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Work stoppage at British Columbia ports now in 6th day
Seattle export volume: The Ocean Bookings Volume Index, which represents bookings submitted to ocean carriers, shows a pickup starting at the end of June, presumably as shippers looked for an alternative to the Port of Vancouver. (Chart: FreightWaves SONAR)
FreightWaves’ Noi Mahoney has reported on the Canadian port strike in recent days. See articles Dockworkers at Canada’s West Coast ports launch strike and Dockworkers strike continues at Canada’s West Coast ports and Thursday’s FreightWaves Now appearance.
Here is a quick summary for shippers:
- Discussions between the International Longshore and Warehouse Union Canada (representing port workers) and the British Columbia Maritime Employers Association (BCMEA, representing ship owners, agents and terminal operators) are currently paused pending further discussion with federal mediators.
- Two mediators appointed by the Canadian government have been overseeing the negotiations. The BCMEA agreed to enter mediation/arbitration but ILWU Canada declined.
- More than 99% of union members voted to strike in a vote conducted in June, suggesting that it will be difficult to reach an agreement without mediation and/or arbitration.
- CN said that a work stoppage could take a number of weeks — or even months — to correct given the impact that the disruption could have on its railway network.
- ILWU Canada had been working without a contract since the last one expired March 31.
- Roughly 85% of containerized import volume moving through the Port of Vancouver is for Canadian trade while two-thirds of containerized imports at the Port of Prince Rupert is destined for U.S. consumption centers.
UPS Teamsters threatening to strike at month’s end
“The largest single-employer strike in American history now appears inevitable,” said Teamsters General President Sean M. O’Brien.
UPS handles one out of every four packages delivered. CPG companies that participate in the direct-to-consumer and subscription box segments are most vulnerable.
I recommend reading Mark Solomon’s latest article here and checking FreightWaves for the latest developments.
Inventory destocking, rising elasticities hit CPG results
General Mills shares fell last week after it reported earnings. (Chart: Barchart.com Inc.)
In the past year, retailers made major pushes to reduce inventory levels. But for the most part, there was a major distinction between nonconsumable items, which were in excess (including discretionary items, such as furniture and clothing), and consumables. In the consumables category, which includes CPG items, retailers were still looking to increase inventories to targeted levels to have high in-stock rates in the mid-to-high 90% range.
General Mills’ results last week, which surprised Wall Street to the downside, may have highlighted a shift where retailers are now more closely managing inventories of everyday items as well. In addition to the higher cost of carrying inventory associated with rising interest rates, retailers seem increasingly concerned that the health of the consumer will translate to higher elasticities (which had been no worse than normal the past two years) while also putting more resources behind their own private-label brands. That gives Wall Street another issue to be concerned about in the CPG space in addition to the widely circulated bearish thesis that companies’ product promotions will erode margins.
For additional detail, see Adam Josephson’s article here.
CPGs prioritize service levels and supply chain resilience over cost
Average spot rates (blue line) have increased in recent weeks but remain significantly below contract rates (white line). SONAR Tickers: VCRPM1.USA, NTIL12.USA
At last month’s FreightWaves’ Future of Supply Chain event, shippers made it clear that freight service levels and supply chain resilience were their top priorities. One example was L’Oreal’s director of transportation, who ranked service, cost and carbon as his team’s top priorities — in that order. While that may seem antithetical to most CPG companies’ top-stated corporate goal of improving gross margins to at or above pre-pandemic levels, consider that logistics costs are typically 8%-9% of a CPG’s cost of sales and the biggest drivers of corporate margins are the companies’ abilities to pass on (or more than pass on) ingredient, packaging, labor and manufacturing costs.
Since the start of the pandemic, not only have supply chain issues risen to higher importance in corporate C-suites, high freight costs from the second half of 2020 to the first half of 2022 resulted in larger freight budgets. Then, falling freight rates in the past 12 months have made it easy for shippers to remain within their elevated freight budgets. With diminished budgetary pressures, logistics managers are endeavoring to position themselves to have capacity available for when freight markets again tighten. L’Oreal shared an innovative example that it calls Backstop, a premium freight service offering in which select carriers agree to not reject tenders, and therefore, no freight falls to the spot market.
Shippers’ prioritization also helps explain why van contract rates (white line above) have remained significantly above spot rates during the past five quarters — the latest spread is 48 cents per mile. It appears that shippers are currently taking care of their best carrier partners by not squeezing every dollar out of freight costs. Whether carriers will return the favor when the market eventually returns remains an open question.