Dollar Tree is sounding the alarm on high freightshipping costs.- On Thursday, the company said the spot market for freight spiked 20% since its last earnings call.
- Industry experts forecast that that freight costs could possibly stay high until 2023.
Dollar Tree fired off a warning flare on skyrocketing freight delays and costs during its Thursday earnings call, shining a light on the turbulence within the world of international maritime shipping.
Dollar Tree executives blamed the rising prices on spiking demand, cramped capacity, and countless delays. Other major factors include equipment shortages, misplaced equipment, port delays, COVID-19-induced labor shortages and closures, and "the lingering effects of the
Dollar Tree's vice president of investor relations Randy Guiler told analysts that the retailer is especially sensitive to rising chaos in the world of international freight. Guiler cited a report from the Journal of Commerce ranking the company as the fifth-largest importer among retailers, and said that the company brings in 90,000 40-foot container ships per year.
"We believe the Dollar Tree banner imports more containers per $100 million in sales than other large retailers," he said. "We have an outsized impact from freight costs."
The spot market rate for freight has spiked 20% since Dollar Tree's last earnings report on May 27. According to the Shanghai Containerized Freight Index, that's a 28% year-over-year increase and a 400% spike since 2019. All in all, the rising rates have cost Dollar Tree an additional $185 million to $200 million since May 27.
Guiler said that a San Francisco-based freight forwarder said in a recently transportation webinar that "the transit times from Shanghai to Chicago had more than doubled to 73 days from 35 days," while another carrier executive estimated "that voyages are now taking 30 days longer than in previous years due to port congestion, container handling delays, and other factors."
"To give you a real-life example of the kinds of challenges we're seeing, one of our dedicated charters was recently denied entry into China because a crew member tested positive for COVID, forcing the vessel to return to Indonesia and change the entire crew before continuing," Guiler said. "Overall, the voyage was delayed by two months. With the current pressure on carriers, once disruptions in the supply chain occur, there is not enough capacity to make it up."
In response to a question from Goldman Sachs analyst Kate McShane, Dollar Tree executives noted that air freight was not a viable option, due to its high costs and high demand.
Edward Jones analyst Brian Yarbrough told Insider that international shipping could take until the summer of 2023 to normalize, but that some retailers are in a "delusion" that things will settle by this upcoming holiday season.
Dollar Tree executives also estimated that the situation wouldn't improve anytime soon. In the first quarter of 2021, Dollar Tree's outlook assumed that the company's regular ocean carriers would fulfill 85% of their contractual commitments. That number has dropped to between 60% and 65%.
"Industry experts expect the ocean shipping capacity will normalize no later than 2023, when many new ships come online," Guiler said.
In the meantime, Dollar Tree's leaders said the retailer will rely on charter vessels for the first time. One such ship has been contracted with the company for three years. The dollar store's supply chain team is also setting priorities based on seasonality, and working to optimize port selection based on shipping availability. Guiler said that seeking out "alternatively sourced domestic product" helped Dollar Tree and
"We're adding alternative sources of supply, both domestic and international that do not rely on Trans-Pacific shipping," Guiler said. "We expect some of this shift could become permanent."