PRICEY PIPELINE

DAN ALAIMO

Rising costs for petroleum and other materials are menacing the pipeline of inexpensive general merchandise product from the Far East.

While all departments in the store have been impacted by rising energy costs — making shipping more expensive and causing customers to watch their spending — general merchandise categories face a special set of challenges.

Much GM is made in China, where costs are rising along with the standard of living, and resources — like electricity — are sometimes in short supply. Meanwhile, the shipping distance is far greater than with domestically manufactured foods, and the use of petroleum-based packaging is widespread for GM goods.

Costs of other commodities used in product manufacturing, like steel and copper, also are rising in East Asia, retailers and wholesalers told SN during a recent conference of the Global Market Development Center, Colorado Springs.

“We have seen price increases on steel products three times this past year,” said Mike Juergensmeyer, group vice president, GM and pharmacy, Schnuck Markets, St. Louis. “So it's not just petroleum products, it's all commodities that are driving up the costs of import goods.”

This generally means higher prices that must be passed along to consumers. Although many chains have already done their purchasing for 2007, they are braced for tougher terms for 2008.

“I fully anticipate that we'll see some healthy cost increases based on materials and ocean freight for '08 season,” said Mike Isom, director of GM, Bashas', Chandler, Ariz. “But we're holding out hope that we won't and obviously it will be a strong negotiating point.”

Bi-Lo, Greenville, S.C., has locked in its programs and costs for 2007 and is looking ahead to 2008, said Anthea Jones, vice president, nonfoods and pharmacy. “Going forward, as we source our programs for '08 and beyond, I think [cost increases] will definitely have some impact and we're just going to have to get smarter about what we do, be more efficient and look for better ways to get the product to the consumer,” he said.

On the other hand, these trends may lead to smaller package sizes that could take up less space in shipping containers and on shelves, and buyers have started to look for sources in countries other than China. According to recent news reports, Wal-Mart Stores, Bentonville, Ark., is making significant cuts in its purchases from China.

Some even speculated that this could lead to more U.S. manufacturing.

DEMAND DRIVES COSTS

Petroleum demand “is driving cost increases anywhere from 3% to 7%, depending on the categories,” said Gregory Hott, director of GM, Weis Markets, Sunbury, Pa. “If you are bringing it in from China, product costs will probably be a little bit more because of the valuation of our currency against Chinese currency.”

A nonfood executive with a Northeast retailer said that he hasn't seen many price increases related to packaging yet. “What we have seen is transportation charges and surcharges, and import charges. Containers are costing more to get from the Orient over to the States now.”

These could equal almost 10% of the cost of transportation, he said. On a one-time basis, the retailer would just absorb the increase. “It used to just become part of the cost of goods. Now you can't do that because the charges are significant,” he said.

“Petroleum pricing is affecting cost on a lot of products across the board, and as petroleum costs continue to go up, we're going to see retail prices go up along with them,” the executive said.

Because of the many additional fees, “it's very tough to manage right now because of the complexities of the issue,” said Mike O'Shell, director of GM/HBC, the Penn Traffic Co., Syracuse, N.Y.

Product in the dollar aisles of Minyard Food Stores, Coppell, Texas, has been affected by the rise in transportation and materials costs, said Mike Bevel, category manager. “It's driving the margin out of it,” and resulting in a change of the “dollar” offer to two for $3, or three for $4 or $5, he said.

“Freight costs are skyrocketing and particularly fuel surcharges,” said Al Jones, senior vice president, procurement and merchandising, Imperial Distributors, Auburn, Mass. “It's impacting all aspects of the business, both domestic and import. Anything that comes from the Orient is going to go up in price because it costs you more to get it here, in some cases more than doubling in cost because of the freight,” he said.

“I don't think it's going to stop. I think we will continue to see these kinds of increases and you have to be able to adjust the cost through the system or you'll fall way behind. If you don't do that, you run the real danger of going out of business,” Jones said.

STILL GROWING

“Import volume continues to grow and grow, especially on the GM side of the business,” said Lanny Hoffmeyer, corporate director, hardlines, photo and lobby, Supervalu, Eden Prairie, Minn.

While Supervalu has not seen the higher costs reported by other companies, this may be because of the larger volumes it is ordering as a bigger company. “We are doing more importing, doing more full containers and more multi-containers, rather than partials, and those automatically qualify you for lower rates,” Hoffmeyer said.

