Sources inside and outside the industry are saying bulk vendors might do well to brace for higher prices of capsuled merchandise. Despite the inevitable suspicions of operators, who often accuse suppliers of seeking to boost their own bottom lines, what appears to be behind an anticipated price jump will mostly be related to costs associated with shipping.
"Freight costs are skyrocketing," said one major supplier. "Suppliers have been eating these costs and struggling to stay afloat. If operators don't believe that some major price increases are headed our way, then it's time for a reality check. They should prepare their business for a major rise in cost of goods, definitely double-digit increases."
While bulk vending suppliers are reluctant to speak on the record, shipping industry officials have acknowledged the increased rates. "Ocean carriers have been raising their rates," reports Dan Meylor of Carmichael International Services, one of the nation's leading freight forwarders. "They've been operating at a loss for the past two years, during the roughest part of the economy, and now they are raising their rates to become profitable again. During the economic crisis, demand wasn't there -- so to keep market share they lowered their rates to keep customers. And there have been substantial and sustained increases."
Shipping costs naturally fluctuate, moving up and down with demand. But because of fuel costs and other variables, the sudden drop-off in demand for products following the economic crisis was far from ordinary. In fact, it may have been unprecedented.
According to Meylor, ocean carriers were hit extremely hard by the economic meltdown that began two years ago. With a sharp decline in imports to the U.S., they began lowering rates to compete for the remaining business and pick up market share. As a result of the sudden decrease in demand, container ships that had been busily ferrying goods from Asian ports to American ports were sidelined. By 2009, many of the ocean carriers were operating at a loss, reportedly losing money on every shipment.
Frankie Lau, a spokesman for Orient Overseas Container Line, one of the largest ocean carriers, said rates were at historic lows in 2009. "Demand was low, everything was down and the requirement of consumers was less," he told VT.
HOW BAD WAS IT?
According to the shipping trade press and industry experts, the crisis extended to the largest carriers. "Everybody lost money in 2009 and a number of carriers were in a financial crisis," explained Lau, who estimates that industrywide losses were between $15 billion and $20 billion. "All sorts financial rescue plans were needed to survive."
As the economy shows signs of recovery, the commercial shipping fleets are charting a course toward profitability by raising their rates anywhere from 50% to 100%, Lau reported.
A cursory glance at the major carriers' websites shows a grim pattern of announcements of steadily rising prices. With demand picking up, space on ships is now going for a premium.
"As we've seen in this recovery, demand for space has been greater than the availability of ships," said Carmichael's Meylor, who describes the cost of readying a ship previously removed from service as "significant."
Despite signs of a recovery signaled by increased freight volume, the shipping industry remains cautious and fears a possible double-dip recession could cut demand again.
"There is a strong belief that inventory was substantially reduced," Orient's Lau said. "As you digest your inventory, you need to replenish that inventory. A lot of people are talking about a restocking, which is different from real-growth demand."
The shipping industry is keeping its eye on November. By the middle of the last quarter, inventories should be replenished and goods for the holiday season already shipped. If the increased demand from consumers is there and an economic recovery is under way, imports should stay at reasonable levels after November. But if consumer demand remains uncertain and the economy falters again, the shipping industry will likely experience another drop-off.
How high are prices of bulk vending merchandise likely to rise? At this point, manufacturers are reluctant to venture a guess on the record, but most agree that current prices cannot be sustained.
On land and in the air, rising transportation costs are expected to continue into 2011. Over the past year, capacity has been reduced by carrier bankruptcies and consolidations. However, demand has been increasing by almost 7% year over year, according to industry and government sources. Less capacity coupled with increased demand is likely to force carriers to raise their rates. Additionally, new safety rules will go into effect later this year, removing drivers with poor safety records from the driver pool. The transportation industry forecasts this will reduce the pool by 5% to 12%, creating a driver shortage and further restricting supply.