Shipping bottlenecks that have led to rising freight costs are cooking up a holiday headache for U.S. retailers.
Costco This week’s retailer was one of many that raised concerns about rising shipping prices and related supply chain issues. The warehouse retailer, which had a similar cautionary tone in May, was joined by athletic wear giant Nike and economic bellwethers FedEx and General Mills in discussing similar concerns.
In recent months, shipping containers to overseas has become more expensive. Getting a 40-foot container from Shanghai to New York cost about $2,000 a year and a half ago, just before the Covid pandemic. It now runs about $16,000 according to Bank of America.
Costco Chief Financial Officer Richard Galanti spoke out Thursday to analysts. He called freight prices “permanent inflationary” and stated that these increases combine with “somewhat permanent” factors to create pressure. Not only do they include freight costs but also rising labor costs, increased demand for products and transportation, as well as shortages in oil, chemicals, and computer chips.
Galanti explained that “we can’t keep on to all those.” Some of it must be given on and that is what we are doing. It’s a pragmatic issue.
He estimated that Costco’s inflation will likely be between 3.5% to 4.5%. He noted that paper products have seen cost increases of 4% to 8% and he cited shortages of plastic and pet products that are driving up prices from 5% to 11%.
“We can hold the line on some of those things and do a little better job — hopefully do a better job than some of our competitors have and be even that more extreme than the value,” Galanti said. All those things, even despite all the difficulties, seem to have been in our favor so far.
Getting ready for the holidays
The timing, though, is not good.
Persistent inflationary pressures come at a time when retailers are preparing for the holiday shopping season – Halloween, Thanksgiving and Christmas, then into the new year. The pandemic has brought with it a relentless slew of factors that has made inflation an economic buzzword after a generation of mostly moderate price pressures.
The situation is forcing companies to respond quickly.
We have worked with retailers to see that we are closer to the holiday season. 1. They have to be flexible in their supply chains,” Keith Jelinek (managing director, global retail practice), consulting firm Berkeley Research Group said. We’ve witnessed cost-of goods increases, especially for apparel. Also, we have seen increases in inbound shipping costs, as well as increased costs with transport and trucking costs to reach distribution centers.
“All of these costs will hit the operating profits,” said he. Retailers are currently faced with two choices: how much should I charge the customer and what efficiency can be achieved in my business to maximize my profit margin.
Numerous businesses have stated that the majority of consumers will accept higher prices, at least temporarily. Trillions in government stimulus during the pandemic have helped swell personal wealth, with household net worth up 4.3% in the second quarter.
During the Thursday earnings call, Nike’s CFO Matthew Friend mentioned second-half price rises as well “stronger than anticipated full price realization” as well “additional transport, logistics, and airfreight cost to move inventory within this dynamic environment.”
It is not clear how long the consumer will pay higher prices. Jelinek said he expects the current situation to persist into at least through the holiday season and into the early part of next year
“There’s only so much you can pass on to the consumer,” he said. “What most retailers are doing is looking across their [profit and loss statements] and they’re looking to improve performance and to optimize efficiency. This means focusing their attention on the supply chain.
This could also mean raising prices.
FedEx this week announced that it will hike shipping rates 5.9% for domestic services and 7.9% for other offerings. According to the company, it’s being affected by “costs associated in the difficult operating environment” and labor shortages.
According to the chief competitor of the company, the firm faces many challenges.
“The labor market is tight, and in certain parts of the country we’ve had to make some market-rate adjustments to react to the demands of the market,” UPS CEO Carol Tome said Thursday on CNBC’s “Closing Bell.”
The company has also been affected by supply chain problems, she said.
This is likely to continue for quite some time. Tome explained that the issues are a long process and will require all parties to work together to solve them.
Federal Reserve officials this week conceded that inflation will be higher in 2021 than they had anticipated. They still expect prices to settle in a normal range of just over 2% within the next few years.
Loretta Mester from Cleveland Fed, however, stated in Friday’s speech that she believes there is a “upside to” the central bank’s inflation forecasts.
She stated that many businesses are reporting increased cost pressures and that consumers have a tendency to spend more. The combination of high demand and challenging supply chains could continue for longer than I expect. This could cause people and businesses alike to have higher inflation expectations than they’ve seen thus far.
Fed officials said they are ready to start pulling back on the monetary stimulus they’ve provided during the pandemic but probably won’t be raising rates soon. Mester indicated that, should inflation be a problem, Fed policy will need to adjust to ensure prices and expectations don’t rise.
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