A worker wearing a protective mask removes
David Paul Morris | Bloomberg | Getty Images
Delivery bottlenecks, which have led to rising freight costs, are a vacation headache for US retailers.
Costco joined the long list of retailers this week on the alert for escalating shipping prices and the associated supply chain issues. The department store retailer, which had a similar cautionary tone in May, was helped by sportswear giant Nike and business leaders FedEx and General Mills to discuss similar concerns.
The cost of shipping containers overseas has increased in recent months. A year and a half ago, just before the Covid pandemic, it cost about $ 2,000 to ship a 40-foot container from Shanghai to New York. It is now around $ 16,000, according to Bank of America.
In a conference call with analysts Thursday, Richard Galanti, Costco’s chief financial officer, called freight costs “permanent inflationary items” and said these increases are being combined with things that are “somewhat permanent” to add to the pressure. This includes not only freight, but also higher labor costs, increasing transport and product demand as well as scarcity of computer chips, oils and chemicals and higher raw material prices.
“We can’t hold onto all of this,” said Galanti. “Some of it has to be passed on, and it is passed on. We are pragmatic about it.”
To quantify the situation, he said inflation is likely to be between 3.5% and 4.5% for Costco. He found that the cost of paper products has increased by 4% to 8% and cited shortages in plastic and pet products that are driving prices up from 5% to 11%.
“We can hold the line on some of these things and do a slightly better job – hopefully a better job than some of our competitors and even more extreme than value,” said Galanti. “So I think all of these things have worked a little in our favor so far, at least despite the challenges.”
Prepare for the holidays
However, the timing is not good.
Persistent inflationary pressures come at a time when retailers prepare for the Christmas shopping season – Halloween, Thanksgiving, and Christmas, then the New Year. The pandemic brought with it a number of factors that have turned inflation into an economic buzzword after a generation of mostly moderate price pressures.
Companies are forced to deal with the situation before a critical phase.
“We’re approaching the holidays, we’ve worked with retailers, and we see that # 1 they need to be flexible with their supply chain,” said Keith Jelinek, executive director of global retail practice at consulting firm Berkeley Research Group. “We noticed an increase in the cost of goods, especially for clothing, including the cost of inbound shipping with the cost of containers, increases in transport, truck transports to get to distribution centers.”
“All of these costs will weigh on operating profit,” he added. “Retailers are currently facing the challenge of how much I can pass on to the consumer, or how I can get other efficiencies out of my operations to meet my overall margin.”
Many companies have signaled that consumers are ready, at least for now, to accept higher prices. Trillions of government incentives during the pandemic helped boost personal wealth, with household net worth growing 4.3% in the second quarter.
In the company’s conference call on Thursday, Nike CFO Matthew Friend referred to the price increases in the second half of the year, as well as “more than expected full price realization” and “additional transportation, logistics and air freight costs to move inventory in this dynamic environment”.
Nobody knows how long consumers will be willing to pay higher prices. Jelinek said he anticipates the current situation will last at least during the holiday season and until early next year
“There is only a limited amount that you can give to consumers,” he said. “What most retailers do is think about theirs [profit and loss statements] and they want to improve performance and optimize efficiency. That means really focusing on your supply chain. “
It also means raising prices.
FedEx announced this week that it will increase shipping costs by 5.9% for domestic services and by 7.9% for other offers. The company said it was hit by labor shortages and “costs related to the challenging operating environment”.
The head of the company’s main competitor admitted the hurdles the business is facing.
“The job market is tight, and in certain parts of the country we had to make some market price adjustments to respond to market demands,” said UPS CEO Carol Tome on CNBC’s Closing Bell on Thursday.
She added that the company was also affected by supply chain issues.
“I’m afraid this will continue for a while. These problems have been a long time coming and we must all work together to remove these blockages, ”said Tome.
Federal Reserve officials admitted this week that inflation in 2021 will be higher than they expected. However, you can still see that prices will settle in a more normal range of just over 2% in the years to come.
But Cleveland Fed President Loretta Mester said in a speech on Friday that she saw “upside risks” for the central bank’s inflation projections.
“Many companies report that cost pressures are mounting and consumers are willing to pay higher prices,” she said. “The combination of strong demand and supply chain challenges could last longer than I expected, leading people and businesses to raise their expectations of future inflation more than we have seen before.”
Fed officials said they were ready to pull back on the monetary stimulus they provided during the pandemic, but probably won’t hike rates anytime soon. However, if prices and expectations stay higher, Mester said, Fed policies would have to be “adjusted” to control inflation.
Become a smarter investor with CNBC Pro.
Get stock picks, analyst calls, exclusive interviews and access to CNBC TV.
Sign up to start a free trial today.