It’s still much more expensive to get stuff to the U.S. from Asia a year after shipping costs first shot up.
By Amy Feldman and Lauren Debter
Try as he might, Greg Hayes, CEO of office-furniture company Branch, can only fit so many desks and chairs into a shipping container. Even the consultants he’s hired to shrink packaging by an inch here and an inch there say they’ve done all they can. So, with shipping rates to the U.S. from his factories in China still stuck at stubbornly high rates a year after they first shot up, Hayes has reluctantly raised prices for customers by about 20%.
The New York City-based company hopes expenses ease before it has to hike prices again. Already, Branch is absorbing half the higher costs. “The idea is we’ll eat some of this in the short term,” Hayes said. “This can’t go on forever. The problem is we’ve been saying that for a year now.”
The global supply-chain mess, prompted by a surge in consumer demand at a time when factories and logistics companies were hobbled by coronavirus-related lockdowns, is not over, with many companies now saying their main struggle is paying sky-high shipping rates and a list of fees for goods delayed at the nation’s slammed ports. The higher costs have trickled down to consumers in recent months, helping push inflation to 40-year highs. If shipping rates don’t come down, companies warn they may have to push prices even higher.
While factory production has largely returned to normal levels – the Chinese manufacturing hub of Shenzhen emerged from a short Covid-19 lockdown last week – the cost to ship finished goods has not. Shipping rates from Asia to the West Coast, home to America’s busiest ports, are almost triple what they were a year ago, and 10 times what they were two years ago, at about $16,000 per container, according to online freight marketplace Freightos.
That has translated into boom times for shipping companies, which raked in record profits last year. Maersk, one of the world’s largest shippers, said profits exploded to $18 billion last year, six times the prior year, on the back of higher rates. Maersk faced some higher costs itself, but gross margins still hit 32%, triple the previous year. The Biden administration is now targeting these shipping giants, saying lack of competition has allowed them to take advantage of soaring demand by jacking up prices, contributing to inflation on everything from groceries to toys to shoes.
“I think we’ll see ocean freights trend back toward their normal levels, but they won’t come down as dramatically as they went up because carriers want to try to hold onto price,” said Michael Farlekas, CEO of E2Open, which handles bookings for international ocean freight.
It’s not just shipping rates. Companies have faced other climbing expenses, too, like port fees. These are incurred when their containers sit at the docks for days or weeks, even if they are helpless to move them due to the congestion and chaos. In an effort to incentivize companies to move their goods faster and make room for incoming shipments, several U.S. ports have announced increased fees in recent months for containers that overstay their welcome.
Arnold Kamler, CEO of Kent Bikes, said he often can’t get to his containers for five or 10 days for reasons that are out of his control. He pays $200 to $300 each day a container sits in port in Los Angeles or New York, up from a previous rate of $30. Last month, he paid more than $300,000 in these fees. “It’s extortion,” said Kamler, who sells his bikes at Walmart and Target. “If the terminal operator isn’t paid, he’ll then refuse to allow your trucks to pick up.”
Branch’s CEO blames the shortage of truck drivers, saying that’s the reason its goods often get delayed at port. “We’re throwing away a few thousand bucks a day” on port fees, Hayes said. The company used to flag and investigate so-called dwelling fees of even $150, but now considers it a win to pay $1,500 to $2,000 per container. That adds up quickly, since Branch is now shipping two containers a day (each holding 400 chairs, or 500 to 600 desks) versus just two containers a month in 2020. Hayes estimates the company has paid $500,000 in these fees in the last several months.
In February, members of Congress proposed legislation to regulate “harmful” port fees. There are signs, however, that the fees have helped clear bottlenecks. At the ports of Los Angeles and Long Beach, the number of import containers sitting on the docks for more than nine days dropped by 60% in the months after a fee increase was announced, according to the Biden administration. That is despite the fact that the implementation of those fees has been delayed multiple times.
Regardless, higher shipping costs are now being baked into the price of new products, said Nick Bozikis, chief financial officer of Article, an online furniture retailer. Article has held off on blanket price increases across its catalog for now, hoping supply-chain disruptions are temporary and will dissipate in the second half of the year. But that’s no guarantee. “We have our predictions. If those predictions turn out to be incorrect then at some point we’ll look at price as a lever,” Bozikis said. “It’s been very challenging from our perspective financially.”
In the meantime, companies are trying to squeeze more goods onto each container ship. Jay Foreman, CEO of toy company Basic Fun, now puts his 14-inch Care Bears in plastic polybags for online retailers like Amazon, helping him stuff three times the number onto a container ship. Foreman said he’s also figured out that he can get 10% more of his Tonka Mighty Dump Trucks onto a container by getting rid of the cardboard backing on the box, which showed a large image of a boy playing with the truck. It saves him $1,000 or more on each container, plus cuts his packaging costs from $1 a toy to just 35 cents. Never mind that it doesn’t look as good on the shelf at retailers like Walmart and Target.
Branch managed to shrink the packaging on its desks by two inches, and squeeze chairs into slimmer flat-pack boxes. But the consultants’ efforts have now reached their limit. “They have re-engineered our chairs in every possible way,” Hayes said. “They can’t seem to create a smaller box.”
The bigger the items, the harder it is to make the numbers work. Kent Bikes’ Kamler says that just 300 mountain bikes will fit in a container, and there’s not much he can do to get more in. As his costs have gone up, he’s raised the price of his mountain bikes from $150 to $250, convincing his long-time retail partners that he had no choice. Even so, his profit margins are lower, and the impact on cash flow has been brutal. “I have to borrow more money from the bank to cover ocean freight,” he said. “Bicycle margins are not that big.”
Companies have spoken for years about diversifying their manufacturing away from China, which they’d chosen for its low labor costs, and to set up factories closer to their consumers. Kent Bikes opened a factory in South Carolina in 2014, where it produces a line of Made In America products. Article accelerated plans to move 15% of its manufacturing to North America during the pandemic, seeing added incentive to cut down on the expenses and delays of putting items on ships. Gap Inc., which owns Gap, Old Navy and Athleta, said that it was accelerating its near-shoring efforts in Mexico and Central America.
Such shifts will happen slowly, however. “It was a labor arbitrage play to manufacture in China,” said Ambrose Conroy, founder of supply-chain consulting firm Seraph. “To do that, logistics costs had to be low. Now logistics costs are high and labor costs are high. The whole model has broken.”
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Source: https://www.forbes.com/sites/amyfeldman/2022/03/28/how-bad-inflation-might-get-according-to-the-companies-that-will-raise-prices/