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Retailers are locking in expensive shipping contracts that will likely outlast the pandemic

By Nicolás Rivero

Retailers are desperate to restock their depleted inventories as the holiday shopping season approaches and global supply chains remain in disarray. In their quest to find a consistent, reliable way to import goods, some companies have locked themselves into expensive schemes that could keep freight rates—and potentially consumer prices—inflated even after the current supply chain chaos dies down.

Shippers ink expensive, long-term contracts

Retailers want to avoid paying spot rates—the one-off prices for companies buying unplanned, last-minute space on a container ship—which have soared during the pandemic. Aside from being expensive, spot shipping is also an unreliable way to move goods, because companies can’t always find a ship that will sell them ad hoc cargo space when they need it.

One option is signing expensive, long-term shipping contracts at rates much higher than any retailer would have paid before the pandemic.

Retailers hope these deals with shipping companies will guarantee their products space aboard container ships until the chaos in global supply chains dies down. The governments of both China and South Korea have pushed retailers to embrace long-term shipping contracts, which they believe will create more stability in the market.

The trouble is, the price of long-term contracts has started to spike, too. The average contract price to ship a 40-foot container from Asia to the US is $4,979, according to data from freight analytics firm Xeneta. That’s more than double what contract rates were a year ago—and even higher than spot rates were as recently as May.

Xeneta’s data on “long-term” contracts include any deal longer than 88 days. But at least some retailers are eyeing contracts much longer than that, which could extend beyond the current crisis in supply chains. “We are talking to our largest contract carrier about a multiyear agreement,” said John Janson, who heads logistics at the apparel company SanMar, during a panel hosted by the Council of Supply Chain Management Professionals. “We don’t see things getting better. If we sign up for a two- or three-year agreement, does that buy us capacity in the short-term?”

Retailers are sailing their own cargo ships

Other retailers—including Costco, Walmart, Home Depot, IKEA, Dollar Tree, and Party City—have chartered their own cargo ships to circumvent shipping lines entirely.

The companies have publicly revealed few details about the terms of their ship charter deals. Costco executives told investors they’ve chartered three 800-1,000 container cargo ships for the next year. Along with its chartered ship, IKEA has bought thousands of its own shipping containers to dodge the impact of a container shortage. Dollar Tree executives said they locked in their chartered ship for three years and expected to add more charters this year.

Chartered cargo ships give retailers more security and flexibility in the short term. “We have a ship that’s solely going to be ours and it’s just going to go back and forth with 100% dedicated to Home Depot,” Home Depot COO Ted Decker told CNBC. Dollar Tree CEO Michael Witynski told analysts at a Goldman Sachs retailing conference that chartering a ship “really was the guarantee [that we would] get the containers that we need at the time we need it,” according to a Factset transcript of the event.

This is less about price, and more about ensuring goods arrive at all. In the long run, a small 800-container ship isn’t as efficient or cost-effective as the massive 20,000-container ships operated by the major shipping lines. As shipping analysts explained to the transportation industry publication FreightWaves, operating a chartered cargo ship is almost guaranteed to be more expensive than doing business with the shipping lines.

Today’s supply chain pain locks in long-term cost increases

Exorbitant multi-year shipping contracts and lengthy cargo ship charters could extend today’s high freight costs even after the worst of the supply chain chaos has ended. Goldman Sachs analysts predict supply disruptions will ease in 2022, while more pessimistic prognosticators at the analyst firm IHS Markit say the supply chain woes might stretch into 2023. But in either case, a reprieve would come well before Dollar Tree’s ship charter ends in late 2024.

Locking in higher freight rates for the long run could have a noticeable impact on consumer prices. Dollar Tree, for instance, has been forced to sell more of its merchandise for more than $1, citing rising freight costs among other inflationary factors. And the discount retailer is hardly the only firm raising prices to offset the cost of shipping.

The companies that are cutting long-term shipping deals now are balancing a precarious set of pros and cons. In the short term, they’re dodging the most expensive spot shipping rates and securing a more reliable source of inventory for the 2021 holiday season. But in the long term, they’re saddling their balance sheets with higher operating costs that may translate into higher prices for everyone for years to come.

This article originally appeared on yahoo! Finance.

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