Companies Resort to Expensive Measures as Holiday Season Looms
With the holiday season heading our way, the race is on for businesses to overcome production delays and shipping bottlenecks as customer demand begins to heighten.
To meet strong consumer demand, businesses are resorting to expensive measures to overcome backlogs at global shipping ports and local lockdown measures in countries, such as Vietnam.
Finance chiefs in the retail sector are choosing to ship their goods by air, rather than by ocean but airfreight comes at a higher price in order to meet demands. This is because the rates for air cargo have increased as airliners continue to operate fewer international passenger flights than before the Covid-19 pandemic.
VF Corp, which owns multiple brands such as North Face, Vans, and Supreme, has budgeted an additional $35 million on airfreight this year, Chief Financial Officer Matt Puckett revealed.
A quarter of their goods are manufactured in Vietnam but production facilities are temporarily closed and workers struggle to travel to work due to public transportation restrictions. By using airfreight the company hopes to offset some of the delays caused by these lockdown orders.
The company plans to raise its prices in 2022, Mr Puckett said, which are expected to be on par with with inflation.
Farfetch Ltd, a luxury retailer, has decided to not raise their prices as it hopes to win more customers, Chief Financial Officer Elliot Jordan said. Higher shipping and airfreight costs have reduced the company’s margins, with gross profit margins in its online marketplace to 53% in the period ended June 30 from 55% a year earlier.
“That is quite a burden for customers to have to pay for shipping, so we actually absorb some of that and reduce our gross margins,” Mr Jordan said.
Meanwhile, container shipping prices have also increased in recent months as a result of supply chain pressures across the world.
Meanwhile, back on the ocean, major retailers and companies are resorting to charting private cargo vessels and busing their own shipping containers to keep goods produced overseas flowing ahead of the holiday season scramble.
Walmart and Home Depot announced they were chartering private vessels this week in earnings calls. Ikea confirmed to NBC News it is also shipping goods over private vessels, along with purchasing its own shipping containers, another costly and unusual move brought about by short supply.
Trucking and logistics provider Schneider National Inc. will also be getting their containers filled with goods delivered to the U.S. this way.
A general cargo ship carrying 200 Schneider containers is heading to Oregan’s Port of Portland, which will bypass the backlog of ships at Southern California ports which has become a major choke point in supply chains caused by congestion and delivery delays.
This will be the first of many shipments from China to the U.S. which is chartered by Germany-based ship owner Schulte & Bruns Group to transport containers for Schneider and cargo for the U.S. carrier’s customers.
Jim Filter, Schneider’s chief commercial officer, said: “We’re hearing from many of our customers that they’re significantly behind in their shipping. They’re looking for any solution.”
Schneider has not revealed the cost of using dedicated vessels but compared it with the option against the costs of long delivery delays and escalating container shipping prices.
Spot container shipping rates from Asia to the U.S. West Coast were 462% higher this week than the same time last year, according to Freightos Baltic Index. The cost of chartering a large container ship can be as much as $80,000 or $90,000, as companies have scooped up capacity to meet strong shipping demand.
“Every container ship that floats is basically in operation already today,” said Soren Skou, chief executive of A.P. Moller Maersk A/S, the world’s largest container shipping line by capacity, revealing “there are no ships to lease anymore.”
Port of Los Angeles executive director Gene Seroka said the pandemic-based consumer buying surge is unparalleled.
“This is a worldwide phenomenon,” said Seroka. “We’ve got 34 ships in the brig water waiting to come into the ports of LA and Long Beach and another 20 over the next few days. We’ve been running at high velocity since June and July of last year.”
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Sources:
NBC News
Wall Street Journal