Supply Chain Shakeup   //   July 2, 2024

Ocean freight rates are once again spiking

Household paper products company Reel relies almost entirely on ocean freight to get its products shipped from Asia. That’s where the bamboo used to make its “tree-free” toilet paper and paper towels is cultivated. That’s also where most of the pulp is turned into the finished product before getting transported to the U.S.

But this summer the company has had to make major adjustments to its operational costs as it grapples with the rising container rates for ocean freight. Reel’s CFO Joe Stilphen told Modern Retail that some containers in the past six weeks have spiked to as high as $10,000 to get product shipped to the East Coast, roughly eight times higher than they were this time last year.

“When things get tight like they are now, we have no choice but to pay the inflated rates,” he said. “We have customers, we need to meet our demand. We’re an emerging business, if we go out of stock that could be a death sentence for our brand.”

It’s starting to feel like 2021 again as ocean freight container rates are spiking. A similar phenomenon occurred at the tail end of the Coronavirus pandemic, thanks to unprecedented e-commerce growth rates. Xeneta, a freight intelligence firm, wrote in mid-June that average spot rates for container shipping from the Far East to the U.S. West Coast were $6,178. Chief analyst Peter Sand wrote that those prices were a 276% increase from mid-December. Meanwhile for shipments to North Europe, prices were up 316% from mid-December to an average of $6,357. “These are huge financial hits for shippers to absorb,” Sand wrote.

It’s been a difficult year for companies involved in overseas shipping. Ongoing conflict in the Red Sea, where Houthi rebel forces are firing on vessels, has forced many tankers and container ships to route around the southern tip of Africa. J.P. Morgan estimates that about 30% of global container trade relies on the Suez Canal. A drought in the Panama Canal further complicated logistics. And this summer, dockworkers for ports on the U.S. East Coast and Gulf Coast are negotiating a new labor contract, one that must be reached by September 30 or else risk disruption to dozens of ports.

J.T. Marcum, corporate vice president at furniture rental company Cort, said the shipping container rates follow a supply and demand curve. That’s what happened in 2022, when some rates were almost as high as $20,000. But Marcum, who previously worked in logistics, said the benefit now is that ports are not congested. Back then, there were more than 160 vessels anchored at the Port of Los Angeles at one point.

Still, “we’re in a bit of a bubble,” he said, and there may be a correction coming through the fourth quarter. “All of the kinks in the supply chain that were there, that presented issues are by and large back to normal,” Marcum said, “so now what we’re dealing with is just a spike in demand relative to a perceived lack of supply.”

Some of that supply and demand curve is brought on by the carriers themselves. Marcum said the carriers sometimes will cancel shipments or skip some ports in an attempt to reduce their carrying capacity. This tactic, called “blank sailing,” drives costs up for the shippers and creates a supply and demand issue, because fewer sailings means there is less space for goods. “The rates will naturally come up a little bit based on what the carriers need to do to be able to turn a reasonable profit,” he said. “But they won’t, in my opinion, head back to where they were in 2022.”

Marcum said Cort helps stave off the increased costs by having contracts with multiple carriers and providers. These can range for a few months to years at a time. But Marcum said this strategy helps the company keeps rates locked in for about 80% of its goods. It also helps divide up shipments among providers and carriers, so there isn’t a single source to rely on.

Cort is also able to weather container rate spikes thanks to a large footprint of 72 warehouses throughout the United States. This means that if there’s an issue where goods can’t get into one port because the rates are too high, the company may have back-up supply “We can be more creative and flexible when it comes to importing into the United States,” he said. “Being able to use your network in a dynamic fashion gives you the flexibility to avoid some of the rate pressure.”

At Reel, the situation merits a multi-pronged response, Stilphen said. Typically, the company orders less inventory during the summer as business tends to be slower. But they’re continuing to order more than they may need to ensure that they have what they need in time for subscribers and fulfilling wholesale orders, which helps insulate against disruption or sudden hikes.

“I think a lot of companies right now are feeling the heat the same way we are,” he said. “Everyone’s putting in bigger and bigger orders, just to make sure they’re going to have enough product if the shipping industry continues to kind of not operate as efficiently as it should.”

Another strategy that works for Reel is being more flexible about what inventory it sends to subscribers. Earlier this year, it told some subscribers they would receive a box with six four-count packs instead of a single box with 24 rolls. That’s because Reel had more inventory of the packages than it did the bulk boxes. Those customers receive an email explaining why the change was necessary, with the hope that the eco-conscious audience could understand. They also gave a slight discount for that box, Stilphen said. “When we can properly explain to [subscribers] why they’re getting something a little different than what they normally get, they’ve usually been very supportive,” he said.

In the long-term, the shipping container crisis has Reel looking deeper into what it can do to make more of its products in North America. Bamboo is farmed at scale in Asia, and most of Reel’s products are also manufactured there.

Stilphen said the company could save money by getting the bamboo shipped in bulk so it can do more manufacturing in North America. “This is really pushing our efforts ahead of schedule,” he said. “You’re not taking the full cost per container issue out of the equation, but you may be minimizing it a little bit.”