A worker wearing a protective mask removes roast chicken from skewers inside a Costco store in San Francisco, Calif., Wednesday, March 3, 2021.
David Paul Morris | Bloomberg | Getty Images
Shipping bottlenecks that have resulted in increased shipping costs are creating a headache for U.S. retailers.
Costco this week joined the long list of retailers sounding the alarm bells about escalating shipping prices and the supply chain issues that accompany it. The warehouse retailer, who took a similar warning tone in May, was joined by sportswear giant Nike and economic indicators FedEx and General Mills in warning of similar concerns.
The cost of shipping containers overseas has skyrocketed in recent months. Getting a 40-foot container from Shanghai to New York cost around $ 2,000 a year and a half ago, just before the Covid pandemic. Now he manages some $ 16,000, according to Bank of America.
In a conference call Thursday with analysts, Costco CFO Richard Galanti called freight costs “permanent inflationary elements” and said those increases combine with “somewhat permanent” elements for turn up the pressure. They include not only freight, but also higher labor costs, growing demand for transportation and products, as well as shortages of computer chips, oils and chemicals, and higher prices for goods. basic products.
“We cannot keep all of this,” Galanti said. “Part of it needs to be passed on, and it is being passed on. We’re pragmatic about it.”
Quantifying the situation, he said inflation is expected to be between 3.5% and 4.5% overall for Costco. He noted that paper products have seen their costs increase by 4% to 8% and he cited shortages of plastic and pet products that are pushing prices up 5% to 11%.
“We can stay the course on some of these things and do a little better – hopefully do a better job than some of our competition and be even more extreme than value,” Galanti said. “So I think all of these things so far, at least despite the challenges, have worked a little in our favor.”
Getting ready for the holidays
The timing, however, is not good.
The lingering inflationary pressures come as retailers prepare for the holiday shopping season – Halloween, Thanksgiving and Christmas, then the New Year. The pandemic brought with it a host of factors that made inflation an economic buzzword after a generation of mostly moderate price pressures.
Businesses are in a hurry to deal with the situation before a critical period.
“As we get closer to the holidays we’ve been working with retailers and what we’re seeing is that # 1 they need to be flexible with their supply chain,” said Keith Jelinek, general manager of practices at global retail consulting company. Berkeley Research Group. “We have seen increases in the cost of goods, particularly in clothing, as well as inbound shipping costs with container costs, increases with transportation, trucking into distribution centers.”
“All of these costs will impact operating profits,” he added. “Right now, retailers are really faced with the question of how much can I pass on to the consumer versus other efficiencies in my operations in order to achieve my total margin. “
Many companies have indicated that consumers, at least for now, are willing to accept higher prices. Billions of dollars in government stimulus during the pandemic helped boost personal wealth, with household net worth rising 4.3% in the second quarter.
No one knows how long consumers will be willing to pay higher prices. Jelinek said he expects the current situation to persist at least through the holiday season and early next year.
“There is only a limited amount that you can pass on to the consumer,” he said. “What most retailers do is look through their [profit and loss statements] and they seek to improve performance and optimize efficiency. It really means focusing on their supply chain. “
It also means raising prices.
FedEx announced this week that it will increase shipping rates by 5.9% for domestic services and 7.9% for other offers. The company said it was hit by labor shortages and “costs associated with a harsh operating environment.”
The head of the company’s main competitor acknowledged the obstacles facing the company.
“The job market is tight and in some parts of the country we have had to make market rate adjustments to respond to market demands,” UPS CEO Carol Tome said on the show on Thursday. CNBC’s “Closing Bell”.
She added that the company has also been hit by supply chain issues.
“I’m afraid this will take some time. These issues have taken a long time and we will all have to work together to remove these blockages,” Tome said.
Federal Reserve officials admitted this week that inflation will be higher in 2021 than they expected. However, they still see prices stabilize in a more normal range of just above 2% in the years to come.
But Cleveland Fed Chairman Loretta Mester said in a speech on Friday that she saw “upside risks” in the central bank’s inflation forecast.
“Many companies are reporting that cost pressures are mounting and consumers seem willing to pay higher prices,” she said. “The combination of high demand and supply chain challenges could last longer than I expected and could cause individuals and businesses to raise their expectations for future inflation more than we do. have seen so far. “
Fed officials have said they are ready to start pulling back the monetary stimulus they provided during the pandemic, but likely won’t be raising rates anytime soon. However, Mester said if prices and expectations remained higher, Fed policy “would have to be adjusted” to control inflation.
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