CrossDock | August 31, 2023

Panama Canal drought, Amazon fee hike, rise in global warehousing costs

August 2023

Welcome back to CrossDock,

The construction of the Panama Canal is an iconic moment in American history. One engineering marvel connected two mighty oceans – the Atlantic and Pacific  – and helped save time and billions of dollars. Today, the canal faces a unique problem. An unprecedented drought in the region has now caused the “biggest traffic jam” in recent times near the canal. In this issue of CrossDock, we discuss what caused this congestion, ​​the repercussions it is causing in the supply chains and market dynamics, and how it will affect consumer goods delivery.  

In this newsletter: 

  1. Drought Causes the Worst Traffic Jam in Panama Canal
  2. U.S. Importers to Take on Increased Shipping Expenses
  3. Ahead of the Holiday Season, Amazon Increases Fulfillment Fee
  4. Amazon to Impose New Fee on Sellers
  5. Walmart Reports Strong Q2 Earnings
  6. Global Warehouse Costs Rise by 10% 
  7. Manufacturing and Distribution Sales in the U.S. Flatlines

Freight and Shipping🚚 

Prolonged Drought Causes the Worst Traffic Jam in Panama Canal

The Panama Canal is now experiencing the worst traffic congestion in recent times, as more than 200 ships are stranded on both ends of the passage. Experts believe this gridlock arose mainly due to the prolonged drought in the region, which caused low water levels within the canal. Another reason for the traffic is the measures implemented by the Panama Canal Authority (ACP) to conserve water. 

Severe drought is the reason for the decline in water levels  

The 50-mile-long canal, a linchpin connecting the Atlantic and Pacific oceans, relies on rainwater to replenish it. However, this year, the region experienced a severe drought, which led to a significant decline in water levels within the canal, thus leading to the “worst traffic jam” in the sea.

State of Freight

The daily traffic is currently capped at 32 ships, down from the prior average of about 36. According to Business Insider, the ACP has placed a higher premium on the heaviest and largest ships that have to pass. This means companies can now transport only fewer goods, which, in turn, could lead to emptier shelves and higher prices.

Supply chain bottlenecks and delayed deliveries 

Panama Canal is a vital trade route, typically processing 40% of all the U.S. container traffic.

The traffic jam is causing a slowdown in consumer goods delivery and is already stoking concerns over the holiday supply chain. Some shippers might experience a supply-chain bottleneck and delays in deliveries due to the conditions, reported Alix Partners.  

Number Spotlight

50 Million

Gallons of water are required to move each ship through the locks in the Panama Canal. Only some of it gets recycled. 

US Importers are Taking on Increased Shipping Expenses this Summer

Shipping expenses for transporting goods from Asia to the U.S. are experiencing a notable upward trend. However, American importers are accepting the elevated costs following a substantial decline in freight rates this year from their previous record levels, as the Wall Street Journal reported. 

Shipping rates 

According to transportation data and procurement company Xeneta, the average spot price for shipping a 40-foot container from China to the U.S. West Coast increased by 61% over the six weeks ending on August 15th, reaching $2,075. 

The surge occurred when major shipping companies hiked their listed prices after a sharp decline in the spot market rates for the sector, dropping from nearly $10,000 per container in February 2022 to below $1,300 by late June. 

Change in consumer spending

Importers in the U.S. experienced a tumultuous journey throughout the pandemic. A surge in consumer spending on goods led to unprecedented imports, causing a rush for shipping capacity and a sharp rise in prices. 

However, this year, consumer spending has shifted towards services, prompting apparel vendors, electronics retailers, and other sellers of consumer goods to cancel international orders and work on depleting their inventories.

The price increase may be short-lived 

Both importers and experts in the shipping industry anticipate that the recent surge in spot rates will be of brief duration. Current U.S. container import volumes are trailing behind those of the previous years, and several ocean carriers are beginning to receive new container ships that were ordered during the height of demand.

“There is a tide of overcapacity that will definitely affect global shipping, so we will see spot rates resuming their downward trend in the fall,” said Philip Damas, managing director of Drewry Shipping Consultants Group, to the WSJ.

Retail and E-commerce🛍️

Amazon Hikes Fulfillment Fees For Holiday Season 

Earlier this month, Amazon announced increased fees for sellers using its FBA fulfillment services during the holiday season. According to Amazon, the hike in the FBA fulfillment fee will apply from October 15, 2023, to January 14, 2024. 

FBA fulfillment fee

As per the update shared on the Amazon seller forum, the holiday peak fulfillment fee rates are unchanged from 2022 for the U.S. and Canada FBA. It further mentioned that “inclusive of the Holiday Peak Fulfillment Fee, Amazon’s average fulfillment fees continue to be 30% less expensive than slower standard shipping methods of other major third-party logistics providers.”

Furthermore, the fulfillment fee will apply to US FBA, Canada FBA, Remote Fulfillment with FBA, and Multi-Channel Fulfillment items, except for US FBA items priced under $10.

Amazon to Impose New Fees on Sellers Shipping Their Own Products 

Amazon, effective from October 1st, will start imposing new fees on third-party sellers who ship their products to customers instead of using the company’s fulfillment service, as reported by Bloomberg.

