West Coast port delays may cost retail $7 billion in 2015, impact meat sector

The nine-month gridlock between major West Coast port terminal operators and dockworkers which resulted in a weekend shutdown has raised concerns within the retail industry which has stayed fairly mute on the impact until now.

Research group Kurt Salmon estimates that congestion at West Coast ports could cost retailers as much as $7 billion this year. The analysis attributes those costs to a combination of the higher price of carrying goods and missed sales due to below optimal inventory levels.

The National Retail Federation warns that a shut down over the any prolonged (10-day period) hit the economy by $2.1 billion a day as half of the nation’s imports pass through the 29 West Coast ports.

THE LABOR PROBLEM
At issue are a few remaining contract issues between the International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association. The union represents about 20,000 dockworkers at 29 West Coast ports, and the PMA negotiates for the major port employers, including Denmark-based Maersk Line, China-based COSCO and Korean-based Hanjin Shipping.

The recent weekend closure was the result of the PMA stopping operations and not a strike by the union. The union, which has represented dockworkers in California, Oregon and Washington since 1934, has said it has dropped most of its demands with just a few remaining issues to be settled. The union also has accused the PMA of creating congestion and delays and then attempting to blame the problem on union workers.

“PMA is leaving ships at sea and claiming there’s no space on the docks, but there are acres of asphalt just waiting for the containers on those ships, and hundreds of longshore workers ready to unload them. The employers are deliberately worsening the existing congestion crisis to gain the upper hand at the bargaining table,” the union said in a statement. “The union remains focused on reaching a settlement as quickly as possible with employers. Talks to resolve the few remaining issues between the Longshore Union and Pacific Maritime Association are ongoing.”

However, the PMA said “ongoing and costly ILWU slowdowns” have forced weekend port closures. The association also said it recently made a generous contract offer.

“Last week, after nine months of contract talks, PMA last week made a comprehensive contract offer that would raise ILWU wages by 14 percent over five-years, on top of current average full-time wages of $147,000 per year. It would maintain fully employer-paid health care, worth $35,000 per year, and increase the ILWU pension to as much as $88,800 per year,” the association said in a statement.

No matter who is at fault, the result for retailers is not good.

WAL-MART RESPONSE
Retail behemoth Wal-Mart Stores told The City Wire that the West Coast ports congestion is a concern but it has not seen any material impact on its business thus far.

“We have a diverse import network that has helped us to mitigate some of the problems experienced with the West Coast ports. Our network includes Seattle, Houston, Savannah, Ga., and Norfolk, Va., in addition to Los Angeles and other West Coast ports,” said Aaron Mullins, corporate spokesman for Wal-Mart Stores.

Wal-Mart imports an estimated $20 billion in products annually from China. Perishable and seasonal items are most impacted by the delays because if they miss their narrow window of retail opportunity the product is often a total loss.

IMPORT SHIFT ATTEMPTS
Supply chain experts also said shifting imported goods to other ports (East Coast or Gulf of Mexico) increases land travel time and costs into the supply chain. Those added costs eat into profit margins unless the retailer is willing or able to pass them on to consumers. High-end retailer Ralph Lauren noted in a recent earnings call that it opted to airfreight more products during the recent quarter. By shifting some delivery to the East Coast the retailer said it added between 3 and 10 days of transit time, which still allowed it maintain service levels.

Kurt Salmon analysts warn that rerouting to East Coast ports or buying extra inventory in advance are only temporary fixes for what is a larger problem. They note that if conditions continue the retail sector could face $36.9 billion more in baseline costs in 2016 compared to 2014.

The NRF is not mincing words about the impact the port turmoil is having on the retail and supply chain industries.

“Temporarily suspending port operations is just another example of the International Longshore and Warehouse Union and Pacific Maritime Association shooting themselves in the collective bargaining foot. The increasing congestion at West Coast ports are bringing the fears of a port shutdown closer to a reality,” said Jonathon Gold in reaction to the temporary suspension at the West Coast ports this past weekend (Feb. 7-8).

Gold, the NRF vice president of supply chain, said the entire supply chain has been dealing with the lack of a West Coast port contract since May 2014.

"Enough is enough … Stop holding the supply chain community hostage. Get back to the negotiating table, work with the federal mediator and agree on a new labor contract,” Gold noted in public statement on Feb. 6.

BROAD IMPACT
Concerns have rippled down the supply chain and causing manufacturers like Marshalltown Company, who makes tools in Fayetteville, keep considerably more inventory than they might otherwise carry. Jack Murders, operations manager in the Fayetteville plant, recently told The City Wire that they began shifting some of their shipments to the Seattle/Tacoma port months ago, but congestion is building there as more companies have had the same idea.

Import cargo volume at the nation’s major retail container ports is expected to rise 10.1% this month over the same time last year even as West Coast ports come closer to a possible shutdown, according to the monthly Global Port Tracker report released Wednesday (Feb. 11) by the National Retail Federation and Hackett Associates.

“With cargo volume growing as the economy continues to recover, the last thing we need is a port shutdown that would bring billions of dollars of economic activity to a halt,” Gold said. “

EXPORT CONCERNS
Springdale-based Tyson Foods is an exporter in addition to being a retail supplier who recently referenced the port issues and the impact it’s having on the meat business. 

“We believe part of the recent decline in beef and pork prices experienced by the U.S. meat industry is due to the West Coast port slowdown, which (Tyson CEO) Donnie Smith noted last month. This could eventually affect livestock producers. Shipping alternatives for the industry are limited, but we’re actively seeking other channels,” Tyson Foods’ spokesman Gary Mickelson noted in an email.

Smith told analysts during the company’s recent earnings call that the company’s “primary concern about exports is coming from ongoing interruptions at West Coast ports, which is pressuring logistics that could eventually affect livestock producers if the situation isn't resolved soon.”

Roughly 25% of pork produced in the U.S. is exported. But if the pork isn’t shipped, then it fills up freezers, which will push domestic pork prices lower. This is positive for the consumer, but a negative for processors and swine farmers. Likewise some beef cuts that might ordinarily be exported for higher sales prices abroad are being ground into hamburger, which has led to a slight reduction in beef prices.

The U.S. meat and poultry industries estimate they are losing $40 million a week as products destined for export from West Coast ports continue to pile up in commercial freezers around the country as the port labor dispute continues. The North American Meat Institute reported this week that lost hides and skins export sales total $42 million per week. The trade group said it continues to work with other organizations pleading for government intervention sooner rather than later.