With freight costs going through the roof, American consumers should brace themselves for higher prices of everything. Bottlenecks across the retail distribution system are spiraling out of control. Pretty soon, retailers will be passing on the added costs to consumers.
Freight Costs Are Soaring
In the last few months, freight costs have gone astronomical. Pre-pandemic, the cost of getting a single 40-foot container from Shanghai to New York costs around $2,000. Now, the price is around $16,000, per research by Bank of America.
Among the companies reeling from higher freight costs is retail giant Costco. In a conference call last week, Chief Financial Officer Richard Galanti called the new freight costs “permanent inflationary items”.
The increase in cost combined with other factors to drive up the pressure. The factors include higher labor costs, increased transportation costs, and higher commodity prices. “We can’t hold on to all those,” Galanti said. He said that the company is passing some of the costs to consumers and that they’re pragmatic about it.
Higher Freight Costs Pushing Inflation Up
Galanti said that Costco’s inflation rate is running between 3.5% to 4.5%. Paper product costs increased between 4 to 8%. In addition, plastic and pet product shortages are pushing prices between 5 to 11%.
“We can hold the line on some of those things and do a little better job — hopefully do a better job than some of our competitors have and be even that more extreme than the value. So I think all those things so far, at least despite the challenges, have worked in our favor a little bit,” Galanti added.
Unfortunately for consumers, these inflationary pressures are arriving at an inopportune time. Many Americans are getting ready for the holiday shopping trio: Halloween, Thanksgiving, and Christmas.
“Getting closer to the holidays, we have been working with retailers and what we see is No. 1, they’ve got to be flexible with their supply chain,” said Keith Jelinek, managing director of the global retail practice of Berkeley Research Group.
“We’ve seen cost-of-good increases especially in apparel, also costs of inbound shipping with the costs of containers, increases with transportation, trucking to get into distribution centers,” he added.
American Consumers OK So Far With Higher Prices
“All these costs are going to hit the operating profits,” Jelinek added. “Retailers right now are really challenged with how much can I pass onto the consumer vs. can I get other efficiencies out of my operations in order to hit my total margin.”
However, many companies said that consumers are so far willing to absorb higher prices. US households reported a 4.3% increase in net worth during the second quarter.
Jelinek doesn’t expect consumers to continue remaining okay with paying higher prices. At the least, he said that higher prices will persist into the holiday season until early 2022.
“There’s only so much you can pass on to the consumer. What most retailers are doing is looking across their [profit and loss statements] and they’re looking to improve performance and to optimize efficiency. That means really focusing on their supply chain,” he added.
FedEx To Charge Higher Shipping Rates
Meanwhile, delivery services are beginning to hike their prices. Earlier this week, FedEx announced a hike of 5.9% for its domestic shipping rates and 7.9% for others. The company admitted to facing labor shortages as well as “costs associated with the challenging operating environment.”
FedEx’s rival UPS is also going in the same direction. “The labor market is tight, and in certain parts of the country we’ve had to make some market-rate adjustments to react to the demands of the market,” UPS CEO Carol Tome said. UPS is also suffering from supply chain issues.
“I’m afraid this is going to last for a while. These issues have been a long time coming and it’s going to take all of us working together to clear those blockages,” she added.
Watch the KPIX CBS SF Bay Area news video reporting that retailers warn supply chain issues could impact holiday shopping season:
Do you support absorbing higher prices of goods due to increased freight rates and other supply chain issues? Do you see an end to higher prices after the pandemic?
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