This new move will essentially make it more expensive for the sellers to ship their own products and push them to pick up Amazon’s FBA services. Interestingly, this development comes at a time when the U.S. government is considering filing an anti-trust lawsuit against the e-commerce giant. 

Sellers Fulfilled Program 

The Sellers Fulfilled Prime program was first launched in 2015 and allows merchants to display a Prime badge on their listings without using Amazon’s fulfillment service. However, as per the program, the sellers must fulfill orders with one-day and two-day delivery at no additional charge for Prime customers. 

Revised fee

According to Bloomberg, third-party merchants who ship products via Amazon’s Seller Fulfilled Prime program will start paying an extra 2% fee on each sale they make from October. This is in addition to the 8% to 15% fee sellers usually pay Amazon.

Reopening the program 

A few years back, Amazon suspended enrollment in the program, stating the sellers were not delivering the same “high-quality experience” customers expect from Prime. However, the company announced its plan to reopen enrollment earlier this year. Many industry experts view this move as an appeasement in the backdrop of Amazon's antitrust lawsuit. 

Walmart Reports Strong Q2 Earnings

Amidst a challenging economic climate with inflation rampaging almost all industries, American retail giant Walmart reported strong Q2 earnings. As per data released by Walmart, its revenue grew by 5.7%, taking consolidated revenue to $161.6 billion. Moreover, Walmart's U.S. e-commerce sales grew 24%, and international e-commerce grew 26%. 

During the May to July period, Walmart International witnessed significant growth in its topline, led by Walmex, China, and Flipkart. Its international e-commerce business grew by nearly 26%, while the advertising business for the international business grew by 40% YoY.

Exceeding expectations

Sam's Club, Walmart's wholesale business, experienced an increase in sales during the last quarter, with a growth of 5.5%. However, this was slightly below the expected rise of 5.58%. The back-to-school and automotive sectors also performed well, as customers stocked up on items for the upcoming back-to-school season.

Similarly, in Q2, the net sales of e-commerce increased by 24% — mainly driven by pickup and delivery. The total online sales have reached $24 billion globally, accounting for 15% of the total sales.

Revised goals 

Walmart has revised its expectations for the rest of fiscal 2024. The company now anticipates consolidated net sales to increase by 4.0-4.5% for the full year compared to 3.5% at the end of Q1 in May. Additionally, Walmart has raised its expectations for consolidated operating income from 4.0%-4.5% to 7.0%-7.5%.

Good days ahead for Walmart

Though Walmart lacked the first-mover advantage in digital commerce, they are now making rapid strides. Their investment in Flipkart, which commands a market share greater than 40% in the $60 billion Indian e-commerce market, is rapidly growing. As per Walmart’s Q2 data, subsidiaries Walmex, China, and Flipkart are hugely contributing to its double-digit sales growth in e-commerce. 

What’s more, Walmart’s 4700+ physical stores are giving them an edge over Amazon. More than 50% of digital orders are fulfilled by stores, as per Walmart’s statement. This indicates that their omnichannel strength is becoming a strong competitive advantage.

Warehouse Real Estate🏢

Global Warehouse Cost Rise 10%, London Tops the List

According to a recent Savills World Research analysis report, the total costs for prime warehouse space grew by 10% globally in 12 months. This is an 8% increase when compared to 2021 and 2022.

Rising warehouse rents

In the Savills' yearly assessment of 52 markets, London retains its position as the most expensive warehouse market, including rents, service charges, and taxes. As per the Bloomberg news report, a prime warehouse space in London costs $42 per square foot. 

This year, Sydney advanced to the second spot with $27.44 per square foot, pushing Hong Kong down to fourth place at $26, while Los Angeles secured a third position at $27.2 per square foot.

According to the report, the growth rate in property expenses has decelerated, with the initial six months of this year witnessing a 4.4% increase in total costs, compared with a 5.4% rise in the latter half of 2022. The report attributes the rate increase to in- or near-shoring, e-commerce growth, and requirements from manufacturing-related occupiers.

Real estate developers and buyers find greener pastures 

Owing to the increasing warehouse costs in prime places and growing logistical snarls, real estate developers and buyers are now flocking to regions beyond the usual markets. A case in point is Arizona’s Loop 303, a 17-mile stretch of highway outside Phoenix that has now become a logistics hub for companies like Amazon, Walmart, and others looking to avoid supply-chain bottlenecks. Houston, Salt Lake City, and the Upstate region of South Carolina are some of the other regions in the United States that are witnessing increased growth in warehouse construction. 

Visualized: U.S. Manufacturing and Distribution Sales Flatlines

Credit: Digital Commerce 360

According to government data, manufacturing and distribution sales in the U.S. were flat at about $10.93 trillion. In June, manufacturing sales witnessed a 2.6% decline – from $589.3 billion in June 2022 to $573.9 billion in June 2023. Similarly, the total sales decreased from $1.877 trillion in June 2022 to $1.818 trillion in June 2023.

Thank you for reading, we’ll see you in the next edition!