Retailers are having to bear the burden of higher transportation costs

Retailers are having to bear the burden of higher transportation costs

On top of mounting concerns over the impact of worsening delays on shipments of holiday merchandise arriving at US west coast ports, analysts are now warning retailers and manufacturers to expect tighter capacity and higher shipping rates to persist into 2015.

US apparel and footwear retailers, distributors and manufacturers are already being hit hard by delays at the ports of Los Angeles and Long Beach, with concerns intensifying as the holiday season nears its peak.

The slowdowns are largely the result of an ongoing dispute between the Pacific Maritime Association and the International Longshore and Warehouse Union (ILWU), which have been negotiating for the past six months over a new contract covering nearly 13,600 workers at 29 west coast ports.

And they have been leading to delays of two weeks or more just to get product through the ports, with some firms also incurring additional airfreight costs as they seek alternative ways to combat delays.

But analysts suggest there are a number of other factors exacerbating already significant holiday peak bottlenecks - and that while ocean freight volumes should start to fall from now to the year-end, problems for the entire US transportation system are likely to persist into 2015.

These include a limited chassis supply (the trailers used to load and unload cargo containers), which add to delays when it comes to moving cargo during peak hours, a driver shortage, the increasing use of mega-ships with longer unloading times, and strained intermodal congestion on alternative rail networks.

Another issue seems to be that some large retailers have placed later and larger orders this year than usual, increasing strain on the US logistics system.

"The bottom line, in our view, is that domestic freight rates (as well as trans-Pacific airfreight rates near term) should increase with congestion-driven supply shortages, benefiting providers of logistics services and expedited delivery, while retailers should bear the burden of these higher costs," says Stifel Research transportation and logistics analyst David Ross.

Retail winners and losers
Not surprisingly, the situation is likely to lead to both winners and losers, he believes.

Among the winners are freight forwarders and third-party logistics (3PL) companies that specialise in solving complex logistical problems and in finding last-minute capacity, while truckers also stand to benefit from port diversions.

On the retail front, those that traditionally use airfreight for a significant portion of their merchandise should see minimal negative impact. Luxury goods are also well-equipped to weather the impact, again, given more flexible supply chains and small cube/value ratios. In addition, offprice retailers could benefit as traditional retailers cancel late deliveries.

And of course retailers like Gap Inc, with its sophisticated supply chain strategies and early steps to mitigate delays, should also be able to limit the impact from congestion in the US logistics network.

But likely losers include vertically integrated retailers that could be at risk of delayed deliveries and increased costs. Ann Inc, has already warned that product shipment delays and the additional costs associated with air freight will put pressure on gross margin.

While the Stifel Research analysts still believe the eventual resolution of the port workers' dispute is more likely than an all-out strike, they note "costs will continue to mount as the parties continue to lock horns."

Longer-term implications
Ross suggests port congestion is probably a bigger issue for those retailers that occupy a lower price point, since high-fashion is more likely to move via airfreight. But there might be "some bleed-over price increases if peak spot demand rises through the system," he advises.

For those who do import via LB/LA/west coast ports, "all is not lost, but they may need to employ more expensive transport modes than normal in order to get the goods to where they need to be."

For manufacturers more seasonally reliant on the second half of 2014, however, "we believe the port strikes have the potential to be a negative risk to 4Q estimates, and CY15 (calendar year 2015) Fall/Holiday order-books."

These risks are seen to include lost sales from cancelled orders due to shipment delays, greater than expected cost of goods due to transportation re-routing, inventory overhang into CY15 due to late deliveries limiting sell-in potential, and margin pressure due to an increase in promotional cadence from fewer weeks for sell-through."

As if this wasn't enough to contend with: "Currently, we do not anticipate discussion of costs being passed along to the consumer, thereby impacting the manufacturers/retailers entirely."