Though the surging tide of the pandemic and its effects might be ebbing, the consequences to the supply chain are lingering at best and dire at worst.
While manufacturing ground to a halt last spring, it returned with renewed force throughout the summer months as consumers began to loosen their purse strings. By fall, brands were fighting tooth and nail to import everything they could in time for the holiday season.
The boom saw freight forwarders flush with new and urgent business, while shipments had dwindled to a trickle just months prior. The rush to bring imports into the U.S. via West Coast ports—which has reached a fever pitch in recent weeks—has created increasingly challenging conditions for brands as well as the ports themselves.
“West Coast ports, particularly those in Southern California, have been pushed to the brink by record-breaking imports, container shortages, numerous longstanding supply chain supply inefficiencies, and at times, Covid-19 illness and quarantining of workers,” Jennifer Sargent Bokaie, International Longshore and Warehouse Union (ILWU) coast longshore division communications director, told Sourcing Journal.
“The supply chain problems go far beyond the ports, and in fact have roots as far away as the Midwest and East Coast,” she added. In fact, longstanding issues like intermodal rail congestion, limits on warehouse space, weather conditions (like the freezing temperatures currently seen across the Midwest), and a lack of available shipping containers and cargo handling equipment are contributing to the delays.
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“On top of that, Covid-19 created unexpected lows in cargo movement last spring, followed by unprecedented highs in import levels as consumers’ buying habits changed quickly during stay-at-home orders,” she added. “It’s a complicated system with many moving parts, and the ports are just the farthest West points in that system—it’s rarely where problems originate, but often where they are most visible.”
“Everyone has experienced volume increases in imports,” Mario Cordero, executive director of the Port of Long Beach, told Sourcing Journal. “It’s also fair to say that we’re the nation’s largest container complex, and the one with the closest proximity, comparatively speaking, to the largest trade region for the United States,” he added, referencing Asia and China more specifically.
The Long Beach and Los Angeles ports together move about $400 billion-worth of cargo annually, he said, essentially evenly split between the two locations, which are part of the same complex. In 2020, a year riddled with supply-chain hiccups, Long Beach still saw $17 billion in product float through on its way to consumers. The port’s February numbers revealed a 32.7-percent year-over-year increase in cargo imports from the same period in 2020. “It gives you some context for the increased volume coming into this port now,” Cordero added.
The complex typically sees a minimal backup of vessels waiting to drop off their shipments at a dock. “Today, we had 33 in line,” he said on Tuesday, and the site has seen as many as 37 teed up for a spot over recent weeks. “It is an unprecedented amount. There have been periods in the last couple of decades where we’ve had this kind of volume surge, but nothing compares to what we’re experiencing this year.”
Space on ocean carriers has become an impossibly hot commodity, as many operators pulled ships offline when business contracted last spring, and a number of vessels have remained inactive since, said Nate Herman, VP of international trade for the American Apparel and Footwear Association. “Demand continued to grow throughout the fall into the holiday season and into this year,” he added, “and none of these problems have really been dealt with.”
Brands are fighting for space for their products on vessels leaving ports in Asia, which can’t come fast—or frequently—enough, he added. Shipping containers are stacking up at a ferocious rate once they arrive at West Coast ports, and the trucks tasked with removing the cargo and taking it to distribution centers are waiting in queues so long that they’re sometimes forced to turn around—empty-handed—after whole shifts spent in line, Herman said. This means that shipping containers that should be empty and headed back overseas to be refilled are instead sitting in lots, full of spring stock that would ideally be on store shelves by now.
These “compounding stressors” stand to have a “huge effect” on brands’ selling seasons, Herman warned. “[Brands are] missing delivery dates, which means they’re missing out on sales,” he added, and frustrated retailers awaiting stock are charging brands for each day that merchandise fails to arrive.
What’s more, ocean freighters are price gouging for the limited space available on their vessels, added Matt Priest, president and CEO of the Footwear Distributors and Retailers of America (FDRA). In February, Priest wrote to Federal Maritime Commission chairman Michael A. Khouri urging the agency to insist that these carriers honor their contracts with FDRA’s member footwear brands.