Former nonfood executive Bill Mansfield is now president and chief executive officer of the VIP International consultancy in Garland, Texas, and he is involved in sourcing imported products for retailers in Puerto Rico. “The cost of goods has increased again due to the transportation and the packaging costs, but not as dramatically as the price of the gallon of gas in Puerto Rico. So the real out-of-pocket money concern for the consumer in Puerto Rico remains with the gas prices,” he said.

“There's no question that imports are going to continue to be a huge part of our life, and of the general merchandise and HBC categories,” said Larry Ishii, general manager, GM/HBC, Unified Western Grocers, Commerce, Calif.

“It will be critically important for us to be aware of all the factors that contribute to the cost of goods so that we're able to source product from the right countries, from the right manufacturers, so that we have the right cost of goods, timely delivery and completeness of deliveries so we don't disappoint consumers or our [retailer] customers,” he said.

One of those factors is the rising standard of living in China, Ishii noted. “That is going to change the dynamics of sourcing, and the cost of goods, and where we look to have product manufactured in the future,” he said.

“We've seen what everybody in the country has seen: Just about every manufacturer has come up with increased shipping costs,” said Dan Spears, director of nonfoods, Ingles Markets, Asheville, N.C. Because a lot of the food products are sourced domestically, GM products imported from China are impacted more by these increases.

While supermarket chains like Ingles are being told the reason is transportation costs, “what we don't know is the true cost,” which is related to other factors. “We pretty much have to take their word that things cost more. When they say, ‘We bit the bullet and incurred this increase without raising costs as long as we could, and now we feel they must go up,’ the end result is just higher prices for everyone,” Spears said.

“There's going to come a point where you have to look at whether it's still feasible to bring stuff in from overseas, or start looking at bringing back more domestic production, which would probably be a good thing,” he said.

Downsizing Packages

Last year, Wal-Mart Stores, Bentonville, Ark., initiated a program to reduce overall packaging by 5%, and many supermarket competitors see this as good for them.

While it will probably benefit Wal-Mart and the environment, smaller packaging will enable other retailers to cut shipping costs and fit more product variety in their stores, retailers and wholesalers told SN.

“Your cube and your shipping costs are going to go down so you'll be able to fit more product in a container and more product on a truck,” said Mike Juergensmeyer, group vice president, general merchandise and pharmacy, Schnuck Markets, St. Louis. “Also, if the packaging is smaller, you can either get more product on the shelf or you can get more variety,” which will please the customers.

“Smaller-size packaging is a responsibility that we retailers have to push back on the manufacturers,” said a nonfood executive with a Northeast retailer. “Having an oversized package wastes space and costs us more to get the product from the manufacturing plant to us, where you could spread the cost over more items and be more cost efficient. Also, we're finite when it comes to the amount of linear footage we have on shelves, so when you have less or smaller items, you're able to get a larger selection on the shelf for the customer. The customers seem to appreciate that more.”

Many manufacturers are responding to rising costs by cutting package size and content, noted Doug Barnett, director, GM/HBC, Brookshire Brothers, Lufkin, Texas. For instance, an item that was 10.2 ounces might become 10 ounces, yet costs the consumer the same amount of money, he said.

Lanny Hoffmeyer, corporate director, hardlines, photo and lobby, Supervalu, Eden Prairie, Minn., disagreed that smaller package sizes is a trend. “What I'm seeing is an upgrading of the packaging. There's more emphasis on making it a nicer pack, and so there may be some increased cost associated with that,” he said.

Others wondered whether smaller packaging will make a difference.

“If you reduce the amount of packaging that is involved, of course it costs you less,” said Al Jones, senior vice president, procurement and merchandising, Imperial Distributors, Auburn, Mass. “So yes, that's some help, but compared to the total cost increases that we're seeing because of fuel, but I don't know that it's going to help the situation.”

Another supermarket executive candidly, and anonymously, questioned the retailer's role in this process. “The buyer's first responsibility is to the sales. Are there issues that relate to packaging? Yes they are, but I'm not sure they are issues that are pertinent to the retailer. Should I be socially conscious about it? I'm not sure if that's my job or not. Maybe it is; maybe it isn't.”
— D.A.