Finance Chiefs Squeezed by Ongoing Rise in Airfreight Costs

August 26, 2021

(WSJ) Finance chiefs in the retail sector are paying up to ship goods by air instead of by ocean as they try to meet strong consumer demand amid ongoing production delays.

Backlogs at global shipping ports and local lockdown measures in countries such as Vietnam, where the Delta-variant is surging, are forcing retail executives to expedite shipments originally slated for ocean cargo. Those alternative modes of transport come at a higher cost, exacerbating inflationary pressures that finance executives are confronting elsewhere in their business.

Rates for air cargo have increased as airlines continue to operate fewer international passenger flights than before the pandemic, according to Clive Data Services, an Amsterdam-based tracking firm. Logistics companies use passenger flights to ship some of their clients’ goods.

The global average rate for air cargo—a figure that includes both passenger and cargo flights—this month stood at $3.39 per kilogram, up 6% from January and 14% from a year earlier, Clive Data Services said. Container shipping prices also have jumped in recent months as a result of supply-chain pressures across the globe.

VF Corp. , which owns apparel brands such as North Face, Vans and Supreme, plans to spend an additional $35 million on airfreight this fiscal year compared with the prior fiscal, or $25 million more than it initially planned, Chief Financial Officer Matt Puckett said.

About a quarter of the Denver-based company’s goods are manufactured in Vietnam, where production facilities have temporarily closed and workers struggle to get to work due to local transportation restrictions. Using airfreight can save time on shipping and help offset some of the delays caused by the lockdown orders.

VF generally uses ocean freight to ship its goods from the region, but decided to pay more for airfreight—which is offered by logistics companies such as FedEx Corp. and United Parcel Service Inc. —to meet the demand from consumers. Rates for shipping cargo from Southeast Asia to the U.S. have jumped 24% over the past year, to $7.66 per kilogram, according to Clive Data Services.

“We’re going to have some higher product costs in the short term to make sure we can get what we need,” Mr. Puckett said. VF earned $324.2 million during the quarter ended June 30, compared with a loss of $285.6 million a year earlier.

Other retail companies also are opting for airfreight instead of waiting for ocean cargo, said Ike Boruchow, a managing director at financial firm Wells Fargo Securities LLC. Some of these retailers will likely increase prices in the months ahead to compensate for the increase in shipping costs, he said.

Children’s clothing maker Carter’s Inc. during a July 30 earnings call said it is currently allocating “several years’ worth” of airfreight spending in response to production delays in Asia. The company didn’t immediately respond to a request for comment.

VF expects to raise prices for new products in its 2022 product lines, Mr. Puckett said. The increases are expected to be roughly on par with inflation, he said, declining to provide specifics.

Farfetch Ltd. , a luxury retailer, decided against hiking prices as it looks to win more customers, Chief Financial Officer Elliot Jordan said. Higher shipping and airfreight costs have reduced the company’s margins, with gross profit margins in its online marketplace declining to 53% in the period ended June 30 from 55% a year earlier. “That is quite a burden for customers to have to pay for shipping, so we actually absorb some of that and reduce our gross margins,” Mr. Jordan said.

Upscale brands and boutiques use Farfetch’s marketplace to sell goods directly to consumers. The company takes a roughly 30% cut of the sale price and provides a range of services including shipping. About 85% of orders are shipped internationally from Europe, according to Farfetch.

The company is searching for ways to offset the increase in costs, including by storing more inventory on behalf of customers at warehouses that it rents from third-party logistics firms in markets including U.S., U.K., Italy, Hong Kong and mainland China, Mr. Jordan said.

The strategy aims to reduce the distance that packages travel to reach customers, he said. Farfetch is working to increase its stock to shrink the distance—and shipping costs—that deliveries and returns have to travel, he said.

Farfetch said it expects shipping-related costs to remain a headwind in the third quarter. The company declined to provide details on its shipping or airfreight budget.

To Read More: https://www.wsj.com/articles/finance-chiefs-squeezed-by-ongoing-rise-in-airfreight-costs-11629977400

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