Many companies have been unable to depend on their advance bookings, and are being notified “days before departure that only a fraction (or perhaps none) of the space requested is available, leaving the companies in a scramble to find alternatives,” Priest wrote. Brands are often forced to pay space guarantee surcharges, he added, “and these fees continue to escalate” to up to four times the agreed-upon rate. Often, the “best-case scenario” involves paying “exorbitant rates to book space on a vessel with a sailing date that is delayed, sometimes for weeks.”
A February survey revealed that nearly 80 percent of FDRA’s member footwear brands saw increases in landed product costs from six months prior, and well over half said they expect to see operating costs increase over the next six months.
“We basically took a year’s worth of product and jammed it into six months of entry,” Priest told Sourcing Journal of the current scenario, adding that the footwear industry has “made a ton of product” to meet burgeoning demand and make up for early 2020 losses. “We’ve just been jamming it through the ports, and that’s going to create a lot of challenges, especially when you couple that with the fact that the longshoremen and others have been impacted by Covid like everyone else,” he added. ILWU numbers showed that 1,134 workers tested positive for the virus between March of 2020 and February 28, with 14 deaths on the West Coast.
“It’s the perfect storm,” Priest said.
The impacts of these circumstances are already being felt by companies selling clothing and shoes. In an earnings call this week, Chico’s FAS reported that fourth-quarter gross margins took a $98.1 million year-over-year nosedive. David Oliver, interim chief financial officer, senior vice president and controller fingered port delays for about $7 million in added shipping costs during the period as it moved some product from boats to planes. And though CEO Molly Langenstein echoed frustration over the backlog at West Coast ports, she also noted a “little bit of delays” coming out of Georgia’s Port of Savannah, too.
Meanwhile, Foot Locker CEO Richard Johnson said the company is working with its vendor partners on “alternate routing” for its products amid port delays lasting up to three weeks. The situation has had a “material impact” on fourth-quarter sales, he said, to the tune of a 2.7-percent revenue drop in the fourth quarter, which missed consensus estimates of a 4.8 percent gain.
Steve Madden chief financial officer Zine Mazouzi said that port congestion could negatively impact its first-quarter revenue by about $30 million, with slowdowns broadening lead times by three to four weeks. “For a company that turns their inventory as quickly as we do and really operates in sort of a just-in-time model, it’s pretty challenging,” he said.
And while Nordstrom beat analysts’ estimates in the fourth quarter, the retailer said it is still dealing with the impacts of shipping delays over the holiday season. “We experienced delays in inventory flow that resulted in higher inventory levels at the end of the year,” president Erik Nordstrom said on a call this week—and the retailer continues to contend with that excess product. Chief financial officer Anne Bramman added that Nordstrom saw “higher than planned outbound freight expense due to carrier surcharges,” which led to the retailer pursuing higher-cost options.
West Coast port congestion “obviously has slowed down some of the receipts coming into the country,” Ross Stores CEO Barbara Rentler told analysts this week on a fourth-quarter earnings call.
Will Urban, chief revenue officer of freight forwarder Flexport believes that companies should brace themselves for continued delays. “Port congestion will last as long as people are at home spending money on goods rather than services,” he said. “There’s simply more volume being generated by consumer demand than our current infrastructure can handle.”
Urban also noted in early February that China’s factories would not be taking their customary two-week break from production for the Chinese New Year holiday due to continued travel restrictions inside the country where the coronavirus originated. The absence of the regularly scheduled respite meant there was also no slowdown in shipments exiting the country’s ports, further adding to the pile-up currently seen in the U.S.
Companies should now be looking into premium ocean freight options, he said this week. “Often smaller vessels have dedicated berths at their ports,” meaning that they’re guaranteed space to dock. To reduce lead times, companies should also look into transloading cargo, or transferring shipping containers from vessels to trucks, and then warehouses, where products can be sorted and the empty shipping containers can be returned to the port, he said. He also noted that LCL shipments, which contain goods from multiple shippers, often receive priority from carriers over FCL shipments. LCL provides consistent, dependable cargo for carriers, and often is a more profitable product, he added.
“Delayed vessels means they are not coming back to Asia on time,” Urban said, “which often leads to equipment shortages and unavoidable blank sailings, further compounding challenges.”