On Wednesday, March 21, 2021, a worker wearing a protective mask removed a rotisserie chicken from inside a Costcore store in San Francisco, California.
David Paul Morris | Bloomberg | Getty Images
Shipping barriers that have led to rising freight costs are creating a holiday headache for U.S. retailers.
Costco has joined the long list of retailers this week, raising concerns about rising shipping prices and supply chain problems. Warehouse retailers, which had similar warnings in May, joined sportswear giant Nike and economic bell-ringing Federal Express and General Mills in similar concerns.
The cost of sending containers abroad has increased in recent months. It cost about 2,000 2,000 a year and a half before the Kovid epidemic to get a 40-foot container from Shanghai to New York. According to Bank of America, it now runs 16,000.
In a conference call with analysts, Costco’s chief financial officer Richard Galanti called freight spending a “permanent inflationary item” and said the increases were being combined with some items that were “somewhat permanent” to increase pressure. These include not only freight but also high labor costs, growing demand for transportation and goods, plus computer chips, oil and chemical shortages and high commodity prices.
“We can’t hold them,” Galanti said. “Some of it has to pass, and it’s being given. We’re realistic about it.”
Measuring the situation, he said inflation could run sharply between 3.5% and 4.5% for Costco. He noted that the prices of paper products have increased from 4% to 8% and he also mentioned the shortage of plastics and pet products which is increasing the prices from 5% to 11%.
“We can hold the line on some things and do a little better – hopefully we can do better than some of our competitors and be more extreme than the price,” Galanti said. “So I think so far all these things, at least despite the challenges, have done us some good.”
Getting ready for the holidays
Although the timing is not good.
Constant inflationary pressures come at a time when retailers are preparing for the holiday shopping season – Halloween, Thanksgiving and Christmas, then the New Year. The epidemic has brought with it an unbroken cause that has made inflation an economic term after a moderate price pressure generation.
Companies are pressured to deal with the situation in times of crisis.
“As the holidays get closer, we’re working with retailers and what we see is, No. 1, that they need to be flexible with their supply chain,” said Keith Jelinek, managing director of the consulting firm’s global retail practice at Berkeley Research Group. “We have seen, in particular, an increase in the price of clothing, the cost of inland shipping, including the cost of containers, an increase with transportation, trucking to enter the distribution center,” he said.
“Managing all these costs is going to hit profits,” he added. “Now retailers are really challenging how far I can go to the consumer versus how I can get other skills from my operations to achieve my total margin?”
Many companies have indicated that at least for now consumers are willing to pay higher prices. Billions of government stimulus during the epidemic helped boost personal wealth, with household wealth rising 4.3% in the second quarter.
No one knows how long consumers will be willing to pay more. Jelenek said he hopes the current situation will continue at least during the holiday season and early next year.
“You can only give so much to the consumer,” he said. “Most retailers are looking across what they are doing [profit and loss statements] And they are looking to improve performance and optimize efficiency. That means really focusing on their supply chain. “
This means raising prices.
FedEx announced this week that it would increase shipping rates to 5.9% for domestic services and 7.9% for other offers. The agency said it was being hit by labor crises and “costs related to the challenging operating environment”.
The company’s main competitor has acknowledged the hurdles faced by the main business.
“The labor market is tight, and in some parts of the country we have had to adjust some market-rates to meet market demand,” UNS chief executive Carol Tommey told CNBC’s “Closing Bell” on Thursday.
He added that the company also had problems with the supply chain.
“I fear it will last for some time. These problems have been going on for a long time and we all need to work together to overcome this blockade,” he said.
Federal Reserve officials acknowledged this week that inflation in 2021 will exceed their expectations. However, they are still seeing prices stabilize at a normal range above 2% in the coming years.
But Loretta Mester, president of the Cleveland Fed, said in a speech Friday that she sees the “reverse risk” of the central bank’s inflation forecast.
“Many businesses report that cost pressures are intensifying and consumers seem willing to pay higher prices,” he said. “The combination of strong demand and the supply-chain challenge could last longer than I expected and raise the expectations of people and traders for future inflation that we have seen so far.”
Fed officials said they were ready to bring back the financial stimulus they provided during the epidemic but would probably not raise rates anytime soon. However, Mester said that if prices and expectations are high, the Fed policy “needs to be adjusted” to control inflation.
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