How Are 3P Brands Handling Sharp Increases in Overseas Shipping Costs?

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James Thomson 8:14

Chuck are you seeing with your business over the last six months?

Chuck Gregorich 8:18

Yeah, we have we entered entered this year billing, okay. We had ordered stuff early last year for our spring and summer selling season. And we got ahead of the ballgame and had a good inventory in February and March and then mainly to stop was shipping October, November, December. Then in January, everything kind of went the went the wrong way on us. Yeah, we our factories couldn’t get it produced. Or if they couldn’t get it produced. We couldn’t get it on a container. And what was happening to our factories was we might have three containers that are completely finished ready to ship sitting on their warehouse floor. But they have other customers that might have had 10 or 15 containers. So some of them would have 20 containers sitting in their warehouse, or 20 containers of stuff in their warehouse, waiting to ship but no containers. So someone actually had to shut production down because they couldn’t produce anymore. There was no place to print. So we had production delays we had with raw material cost increases labor. And so that that container costs just made it even worse than when we used to pay. We we have three or four warehouses around the United States and we average about $4,000 a container in the past and late last year, and earlier this year, we were paying an extra $1,000 which seemed like a lot of money at the time. But now, you know we’re booking them at about 15,000 on average. And that means we’re booking some of that 25,000 And in some ways, we’re still getting the book at 10 or 11, or 12,000. But it’s about 15,000 average. And what I’m hearing in August, here, it’s going to go up another three to $5,000. So you can imagine some of our bigger bulkier stuff, we only get 100 units on a container, you paid 20 grand extra with 100 units. That’s $200 more unit. Yep. And something that may be used to sell in the past at $600. You know, that just the freight alone is gonna add $200 to your cost. And so you got to increase your price more than 200. Because you got to cover your your Amazon fees. And in a lot of cases, in every case, we got factory increases, too. So we’re probably seeing to $250 increase in costs on that product, which means a 300 $350 price increase to cover your Amazon fees in your advertising. So yeah, so what’s expensive, we raised our prices. Typically, we do it once a year, we did it in March. And then we raised them get in June, by 10%. And I think it had an impact on our sales. And I think it’s just a matter of time that the market catches up to us to theirs. I’m sure some of my competitors had product that they probably imported that four or five or 6000. Now they’re refilling or inventory at 10 or 15, or 20,000. So I’m hoping that it’s just a delay, that everybody don’t catch up to us. And it’s affecting our purchasing plans. We’re not, we’re not purchasing as much going forward. We’re more conservative, how much we’re purchasing because we do about 1500 to 2000 containers a year and, and the thing I always tell my guys is we set out about 400 containers of inventory. And if you have 400 containers you’re paying 4000 for versus 400 complaints. And here’s you’re paying 24,000 for 20,000 more container times 400. That’s $8 million of extra inventory I’m sitting on, that’s really just air, it’s not one extra unit of product. So it’s gonna cause working capital issue, you know, your line of credit, you’d like to use it to order more inventory, not just pay more in freight. So I think cost increases price increases. And I think the customer I end up with less selections over time, just because we’re not going to bring in as much stuff and we’re not going to be launching as much new products next year. Just to be more conservative.

James Thomson 12:31

Let’s come back to Amazon here in a moment, I want to first talk about the process of booking shipping. Rick, I’d love your thoughts on just how disorganized things have become for everyone looking for less expensive shipping capacity, are there consolidators, or shipping consultants that are helping you in some way to find those nooks and crannies where you can find cheaper, cheaper shipping?

Rick Fung 12:54

Yeah, for me, I’ve been bidding it out to a few freight forwarders. A lot of them want new business clients. So they’ll they won’t value as bad. But we’ve had one that we use for and the price difference was a few $1,000. Like it’s it’s it really is bad. I don’t know, if Chuck and Sanjay is having the same experience with what I’m having. But it really is a free for all. They’re just taking your drug yours container and they won’t load it. And the open spot on the boats like a bidding. It’s literally an auction. You want that spot, just keep paying for it, it comes down to how bad you want it because someone’s going to pay for it.

James Thomson 13:36

Sanjay, what are you seeing with regards to consultants or companies that you can work with to help find whatever less expensive shipping is out there.

