Freight costs carry manufacturer woes

NEW YORK —There may be a new kind of Grinch ready to pirate away profits from holiday sales this year, as the costs associated with shipping merchandise from the Asian market have skyrocketed heading into the 2010 holiday season.

“Costs have tripled, and quadrupled in some areas,” Jonathan Gold, VP supply chain and customs policy for the National Retail Federation, told Drug Store News. “It’s definitely more expensive than it was at this time last year.”

As of the end of August, capacity demand had stabilized somewhat, Gold reported, but if there is any indication that consumers have loosened their purse strings headed into this holiday season, demand for merchandise may very quickly outstrip available freight capacity. “It’s resolved itself for now, but there is concern [about] what can happen later on in the year,” Gold cautioned. If demand again exceeds capacity, it could prove a costly battle to get container space on a ship, and consequently some shipments could be delayed for weeks.

“Because of the economic slowdown [last year], a lot of the shipping lines took boats out of service,” said Steve Perlowski, VP member relations and industry affairs for the National Association of Chain Drug Stores. And while that has the potential to impact holiday sales, pharmacy retailers already should have their seasonal merchandise flowing throughout the supply chain. “A lot of our [retail members] typically push to receive their holiday orders in the beginning of July,” Perlowski said, and warehouse that merchandise for the few months before it’s needed on shelves. “You don’t want to be caught without product,” Perlowski said.

Net-net this year, increased shipping costs—both international freight and domestic transport, due to climbing gas prices—should only have a negligible impact on holiday merchandise margins.

While freight capacity issues have the potential to frustrate retailers this year, it may be a harbinger of better times to come. International freight, as an industry, typically lags the economic realities of today. Last year, carriers were frustrated by excess capacity—a reflection of more conservative buying habits among retailers. “By the end of September 2009, an estimated 548 container vessels with a carrying capacity of 1.3 million 20-ft. equivalent units, [or TEUs,] were idled at seaports worldwide as a result of the decline in global demand for containership services,” the U.S. Bureau of Transportation Services reported earlier this year. Global container throughput fell from 524 mil lion TEUs in 2008 to 473 million TEUs in 2009, a drop of almost 10%, according to Drewry Shipping Consultants.

But international freight carriers cautiously have resumed growth projects for the future. Drewry projected container throughput to increase globally by an average of 7.2% a year between 2009 and 2015. Ocean carriers have brought back 19% of capacity to the eastbound transpacific in the second quarter, compared with the first quarter. On the Asia-Europe trade, it is 12.4%, with a forecasted 8% returning during the third quarter.

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