A worker wearing a protective mask removes roast chicken from skewers inside a Costco store on Wednesday, March 3, 2021 in San Francisco, California.
David Paul Morris | Bloomberg | Getty Images
Rising transportation costs due to shipping bottlenecks are creating a headache for US retailers.
Costco is joining a long list of retailers this week sounding the alarm bells about rising shipping prices and supply chain issues. The warehouse retailer, who had a similar tone of warning in May, was joined by sportswear giant Nike and economic indicators Federal Express and General Mills in warnings of similar concerns.
The cost of shipping containers overseas has increased in recent months. Just before the Covid pandemic, getting a 40-foot container from Shanghai to New York cost around $ 2,000 a year and a half ago. Now, according to Bank of America, it’s hovering around $ 16,000.
In a conference call with analysts, Costco chief financial officer Richard Galanti called the freight costs “permanent inflationary elements” and said that these increases combine with “somewhat permanent” elements to increase the price. pressure. “Huh. It’s not just freight but high labor costs, increased demand for transportation and products, as well as shortages of computer chips, oil and chemicals, and prices. high raw materials.
“We can’t catch them all,” Galanti said. “Part of that needs to be passed, and it’s in the process of being passed. We are pragmatic about this.
Making matters worse, he said inflation for Costco would likely be between 3.5% and 4.5%. He said the cost of paper products had risen 4-8% and cited a shortage of plastic and pet products that is pushing prices up 5-11%.
“We can stay the course on some of these things and do a little better – hopefully better than some of our competition and be even more extreme in terms of value,” Galanti said. “So I think all of these things have worked a bit in our favor so far, at least despite the challenges.”
Getting ready for the holidays
Even if the timing 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 about a number of factors, which made inflation an economic buzzword after mostly moderate price pressures generated.
Companies are forced to deal with the situation before the critical period.
“As the holidays approach, we are working with retailers and what we see, # 1, they need to be flexible with their supply chain,” said Keith Jellinek, Managing Director of Global Retail Practice at consulting firm. Berkeley Research Group. “We have seen a growth in the cost of the good, especially in applications, the cost of inbound shipping with the cost of containers, growth with transportation, trucking to get to distribution centers.”
“All of these costs are going to have an impact on operating profits,” he said. “Right now, retailers are really challenged with how much I can pass on to the consumer versus whether I can get further efficiencies from my operations to reach my total margin. “
Several companies have indicated that consumers are prepared to charge higher prices, at least for now. 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 the higher price. Jellinek 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 give to the consumer,” he said. “What most retailers do is look before their [profit and loss statements] And they want 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 tough 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 meet market demand,” UPS CEO Carol Tomei said on Thursday on “Closing Bell “from CNBC.
He added that the company has also been hit by supply chain issues.
“I’m afraid this will take a while. These problems have been slow to come and we must all work together to remove these blockages. “
Federal Reserve officials acknowledged this week that inflation in 2021 will be higher than expected. However, they still see that prices will fall within the normal range by more than 2% in the years to come.
But Cleveland Fed Chairman Loretta Meester said in a speech on Friday that she saw “an upside risk” in the central bank’s inflation forecast.
“Many companies are reporting that cost pressures are accelerating and consumers are willing to pay higher prices,” she said. “The combination of high demand and supply chain challenges could last longer than expected and cause people and businesses to raise their expectations regarding the future inflation that we have experienced so far. “
Fed officials have said they are ready to start pulling back the monetary stimulus provided during the pandemic, but likely won’t hike rates anytime soon. However, Meester said Fed policy “will need to be adjusted” to contain inflation if prices and expectations remain high.
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