Shipping costs and lag times are wreaking havoc on profit margins at Dollar Tree Inc., which relies on a steady volume of cheap goods to make money at low prices.
A global rebound in consumer demand for all sorts of goods is putting strain on shipping networks and ports. And new surges in COVID-19 cases have caused some ports to close or slow down entry. Transit times are about 30 days longer than in recent years, Dollar Tree said Thursday, citing freight industry contacts. That’s tough for a company that brings in almost 90,000 40-foot containers a year.
In a recent case, Dollar Tree (No. 197 in the 2021 Digital Commerce 360 Top 1000) had a dedicated charter vessel turned back from a port in China because a single crew member tested positive for COVID-19, Dollar Tree CEO Mike Witynski said on an Aug. 26 earnings conference call. The voyage was delayed by two months because the ship had to go to Indonesia and replace the entire crew.
“We believe the Dollar Tree banner imports more containers per $100 million in sales than other large retailers, and combined with our low $1 price point, we have an outsized impact from freight costs,” Witynski said.
More charters are in the works for Dollar Tree
“As freight costs moderate in the future, we are confident when paired with our team’s significant efforts to enhance our supply chain,” Witynski said during the Aug. 26 conference call, according to a transcript from Seeking Alpha.
To cut costs, the retailer is doing things like using dedicated space on chartered vessels for the first time, including one large vessel contracted for a three-year term, which is scheduled to make its first voyage within weeks, Witynski said.
“We’re expecting to add more charters this year. We’re adding alternative sources of supply, both domestic and international, that do not rely on trans-Pacific shipping. We expect some of this shift could become permanent,” he added.
Supply chain delays are a global problem
The costs for shipping containers full of goods around the world soared in 2021. For example, the average spot price to ship a standard, 40-foot container from Shanghai to Los Angeles was $9,531 as of July 8—up 229% from a year earlier—according to the Drewry’s World Container Index. By Aug. 26, the rate was $11,362.
“Shipping rates have become decoupled from operating costs and are driven by scarcity of capacity,” Martin Dixon, director and head of research products for Drewry Shipping Consultants, said in July. Drewry, based in London, provides research and consulting services to the maritime shipping industry.
Spot rates reflect the real-time rate to ship cargo. They compare to contract rates, which are negotiated ahead of time and apply to shipments made during an agreed-to period.
Longer-term contract shipping rates have not grown as fast, Dixon says. But Drewry expects average freight rate levels to increase 50% during 2021. That would be “by far the largest overall annual increase on record,” he says.
But shipping isn’t just vastly more expensive. It’s also far less reliable than in the past. A June report from Denmark-based Sea-Intelligence ApS says a “staggering” 695 vessels were over a week late in arriving on the West Coast from Asia from January-May 2021. Of those, 343 vessel arrivals were more than 14 days late and 132 were more than 21 days late.
“For comparison, from January 2012 to December 2020, 1,535 vessel arrivals were more than a week late, 330 were more than two weeks late, and a combined 104 vessel arrivals were over 21 days late,” the report says.
The 2021 Click, Ship & Return Report
Want to know more about the state of the global supply chain? We address the scope of the crisis in the 2021 Click, Ship & Return Report explores the fulfillment practices and strategies of retailers in the Top 1000, including Amazon, Walmart, Target and Best Buy, and the current pain points in order processing and fulfillment. This report examines everything from shipping and returns to omnichannel services. The report includes:
- 30+ data-packed charts and graphs
- In-depth analysis of the shipping policies of Top 1000 retailers
- An overview of Amazon’s fulfillment practices
- Details on the state of the worldwide supply chain in 2021
- Breakout sections on topics including in-warehouse automation and the potential of delivery robotics
- Exclusive consumer survey insights
View the table of contents for full details on what’s included in the report.
To purchase the report for $399, you can click here. Digital Commerce 360 Gold and Platinum members receive this report for free.