Sanjay Chandiram 13:45

Unfortunately, there doesn’t seem to be much less expensive options at this time. I mean, I’m part of the seller group and there’s free sharing of information. And so if someone gets a resource that’s getting them cheaper containers, you know, if they share it in the group, then there’s a ton of people after the same limited capacity. So we’ve tried to sort of aggregate our volume and go to forwarders to get better rates but that it’s clearly not something that is working in this current market. Freight forwarders are not honoring contracts anymore. Even you know, the big shippers like Walmart, they have contracts which they’re still paying four or 5000 per container and the rest of us smaller sellers are paying 15,000 – 20,000 so but those rates are not indefinite either. While they might have that advantage, at least to the end of the year. Things will change for next year going into next year. But they are if you’re in retail Some of these large retailers are taking on the shipping burden from their vendors. And they’re shipping the goods on their behalf. So it benefits everyone.

James Thomson 15:10

Chuck, are you seeing any types of avenues to pursue to find either more capacity or cheaper capacity?

Chuck Gregorich 15:19

No, not not at all. And when this all kind of blew up on us this spring, we went on, we use four different break borders historically, depending on which lanes we’re shipping, what we’re doing. When this all blew up, we went on, probably contacted 10 to 12 other ones. And you know, and everybody said, we got the same problem, and we’re going to take care of our customers first. If you want to use us, you can, you’re going to pay a premium price. Oh, wow, that didn’t work for us at all. So we don’t have any good solution. The only good solution we had was, because we have multiple warehouses across the United States. Things that we used to bring, we’re located in Wisconsin, things we used to bring Wisconsin, we ship more to the west coast and East Coast and our three pls in store started there, just to beta get it out of Asia, right? The inbound, they didn’t really want to bring anything inbound. So we had to bring it to the coast at a lower cost and then the Midwest. But then when it got to the three PL, then we had to unload it and then make a business decision. Do we send it into FBA? from there? Do we send it back to Wisconsin? But what what gave us a lever to get more containers out? If I didn’t have those three pls? You know, third, only about a third of the containers I received the last three months where they’ve even got out of Asia. So So by having those three piles, I, I got product, I got expensive product, but at least I had something to sell. So

James Thomson 16:53

you’ve talked about shipping costs increases raw ingredient increases, there’s probably some storage increase as well, when you look at all these different types of costs increases, I’d love to understand, how are each of you thinking about what parts of those costs increases to pass on to customers? versus which ones you see as short term costs that you’re willing to absorb? At least partially?

Chuck Gregorich 17:16

I think I’ll start, I’ll start with that one, James. You know, when we, when we ran our numbers and tried to do that price increase in June, yeah. I looked at like, I want to cover all my price ball, my costs increase. And I had to do like a 16% price increase. Okay, and I just couldn’t, I just couldn’t see that happening. And so then I backed it down to like, 5%. And then all of a sudden, you know, your margins just go away, and there’s nothing left? And is it worth it. So I settled somewhere in the middle around a 10% price increase. And it was just a matter of a survival increase, right? Like, okay, we can do this, and we’re going to take a haircut, and the customers are going to pay a little bit more, and we can bring an inventory to have something to sell. And I got 100 employees, they got a job and they can keep working. So that was important to us. And so in this case, you know, the the owners are taking a cut a cut, because we’re gonna make less than the consumers are taking a cut, because they’re gonna have to pay a little bit more. Rick and

James Thomson 18:26

Sanjay, how do you think about what portion of your cost increases that you need to pass on to customers? Sanjay, you want to go?

Sanjay Chandiram 18:33

Sure. I don’t think these increases are short term increases. These are some of these are here to stay for the medium term, you know, 12 to 18 months, at least similar to Chuck, it’s not going to be easy to pass on the entire cost increases onto the customers. So we have sort of run our margins. And yes, we are going to end up with slightly lower margins. But yeah, there’s only a percentage that you can pass on to customers. And we are also looking at around 10%. It’s not gone into effect across the board, because it does have impact on sell through. So we are depending on inventory levels for a product which we carried over from last year or what we had by the middle of this year. And so it I would say the average is five to 10%. With more to come in the fourth quarter.

James Thomson 19:38

Rick, what are you doing to work through this cost cost increase and what you pass on to customers?

