The Supply Side: Retail suppliers brace for higher transportation costs

Capacity shortage in the trucking sector threatens to squeeze margins for retail suppliers who face higher shipping rates and tighter delivery requirements. Several companies recently reporting earnings voiced concern about rising transportation costs. Tyson Foods, a large retail supplier, said its transportation costs are expected to rise $200 million this year.

“Across all segments, freight costs have escalated as trucking capacity has tightened nationwide,” Tyson Foods President and CEO Tom Hayes said in February during the company’s first-quarter earnings call.

Tyson Foods operates a private trucking fleet but also contracts with carriers for long-haul transportation. The company has been negotiating higher prices with its retail and food service customers for the back half of 2018 to help offset some of its higher transportation costs.

Tyson Foods’ largest customer, Walmart Inc., also operates a large private fleet. Walmart Chief Financial Officer Brett Biggs recently said higher fuel costs were a hit on company earnings in the fourth quarter. He said Walmart has an advantage over some retail competitors because it operates a large private fleet. He said as the company sells more goods that means more goods also have to be moved. Walmart’s transportation division held meetings with carriers late last year hoping to leverage its scale and get the best rates possible. Also, some suppliers rely on Walmart’s transportation network to move goods.

Analysts expect freight rates to rise up to 20% this year, and those having to use spot rates will see higher rate increases. Brad Delco, transportation analyst with Stephens Inc., recently said there are several factors resulting in more shipping demand than shipping equipment.

The impact of the electronic logging device mandate effective (ELD) Dec. 18 is having a larger capacity crunch than the 10% previously anticipated. Delco said the capacity constraint is occurring during the peak spring shipping season at the same time product manufacturers and retailers are negotiating contract rates with carriers. Delco said spot rates increased 20% on average in the fourth quarter, rising 30% year-over-year. Stephens forecast freight rates will be up 6.3% this year, more than the 4.2% increase previously forecast.

Delco said pricing power rests with carriers and transportation providers, noting some suppliers will try and pass some of that expense in the form of higher product prices.

Colby Beland, vice president of sales and marketing with Fayetteville-based CaseStack, said everyone is feeling the capacity crunch, and there is no relief in sight. He said retail suppliers have to meet narrower shipping guidelines, but it’s possible to do. Beland said suppliers must negotiate the best rates possible, look for ways to save miles through consolidation programs that ship full truckloads, and avoid spot shipments unless they can upcharge for the added costs.

VOLATILE SITUATION
Fareed Khan, chief financial officer at Kellogg Co., said the combination of driver shortages and regulation changes resulted in fourth-quarter shipping costs rising more than 10%. He predicts high single-digit shipping cost increases through the first half of 2018. Campbell Soup Co. CEO Denise Morrison said significantly higher transportation and logistics costs are negatively impacting all of its U.S. business.

“While we initially expected transportation costs to moderate throughout the year, the challenges have proved more persistent than originally anticipated. On the transportation and logistics side, this is a volatile situation. Obviously, the rate increases are lasting longer than we expected,” Morrison said.

Hormel execs have said recouping all of the freight increases won’t be easy this year, but the company is talking with retailers about raising prices of Skippy peanut butter and Spam. The company’s operating margin fell to 13.2%, down from 15.2% thanks to higher supply chain costs which include freight.

“Although we planned for much higher freight costs, the level of increase has exceeded our expectations,” James Sheehan, chief financial officer at Hormel Foods Corp., noted in the company’s recent earnings call. “Freight expenses negatively impact the first-quarter financial results for our refrigerated products and Jennie-O business.”

Grocery supplier U.S. Foods Holding Co., has also been vocal about rising transportation costs.

“Gross profit as a percentage of sales was negatively impacted by year-over-year inflation and higher inbound freight costs, due to the continued tight inbound freight capacity,” Dirk Locascio, chief financial officer at U.S. Foods, said during the fourth-quarter earnings call. “The trucking industry capacity has continued to tighten since mid-2017, which has been widely reported in the press. Industry capacity is expected to be a headwind at least through the first half of 2018.”

Pietro Satriano, CEO of U.S. Foods, said during the earnings call, “With spot rates rising 20%, the company’s costs from third-party carriers go up immediately compressing operating margins.”

NO RELIEF
Chicken processor Sanderson Farms Inc. said the company’s freight costs per pound in the first quarter rose 13.7% which equaled about a quarter of a cent per pound, said Lampkin Butts, chief operating officer.

“The higher costs were the result of carriers having fewer drivers available during the holiday season and weather-related problems, both of which forced us into the spot market for carriers which increased our costs,” Butts said during the company’s first-quarter earnings call. “We expect between 10% and 15% increase in freight expense this year, and we are currently negotiating 2018 rates as many of our contract with carriers expire soon.”

The J.M. Smucker Co., also a Walmart supplier, had to use spot market rates as well, which drove up freight costs.

“When the customer comes to us with special requests or we have something break down or something goes wrong and we have to move a spot load, costs rise,” said Steven Oakland, president of J.M. Smucker U.S. food and beverage division. “I know it doesn’t sound like a lot, but it’s really difficult to do. The trucking industry right now is pretty tight. So, a spot load is difficult to do, and it comes at a much higher cost. Freight is going to be something the industry struggles with for the near term.”

Patricia Little, chief financial officer at The Hershey Co., said striving to hit ever higher service delivery goals imposed by retailers like Walmart, Kroger and Target is a challenge. She said Hershey will prioritize to get the product on the shelf even if it means added costs to the supply chain.
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Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.