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Cost Pressures Build in U.S.

Brands and retailers have been tightening inventories and reducing orders in response to a weakening global economy and a marked slowdown in consumer spending.

Diesel prices peaked at $4.76 a gallon in July.
Appeared In
Special Issue
WWD Sourcing Horizons issue 09/16/2008

Brands and retailers have been tightening inventories and reducing orders in response to a weakening global economy and a marked slowdown in consumer spending, but despite these cost-cutting efforts, the cost of getting goods into the country and onto store shelves is likely to rise as pressures along the supply chain mount.

This story first appeared in the September 16, 2008 issue of WWD.  Subscribe Today.

The most visible threat to transportation costs has been surging energy prices. Gasoline prices reached highs over the summer and spurred more cutbacks in consumer spending. Truckers were particularly hard hit when diesel fuel reached a peak of $4.76 a gallon during the third week of July. According to the American Trucking Association, fuel costs for a 2,000-mile trip were approaching nearly $3,000 this summer compared with $1,680 during the summer of 2007. The ATA said it currently costs about $1,400 to fill a typical tractor trailer’s fuel tanks.

While fuel costs have since come down some, those in the transportation industry understand that competition for energy will only grow in a global economy.

“In developing countries, prosperous exports have brought wealth to a small portion of the population who are then able to pursue Western lifestyles,” wrote Paul Bingham, managing director of Global Insight’s trade and transportation group, in a report released on Sept. 12. “If just 30 percent of the Chinese and India populations reach Western levels of consumption, then world consumer energy consumption will be doubled, not to mention the billions of people still aspiring to this lifestyle. So, long-term energy price increases are not surprising.”

States are also searching for ways to bring in money to fund massive overhauls of roads and bridges that are deteriorating or have exceeded their life spans. The likely option for many states will be to institute toll systems or to raise existing tolls.

The Pennsylvania Department of Transportation and Pennsylvania Turnpike Commission have sought to put tolls on the state’s 311-mile stretch of Interstate 80 since late last year. The groups are calling for a “ground up” reconstruction of I-80 in the state and believe a toll system would quadruple capital spending to $2.5 billion over the next decade. In July, the Turnpike Commission said more than half of I-80 had exceeded its design life. After a six-month engineering analysis, an improvement plan was developed that called for refurbishing 80 percent of the roadway and replacing 60 bridges.

The nation’s ports are also facing increased pressure to improve environmental practices and reduce truck-related traffic and emissions. The ports of Long Beach and Los Angeles, the country’s largest port complex handling 40 percent of imports, are leading the way with the implementation of the first phase of its Clean Truck Program. The ports are seeking to lower air pollution 80 percent by 2012. On Oct. 1, all truck models older than 1988 will be barred from the port. Truck models between 1989 and 1993 and models from 1994 to 2003 that haven’t been retrofitted will be banned as of Jan. 1. A fee of $35 per 20-foot equivalent unit, or TEU, will also be assessed on containers beginning on Oct. 1 to help fund financial assistance for truck replacement.

The ATA filed suit against the ports in July, alleging that the program would result in fewer trucking companies being able to service the ports and would therefore reduce competition. On Sept. 9, a federal judge found in favor of the ports and ruled that the program could move forward. The ATA contends that it supports the ports’ environmental goals, but believes systems have not been implemented to properly manage the program and that congestion is likely to result.

“Unfortunately, it is clear that the ports are now in no position to put in place the systems needed to collect the ports’ clean truck fee and administer the ban on pre-1989 trucks by the Oct. 1 program start-up date,” said the ATA, adding that it would continue to challenge the program.

Congesting ratings for Los Angeles-Long Beach were raised to medium in the National Retail Federation’s September Port Tracker report. The report also expects container traffic at the nation’s major retail ports to fall 6 percent in 2008. In August, NRF had projected a decline of only 4 percent.

Bingham believes the Los Angeles-Long Beach port system will continue to lose discretionary cargo as costs rise.

“[Brands and retailers] will ask themselves ‘Is this still the gateway I want to use,’” said Bingham. “If I’m feeding a store in Orange County or anywhere in California I’m still going to do it, but if I’m feeding by intermodal rail to Chicago, then I start to look at other options.”