Rick Fung 19:43

Yeah, I think I’m in the same boat with Chuck and Sanjay, we’re, we’re all taking a hit. Right? There’s no immediate raise like for us having afraid like go increase like four times in a span of like two, three months. There’s no way we Pass it all. So, yeah, just kind of like Sanjay Sanjay strategy. We’re just kind of gradually increasing prices, we’re hearing freight costs will come down to allow for Chinese New Year as what we’re hearing and yeah, just gradually increase the price. And hopefully, it doesn’t affect the sales too much or huge impact on that. But yeah, that’s that’s all we can manage. I think the worst part is it’s not really advertised on news where people know why things are going out why prices are going up? No, it’s not really advertised that much.

James Thomson 20:37

Talk to me about costs within your organization that other types of costs that you’re having to evaluate, to figure out, do you stop making certain types of investments or stop spending money in certain ways to help drive down your average costs? Are there decisions that you’ve had to make on those fronts? As you see these sharp increases in shipping costs?

Rick Fung 21:00

Yeah, so for me, definitely, we’ve had to, you know, Amazon also cut back on inventory. I don’t know if that’s been experienced by the rest of us. But that’s been a big impact, right? Because not only can we not put as much into FBA, which they have a great program on shipping and everything that helps with the brain the cost down, but now we’re doing fbm. With general cost goes up because we don’t have that same freight advantage that Amazon has that way better shipping rates. So we’re, we’re kind of Amazon put on a new program. What do they do MCF? They basically fulfill orders from your website for you, it’s an FBA so we constantly have to fill FBA, we see the costs, additional shipping costs, just getting product in because the frequencies increase a lot higher. Right. That’s been that’s been a, something that we’ve had to readjust. But we’re also now kind of changing more not to rely so much on Amazon sales, and just putting more effort onto our own e commerce, channels, and other orals reach to other resellers and international distributors and things like that just to to have different avenues of pushing and changing our marketing landscape that way.

James Thomson 22:18

Sanjay and Chuck, are there other aspects of your business and things that you normally spend money on that you’ve had to reconsider in light of some of these other shipping costs?

Sanjay Chandiram 22:28

So one of the things that we did last year was we put together a team hired a couple agencies, and we made a pretty serious effort and growing our Shopify sales. And while the top line went up, we weren’t making money on that channel. So we realized that CPAs are high. And a lot of the sales anyway would happen in the fourth quarter. So we scaled back that effort recently. And we are going to ramp up only in the fourth quarter. That’s one of the things we have done. There are some other channels that we have got on to which have better margins than Amazon. And that’s working well for us. So it’s not making up. The volume doesn’t compare yet, but they’re growing channel, margins. That certainly helps. There’s very little else that we can cut in terms of battery expenses.

James Thomson 23:34

Chuck, on your front, are there things you’re having to do operationally differently, cutting back in other ways?

Chuck Gregorich 23:41

Yeah, you know, when the supply chain got all messed up with these containers coming in late and stuff like that, we started cutting back on our advertising. So our total advertising spent on Amazon dropped, you know, two or three percentage points of sales, just because we knew we were going to be running out of stock, because we couldn’t get good containers out. And so we took a we budgeted that in there, and that saved us a few dollars. But um, we’re also, you know, the the labor market stuff out there right now. So, we did a lot of employment increases here, additional labor, labor increases here. So, um, that was kind of offset by that. And there isn’t a lot you can, there isn’t a lot of levers you can pull, you know, we we do sell a lot outside of Amazon. That certainly, you know, as you guys probably all know that. Generally selling outside of Amazon is more profitable than selling on Amazon because you don’t have to spend as much on advertising. So, we didn’t necessarily promote that more than but we certainly liked that option is, you know, because we have the warehousing all set up and when when they print all these restrictions on The inventory, you can have an FBA, you know that, in a way, it probably helps us a little bit because we have our own warehousing all set up in our network. But um, no, there wasn’t a lot of levers to pull there.

James Thomson 25:13

So Sanjay, you mentioned some numbers earlier. And I’d love to get your thoughts around what you’re hearing on how much longer the shipping delays are expected to continue. And even if the time for shipping, even if that gets adjusted, what’s going to happen to the costs for shipping? How long before the costs start to drop? What are each of you hearing? And what do you believe is likely, somewhere around the truth?

