Dive Brief:
- Costco will slow use of chartered vessels as shipping congestion eases and ocean freight prices plummet, CFO Richard Galanti said on an earnings call last Thursday.
- The wholesale giant reported a $93 million charge in the third quarter primarily related to downsizing its charter shipping activities. Costco chartered seven ships at the height of pandemic congestion.
- “Now with a dramatic improvement in shipping times and much lower shipping and container costs, it made sense to downsize our commitment,” Galanti said.
Dive Insight:
As unprecedented congestion in ocean shipping roiled the retail industry last year, Costco joined a cadre of retailers with pockets deep enough to charter their own container vessels to ensure deliveries for the crucial third and fourth quarters.
Among them were Walmart, Target, Amazon, Home Depot and others. The ability to charter gave the largest retailers a competitive advantage and the confidence to assure their customers they would be fully stocked during the holiday season in 2021.
At the time, there was no certainty — only guesses and estimates — about when the market would start to loosen, capacity free up and sharply spiking freight rates recede.
In chartering seven ships, with a three-year commitment, Costco’s Galanti said the company had two objectives: get shipments faster and reduce their “skyrocketing” ocean shipping rates. Over the next year to year and a half, the retailer controlled the delivery of 50,000 containers, saving between $1,000 and $2,000 on each container.
What nearly no one saw coming was the sudden drop in demand this year as consumers came under pressure from inflation. As retailers have reduced their imports in response, shipping rates have started to fall, finally, and many are once again rethinking their shipping strategies broadly.
Victoria’s Secret, for example, has seen ocean rates and supply chain flows normalize enough to move more freight to the ocean and away from the air, where many apparel sellers turned as container shipping delays became untenable last year.
At Costco, the changes in ocean rates and delivery times have been favorable enough that the company was willing to take on a $93 million charge as it reduced its chartering activities.
To take another retailer, Target COO John Mulligan said in November that his company has seen container rates in global shipping fall by one-third, but still remained three times higher than what the retailer was paying in 2019.
As for shipping lead times, they’ve fallen by so much that Target is having the opposite problem from last year when long delivery times were the norm. This year, lead times improved by 15% in Q3 — a good thing, if only the retailer had expected it.
“While we were really pleased to see this improvement, the acceleration was faster than we expected, causing many overseas orders to arrive earlier than needed,” Mulligan said. As a result, Target’s supply chain teams had to scramble to segment off containers at ports, allowing them to age so as to prevent early-arriving containers from entering the retailer’s distribution and store networks before they were ready for them.
