Why shipping snarl will be costly for merchants, holiday shoppers

Nektar Petroff has gotten used to waiting.

As the owner of Most Fun Toys, an online business based in North Hollywood, she’s in the middle of ordering merchandise for the busy holiday season. But she’s waiting an extra week or two — and sometimes more — to get her goods. Adding to her stress are the shipping costs, which Petroff says are often two to three times higher than the value of the merchandise she’s ordering.

“I ordered 24 dollhouses and paid about $120 for them, but the shipping cost me $300,” said Petroff, who also gives many of her toys to children in need. “Before, the shipping would have been closer to $200.”

With the holidays fast approaching and supply chains clogged, local retailers big and small are scrambling to get holiday goodies on their shelves.

Nektar Petroff, owner of Most Fun Toys based in North Hollywood, has seen shipping costs for her toy orders go up by some 33%. (Courtesy of Most Fun Toys)

Back-ups at Southern California ports and a shortage of warehouse workers and truckers will likely make that a tall order for merchants. So what are they doing to prepare for the shopping onslaught?

Getting very nimble.

Jon Gold, vice president of supply chain and customs policy for the National Retail Federation, said companies are mitigating the risks by pivoting fast, over and over.

“They’re bringing products in earlier than usual, shifting to different ports if need be, using air-freight delivery instead of cargo ships, and in some cases, chartering their own cargo vessels,” he said.

The price for containers from China to the U.S. West Coast has hovered near record highs, with contract rates 25% to 50% higher than a year ago, according to S&P Global Platts.

Switching the game strategy

Target is one of the larger retailers finding new ways around the overwhelmed supply chain.

The company is ordering larger shipments, even chartering its own container ship, ahead of the holidays.

“As co-managers of the ship, we can avoid delays from additional stops and steer clear of particularly backed-up ports,” the company said last week.

Sixty container ships sat offshore from the ports of Los Angeles and Long Beach on Wednesday, October 6, waiting to unload their cargo. (Photo by Jeff Gritchen, Orange County Register/SCNG)

That traffic jam is playing out at Southern California’s twin ports, which have been clogged for months.

“As of this morning, there are 60 container vessels waiting to get into the two ports,” Port of Los Angeles spokesman Phillip Sanfield said Wednesday. “Twenty-five are headed to L.A. and 35 are headed for Long Beach.”

It’s estimated that nearly half a million shipping containers are waiting outside the ports to be unloaded, and Sanfield said ships are waiting about 10 days to unload their goods.

Some waits have been much longer.

Chatsworth-based MGA Entertainment, one of the nation’s largest toymakers, said it had more than 600 containers filled with toys that were stuck in the port of Los Angeles for six weeks waiting to be unloaded.

The domino effect

The gridlock stems from the temporary closure of factories, warehouses and other key facilities during the COVID-19 pandemic. Many workers moved to other jobs, while others are leery of returning to work amid the delta variant.

The shortage has created a supply-chain backup amid a climate of rising consumer demand and increased e-commerce buying heading into the holidays. Retailers across the brick-and-mortar and e-commerce spectrum are hustling to keep up.

Walmart, like Target, is chartering its own cargo ships, while also looking to avoid congested ports.

“We have hired more than 3,000 drivers this year, with more in the pipeline,” the company said in recent days. “We’re hiring 20,000 permanent supply chain positions to help move products through our facilities as quickly as possible.”

The company has grown its inventory of electronics, with a focus on TVs, laptops and video games, in preparation for the holidays.

Burt Flickinger III, managing director for the retail consulting firm Strategic Resource Group, said Amazon, Walmart, Target and Costco have a leg up in the holiday arms race because they’re able to hire their own cargo ships.

“They also save money by pre-booking the ships,” he said. “They’ll pay $5,000 to $6,000 per container, but other companies that contract cargo ships on the spot market might pay as much as $20,000 per container.”

Walmart, like Target, is chartering its own cargo ships, to get goods to stores. The retailer has grown its inventory of electronics, with a focus on TVs, laptops and video games, in preparation for the holidays. (Photo by David Crane)

Sticker shock in the stores

Consumers will also be facing sticker shock this holiday season, particularly when looking for items like T-shirts and jeans.