Sanjay Chandiram 25:40

So I’ve come across from multiple different sources recently that the consensus among industry experts, is 12 to 18 months. Some shippers are expecting some kind of a breather after Chinese New Year, when the shipping system gets a bit of a break. But that didn’t happen this year, because of just factories in China not closing for as long as they normally do for Chinese New Year and then just the demand for for goods being as high as it is. So we are expecting this to be in that 12 to 18 month range.

James Thomson 26:28

And Rick and Chuck, what what are you hearing in terms of how much longer this will last? And what what’s going to happen to costs? or How long before costs start to drop as well?

Rick Fung 26:34

I’m hoping

James Thomson 26:35

Hoping? Hoping is a totally different part of a different question.

Rick Fung 26:44

Well, it’s hard to navigate because there’s there’s like this, this whole COVID has been this variable that just never ends. And even COVID was better if people were vaccinated not just here in the US, but in other countries that that they have an effective vaccine, I think things will be better. It’s just it’s nonstop this this COVID thing is just filling the ports, chillin for a cost the the manpower, it’s a never ending thing on the news. So I’m hoping by Chinese New Year before power, or just right after that, that things get back to normal. But we No no, like right off the train year everyone’s looking and stuff. Booking containers all day long, trying to get their stuff out right out. Yeah. It’s just it’s just this is another another cycle. Right? But, um, yeah, I’m just really hoping that I mean, we try to steer left, we tries to You’re right, and we’re going head on, and we keep hitting barriers, but you just keep opening in 10 of the best.

James Thomson 27:44

Chuck, what’s, what’s your take on this?

Chuck Gregorich 27:47

I like Rick’s response, I like to hope that too. We, um, you know, we’ve been consistently hearing for, you know, three to four months that after Chinese New Year, it could get better. But just in the last week, we’ve had Uber freight forwarders tell us, you know, don’t count on it. And to me, I look at our business. And what we’ve had to do is we sell some some seasonal products that been around Halloween and Christmas at all. And we’re trying like abandoned to get that those containers out of out of Asia and we’re struggling getting them out. And we’re afraid we’re going to that stuff’s just gonna miss the holiday season this year. In additional with all these delays that we’ve had this year, we had to push almost 400 containers that we ordered last August, we made the positive side, we had to push them to ship December, January this next year. So we went almost 18 months with deposits on those. And then I’m afraid that there was going to be a bunch of other people that are in the same situation that can’t get their stuff out in the third quarter. So it’s so expensive. They’re going to push it into the fourth of the first quarter. And there’s a bunch of people hearing that it’s going to be better after Chinese New Year. So they’re going to delay their orders in their ship dates until February or March. And it’s just going to be a mess. I’m probably more leaning more towards Sanjay right now that, you know, maybe maybe next summer, before we see a release.

James Thomson 29:21

What has this whole situation taught each of you around building brands and sourcing brands overseas, if you could change anything with what you know now, how realistic is it that you would do things differently? I know it’s hard question because nobody knew quite what COVID was going to do to the world. But I’m curious how you think about manufacturing overseas at this point.

Rick Fung 29:52

I can go first. I think it’s for us on our products. It’s hard to choose just wrong. serials this for our process typically in Asia, a lot of PT. Very difficult to do here. For us we even if we wanted to transition here with the machines, the raw material still comes from Asia, but we will we will hit the same problem. It’s no different.

James Thomson 30:23

Sanjay and Chuck, do you think about overseas manufacturing at this point?

Sanjay Chandiram 30:28

I’d love to have diversification of manufacturing sources. Unfortunately, for our product type, Asia is the only source. I mean, I’ve been to several factories, and it’s not like an automated process, there’s a fair amount of labor involved. And I don’t see that manufacturing ever coming back to the US or our product types. So if I were to do this differently, I would look at products that are us manufactured, and obviously smaller and higher price points. So completely different business model and category.

James Thomson 31:06

Chuck, what would you do differently?

