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Costco, Nike and FedEx are warning there’s more inflation set to hit consumers as holidays approach


A worker wearing a protective mask removes rotisserie chicken from skewers inside a Costco store in San Francisco, California, on Wednesday, March 3, 2021.

David Paul Morris | Bloomberg | Getty Images

Shipping bottlenecks that have led to rising freight costs are cooking up a holiday headache for U.S. retailers.

Costco This week, the retailer joined the chorus of others who are concerned about rising shipping costs and associated supply chain problems. The warehouse retailer, which had a similar cautionary tone in May, was joined by athletic wear giant Nike and economic bellwethers Federal Express and General Mills in warning of similar concerns.

In recent months, shipping containers to overseas destinations has become more expensive. A 40-foot container measuring approximately 40 feet from Shanghai to New York was about $2,000 one year and half ago. This price was just before the Covid pandemic. It now costs $16,000 according to Bank of America.

Richard Galanti from Costco, Chief Financial Officer said freight prices are “permanent inflationary” in a conference call. These increases can be combined with “somewhat temporary” items to create pressure. These include freight, higher labor costs and rising demand for products and transportation. They also encompass higher commodity prices, shortages of oil and chemical, and increased competition in the market.

Galanti stated, “We cannot hold onto all of those.” Galanti stated that some of this must be transferred on and is doing so. It’s a pragmatic issue.

He estimated that Costco’s inflation will likely be between 3.5% and 4.5%. He noted that paper products have seen cost increases of 4% to 8% and he cited shortages of plastic and pet products that are driving up prices from 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,” Galanti said. All those things, even despite all the difficulties, seem to have been in our favor so far.

Getting ready for the holidays

The timing, though, is not good.

Persistent inflationary pressures come at a time when retailers are preparing for the holiday shopping season – Halloween, Thanksgiving and Christmas, then into the new year. The pandemic has brought with it a relentless slew of factors that has made inflation an economic buzzword after a generation of mostly moderate price pressures.

It is imperative that companies deal with this situation before it becomes a crisis.

We have worked with retailers to see that we are closer to the holiday season. 1. They have to be flexible in their supply chains,” Keith Jelinek (managing director, global retail practice), consulting firm Berkeley Research Group said. “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,”

“All these costs are going to hit the operating profits,” he added. The retail industry is currently facing a dilemma: How much do I have to pass on the consumer and how can I make my operation more efficient in order for me to increase my overall margin?

Numerous companies indicate that for the moment, consumers are more willing to pay higher prices. Trillions in government stimulus during the pandemic has helped swell personal wealth, with household net worth up 4.3% in the second quarter.

It is not clear how long the consumers will continue to be willing and able to spend more. Jelinek said he expects the current situation to persist into at least through the holiday season and into the early part of next year

“There’s only so much you can pass on to the consumer,” he said. “What most retailers are doing is looking across their [profit and loss statements] and they’re looking to improve performance and to optimize efficiency. It means that they must focus on their supply chains.

Also, it means increasing prices.

Company warnings

FedEx this week announced that it will hike shipping rates 5.9% for domestic services and 7.9% for other offerings. It said that it was being affected by labor shortages as well as “costs associated to the challenging operating environment.”

According to the chief competitor of UPS, the firm faces many challenges.

“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 demand of the market,” UPS CEO Carol Tome´ said Thursday on CNBC’s “Closing Bell.”

Additionally, the company was also affected by issues in its supply chain.

This is likely to continue for quite some time. “These issues have been long coming, and it will take us all working together to remove those blocksages,” she stated.

Federal Reserve officials this week conceded that inflation will be higher in 2021 than they had anticipated. They still expect prices to settle in a normal range of just over 2% within the next few years.

Loretta Mester from Cleveland Fed, however, stated in Friday’s speech that she believes there is a “upside to” the central bank’s inflation forecasts.

She said that “many businesses report rising costs and consumers are willing to pay more.” The combination of high demand and challenging supply chains could continue for longer than I expect. This could cause people and businesses alike to have higher inflation expectations than they’ve seen thus far.

Fed officials said they are ready to start pulling back on the monetary stimulus they’ve provided during the pandemic but probably won’t be raising rates soon. Mester stated that if prices rise and inflation expectations continue to increase, Fed policy would need to “be adjusted” in order to keep it under control.

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