space remains just as crimped ever, and inventory is stuck in Chinese factories. Meanwhile, retailers are starting to panic as they try to bring in Halloween and Christmas decor, Butler said.

"I think there's definitely going to be empty shelves," Butler added. "We know there are retailers that aren't able to get even half of what they wanted."

According to a report from consulting and research firm Berkeley Research Group, the supply chain logjams mean that "many items are in shorter supply than normal, so the selection of hot/trendy products and the depth of promotional discounts will likely be less prevalent."

With the prospect of lower inventory levels, retailers should be prepared to market and sell gift cards, the report's authors write. They also see inflation as "a looming issue" hanging over the season.

A presentation from liquidation and restructuring specialist Malfitano Partners noted that inventory shortages are likely going to be a ubiquitous problem in retail this holiday season.

"This dynamic will likely lead to one of the most expensive holiday shopping seasons for consumers," the report noted. "With less inventory, retailers will be forced to hold the line on discounts to maximize margin on the units they have available to sell in order to bring in the required revenue for the season."

In an interview, Joseph Malfitano, founder and managing member of Malfitano Partners, said retailers could begin burning cash in the early months of next year as supply remains constrained and the cost of inventory high, with little room in margins for discounts and less demand post-holiday. For the less-capitalized retailers, that set of conditions could cause financial distress.

"That could be where the rubber meets the road," Malfitano said. "You get into Q1, and people are going to start burning some money."

'Unprecedented efforts'

The pain will not be spread out evenly in retail. As Garfield pointed out, larger retailers like Walmart, Home Depot and Ikea have chartered their own ships to ensure goods get delivered.

Others have spent what would in past years have been unthinkable amounts of money to fly product in by air freight, usually a transportation mode of last resort for many companies. Executives at Nordstrom, Gap Inc., Tapestry and others have all told analysts they were taking on air freight costs to bypass bottlenecks in ocean freight.

"We've seen some really drastic and unprecedented efforts by some of these retailers to try and deal with the supply chain," Garfield said.

Larger, high volume, well-capitalized retailers can absorb those costs and sway their vendor base in ways that mid-tier and smaller retailers often can't. Smaller players will have to stock what they can and lay off the deals that are the hallmarks of the shopping season.

"We're going to see a lot less promotional activity this year as retailers are trying to recoup some of the margin that they're losing across the board," Garfield said, adding that prices on consumers are "one of the few levers that you can adjust in this market."

In the end, even large retailers will struggle to hold on to their margins and keep their shelves fully stocked for the holiday season. Historically a major draw for Black Friday sales, many consumer electronics could be especially in short supply this season, Garfield noted. "We've been seeing that across multiple outlets," Garfield said. "You just can't get your hands on those electronics these days."

For those who wait until the final days before Christmas to buy gifts, "You're going to have a really rough holiday season," Garfield added.