Photo: Getty Images/Suriyapong Thongsawang
Will retailers win now and lose later with long-term shipping contracts?
Supply chain disruptions have plagued the U.S. retail landscape in recent months, raising concerns that Christmas shoppers will be met with stock outs rather than gifts when the holiday season gets under way. Some major retailers have been trying to circumvent international supply bottlenecks by contracting with overseas shipping companies, but the terms of the deals are not always a bargain.
Long-term shipping contract prices have more than doubled since this time last year, according to an article on Quartz. Even so, the long-term contracts tend to be cheaper than one-off “spot rate” fees retailers have been incurring to get product shipped at the last minute. Experts are concerned, though, that the long-term contracts will lock in retailers to pay more after overseas shipping costs have normalized.
Dollar Tree, for instance, has entered into a shipping contract until 2024, though analysts see the supply chain problems working themselves out sometime in 2022 or 2023, leaving the retailer paying above market rate shipping costs for a year if not longer.
U.S. retailers are facing bottlenecks at numerous points in the global supply chain. Retailers’ ability to get products on the shelves have been compromised by a variety of factors: a resurgence in demand for products after the first wave of pandemic shutdowns, stateside worker shortages in shipping and logistics, production shutdowns in Asia and Southeast Asia due to COVID-19, the high-profile blockage of the Suez Canal and environmental devastation in some parts of Europe due to flooding.
There has even been disruption on the packaging side of the equation, with a shortage of shipping containers necessitating that retailers like IKEA purchase a supply for their own use.
Shipping-related problems are not the only global supply chain issue with the potential to impact holiday sales and retail moving forward.
The tech world is facing a shortage of computer chips which, according to the BBC, appears to be connected to outsize demand due to the adoption of 5G, manufacturing complexities and hoarding of chips by some tech firms. Such chips are foundational to products as varied as video game consoles, cars, washing machines and smartphones.
Discussion Questions
DISCUSSION QUESTIONS: Is getting locked into a long-term overseas shipping contract worth it a for major retailer? What other ways might be more or less effective to mitigate short-term supply chain concerns? When do you see supply chain woes easing up given what we know now, and are multi-year contracts certain to outlast the length of the disruptions?
Poll
Loading …BrainTrust
Bob Amster
Principal, Retail Technology Group
John Hennessy
Retail and Brand Technology Tailor
Contracting a vessel is part of the solution to the supply chain crunch, but how do you get that vessel into a port that has no capacity and a stack of container ships waiting to enter?
The answer – like with most complex questions – is “it depends.” Shareholders can only hope that DG and others have done the math several ways to understand worst-case scenarios so they know as much as possible about long-term deal upside vs. what’s at risk, should things normalize next year. There is no substitute for diligence.
Given the direction current trends are pointing I’m not convinced shipping rates will be coming down, but being locked into a shipping arrangement will limit retailers’ ability to respond to looming changes in the type of goods consumers will want to buy in coming years. The demand for second hand goods, sustainably made goods, locally sourced goods is poised for major growth over the next five years, meaning retailers could be in the position of needing to revise their supply chain long before contracts have expired.
Long-term contracts are always a form of gambling. Retailers need to feed many variables into a meat grinder that eventually comes up with a worthwhile recommendation. There are no certainties in this particular space.
Securing capacity to ensure goods arrive is an expensive but prudent move. It will probably help big retailers keep customers, and could prove to be a differentiator during the holiday season since there are concerns about potential product shortages. The decision to enter into long-term shipping contracts needs to be weighed against brand promise, customer expectations and the ability to help offset some of that cost through efficiencies or productivity gains in other parts of the business.
There is no silver bullet here to solve today’s supply chain challenges – only tactics that help mitigate the challenges for the short-term and hopes that in the long-term these solutions will maintain their value while not resulting in higher, unnecessary costs. The main lesson learned here is to be agile enough to adapt. That lesson will continue to be true over time even as the supply chain woes of 2021 play out over 2022 and into 2023. While contracting ships solves one challenge, others remain, including port delays and last-mile challenges. Each of these demands similar attention and mitigation.
Most retailers are at present focused on getting inventory for the holiday season and beyond. If that means signing longer term deals, that is less important than having the possibility of lower costs but no inventory. If you have nothing to sell, cheap shipping is irrelevant.
The global supply chain issues are not going to be solved overnight. Energy costs are increasing, there is more focus on the environment and skilled labor, including drivers, is increasingly hard to come by. All of these will take time to work themselves out and will create inflation, so the idea that cheap deals will be around quickly is unlikely.
As Neil pointed out, given the state of the ports, lack of drivers, lack of will on the parts of carriers and now an oil spill for good measure, I see no value to a long-term contract.
This is, in my view, a horrible situation that could be fixed far more quickly if it actually was costing the carriers money. It’s not. So rewarding what I see as bad behavior is a bad idea. Always.
This is a great opportunity for local hard goods manufacturers and suppliers to take a page out of the farm to table playbook. Promote their locally sourced, locally manufactured products with timely delivery. This could be the most locally sourced holiday shopping season ever. Shop local. It might be a shopper’s best option, not just a marketing slogan.
This is a long-term game, but a long-term contract at surge pricing leaves little room for creative solutions over time. More ownership over the distribution network as a whole will be key, and while shipping contracts are smart for now, it’s a form of outsourcing that ultimately still gives up some control.
Classic scenario analysis is much needed, and this requires a ton of data from many difference sources that – hopefully – has been harmonized and integrated for ease of use. If companies are not running hundreds and/or thousands of scenarios with advanced analytical techniques, then they could easily find themselves in a sticky wicket three, six or 12 months from now. Given the current global dynamics, there will continue to be a push for new logistical patterns and models, but the short term could be pretty painful for all.
Considering all the constraints, global supply chain challenges, and the unpredictable nature of the worldwide economy, committing to a long-term shipping contract could be a tricky proposition. The supply chain situation the world finds itself in has been unprecedented, even when considering the Great Depression.
With supply chain channels snarled by the effects of the COVID-19 pandemic, major retailers like Target Corp. and Home Depot Inc. are taking matters into their own hands, chartering ships to deliver goods in time for the critical holiday season. However there are high costs, infrastructure investments, and resources to drive this capacity forward.
The cost to lease a ship runs from about $1 million to $2 million per month plus operating expenses, including the cost of renting the containers, which can run hundreds of dollars. The biggest retailers are using between 500 and 1,500 containers per month.
I believe the many of us who voted “nay” are assuming the contracts will reflect current conditions, and that the conditions will actually improve; hence you’ll be locked into a worse than I’d get now situation. But obviously it depends on the terms of the contract; and there’s a value in certainty … knowing that if worse comes to worst … well it won’t actually be worst(i.e. no shipping ability at all).