The price of cotton rose 22% over the past two weeks as a result of severe drought and impacted production. Overall apparel prices rose 4.2% during the 12 months ended in August.

But prices aside, many consumers will likely be clamoring for items on Amazon’s list of the hottest toys for the 2021 holiday season. They include the Big Dig Working Excavator with Wheels ($55), the Star Wars Snackin’ Grogu ($79) and the Hot Wheels City Ultimate Octo Care Wash ($80), among other items.

While toys are the perennial holiday favorite, getting them to the shelves without long delays and high delivery costs is a different matter.

Basic Fun, a Florida-based toy company, opted to leave one-third of its iconic Tonka Mighty Dump Trucks destined for U.S. store shelves in China.

Basic Fun attributed the move to the surging price of shipping containers and clogs in the supply network, as well as increased transportation costs. The cost to bring the products to the U.S. now accounts for 40% of the retail price, or roughly $26.

That’s up 7% from a year ago, and it doesn’t include the cost of getting the product from U.S. ports to retailers.

No forks for you

The logistics logjam is also impacting the food industry.

Art Solis, who co-owns 3.99 Pizza Co. with locations in Covina, West Covina and Montclair, says he’s struggling to get some of the basic products he needs.

“We’ve actually had to tell some customers that we don’t have forks,” he said. “At one point, I went to every Smart & Final around here and not one of them had forks. We’re having the same issue with straws.”

Solis is also scrambling to keep enough pizza boxes on hand.

“A lot of them come from China and right now they’re stuck at the ports,” he said. “We’re also short on hot wings. They come from Tyson, but they can’t get enough workers to cut them and they don’t have enough truck drivers.”

In some cases, retailers have resorted to buying goods made a couple of years ago to make sure they can secure at least some inventory, according to Steve Azarbad, co-founder and chief investment officer of the hedge fund Maglan Capital.

In normal times, these items would be liquidated at closeout stores or in foreign markets, but not now.

“Retailers are having a really hard time filling their shelves,” Azarbad said. “I talk to a lot of suppliers, and they’re telling me ‘I just can’t fill all the orders I’m getting.’ ”

Gene Seroka, executive director for the Port of Los Angeles, said the facility has extended its operating hours and added another 1,000 workers in an effort to keep pace with the heavy flow of merchandise ahead of the holidays. (File photo by Brittany Murray, Press-Telegram/SCNG)

Accelerate Cargo L.A.

The mess at the ports could improve with a pilot program and potential federal infrastructure funding.

Gene Seroka, executive director for the Port of Los Angeles, said the facility has extended its operating hours and added another 1,000 workers in an effort to keep pace with the heavy flow of merchandise.

“We’re having difficulty absorbing all of this cargo into the American supply chain,” Seroka said in a recent interview with CNN Live. “And the U.S. importer is sitting on that cargo longer than ever here at the port.”

The port launched the pilot program Accelerate Cargo L.A., which was designed to ensure that gate availability meets cargo demands. It also calls on marine terminal operators to incentivize the use of all available gate hours — especially night gates — to reduce congestion.

Seroka also is seeking federal support through the nation’s pending $1.2 trillion infrastructure bill.

“This is what 10 years of under-investment looks like, and we need to move forward,” he said.

Importers began bringing in seasonal cargo in June, Seroka said, about two months ahead of schedule, to better ensure they could get products to stores on time. In spite of the challenges, he’s hopeful.

“I think we have a pretty good chance of making sure inventory levels are appropriate,” he said.

But there’s no guarantee.

“The logistics system is just stressed from end to end,” said Gold with the National Retail Federation. “There’s no one silver bullet that will fix everything.”

Gold said smaller retailers are having a tough time getting their products because they’re less nimble than the big players. Still, he expects shoppers to be understanding.

“Retailers are doing a good job of explaining what’s going on,” he said. “The best advice I can give customers is to shop early. If there’s a hot item you want, make sure you get it early in the season.”

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