Chuck Gregorich 31:10

You know, we saw some nine different countries now. And we’re having issues in every country, of getting it out of the container cost COVID sitting every country, and certainly you if all that stuff can be made in the USA, that would be nice, but we just don’t have the workforce to manufacture that kind of stuff. So I don’t think we have a choice, either. There may be some stuff, if there’s probably anything, I probably wish I would have been more aggressive with Mexico over the last few years. And it did try and try to get more out of Mexico. Just because it probably solves maybe some of the container issues. Maybe we can just throw it on a trailer. But you know, the, the raw materials? I’m not sure where they all come from. But um, I know even if you had us manufacturers, they still got raw material problems, right. So I don’t know how to solve any issue. But I don’t I don’t think there’s a good solution for this in the next 12 to 18 months. You can’t say well, I’m going to move my production from China to Vietnam, or India.

James Thomson 32:20

I want to wrap up our conversation with with one last question. Let’s say in a year and a half from now, I’m calling each of you and I’m saying, hey, let’s do an update on this podcast. And let’s say in 18 months from now, not much has changed. How do you see yourself deciding what the new normal is? versus Oh, can we get back to the normal we had back in 2019? How much longer? Can you go with this craziness? Before you have to seriously reconsider what you’re doing?

Chuck Gregorich 32:53

No, I think that I think the market is going to have to adjust because you just can’t be importing this stuff and sell at the price you used to you’ll be out of business. And I think the competition is going to be less. I can’t imagine somebody out there right now thinking they’re going to source these widgets, and throwing that new production costs and saying, well, there’s no money, why would I do that? I think the competition will be less over time. And I think you know, the demand for these products are probably going to continue, the consumers are going to continue to spend. So I think it’s just gonna be a different a little bit different model and different prices, different costs, and just work through it. That’s what we are. We’re entrepreneurs, and we’re here to solve problems. So that’s what we’re gonna do.

James Thomson 33:42

Sanjay and Rick, your thoughts on? How much longer can we continue this before we have to reconsider what we’re doing.

Chuck Gregorich 33:50

Sanjay, go ahead.

Sanjay Chandiram 33:52

So I think, as Chuck mentioned, the competition is going to reduce, there are a lot of sellers out there that have traditionally been selling at really low margins. And fortunately, I see a lot of those going away or raising prices to be more in line with the current costs. As far as shipping costs go, the freight companies are not adding significant capacity to 2023. And once that happens, the new norm will end up being like $5,000 a container, which, when you look at it from what it is now sounds reasonable, but from a year and a half ago, it’s still three times what it was. So I think that’s going to have to be factored into everybody’s pricing and business model. And then as far as product mix goes, there will be some adjustments made there too. Sort of steered toward products that are smaller and have lower shipping costs, and also higher price point items. Some of those changes can be made, I think, yeah, this is it is sustainable. There is some short to medium term pain. But I think we should come up with pretty strong

James Thomson 35:17

Rick, what what’s your take on all this?

Rick Fung 35:19

Um, I hope we’re still around after 18 months with our products, because I see a lot of the the larger companies may consolidate is what would happen since they have more buying power or things like that. But yeah, I think the marketplace is going to change. I think any people gonna reconsider really high ticket price items, and probably just settle for something that’s cheaper. It’s too expensive for them, depending on how the economy is going to be 18 months from now. But even I’m hoping in the news right now, I think the government’s getting involved trying to pin down all the spray costs and help everyone else because everyone’s getting impacted for everything. So but uh, yeah, that’s that’s kind of my thoughts. I don’t think there’s going to be readjustment on consumers and how they spend money, where they want to spend it.

James Thomson 36:21

Rick, Sanjay, Chuck, I want to thank all three of you for joining us today on the Buy Box Experts Podcast. We look forward to seeing a return to some sort of stability in the overseas shipping situation over the next 12 to 18 months. Thank you again and join us next time on the Buy Box Experts Podcast. Today’s episode is brought to you by GETIDA. GETIDA is a global leader in Amazon FBA auditing and reimbursements. GETIDA analyzes your Amazon data and reconciles your FBA inventory, and files claims reimbursements on your behalf. No obligations, no hidden fees, just GETIDA recovering your money. GETIDA helps you get your money back into your pockets so you can focus on investing in more inventory and growing your business. To learn more, check out getida.com. That’s getida.com.

Outro 37:11

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Meet the Speakers

Sanjay Chandiram

Sanjay Chandiram

Co-founder and CEO of Kaliber Global

Chuck Gregorich

Chuck Gregorich

Co-founder of Net Health Shops LLC and Net Pet Shops LLC

Rick Fung

Rick Fung

CEO of MotoShield Pro

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