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.
- Retailers are locking in expensive shipping contracts that will likely outlast the pandemic – Quartz
- Ikea is Buying Containers and Chartering Vessels – Maritime Executive
- Why is there a chip shortage? – BBC News
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?