California Apparel News

Just as the economic picture is beginning to look rosier for the apparel industry, a dark cloud is gathering on the horizon.

Ocean carriers are hoping to raise their shipping rates again next May. Carriers already raised rates by about 30 percent last spring, when the cost to ship a 40-foot container from Asia to the West Coast increased by $700.

The new round of shipping increases would add another $450, or about 20 percent, to the cost of transporting a 40- foot container from Asia to the West Coast and $600 to the cost of shipping a 40-foot container to the East Coast. A $400-per-container surcharge would be tacked on during the peak season, which is from June 15 to Oct. 31. That is a $100 increase over the current peak-season surcharge.

Many freight forwarders and customs brokers have not notified their clients of the price increases yet. They are hoping that the 14 shipping members of the Transpacific Stabilization Agreement, which recently announced the proposed rate change in Kuala Lumpur, Malaysia, will reconsider the increases. Those shipping members include Maersk Inc., APL Ltd., Evergreen Marine Corp., China Ocean Shipping Co. and Hapag-Lloyd AG.

“I’d rather not give my clients any bad news before Christmas,” said Robert Krieger, president of Norman Krieger Inc., a Los Angeles freight forwarder and customs broker. “If it is a strong year in shipping, they will be able to get their rate increase.”

At the Port of Long Beach, year-to-date container traffic is down nearly 4 percent from last year. Meanwhile, traffic at the Port of Los Angeles was up 19 percent during fiscal 2003.

“It’s really much too early to say with any certainty that these increases will actually come in,” said Hubert Wiesenmaier, executive director of the American Importer Shippers Association Inc., a nonprofit organization in New Rochelle, N.Y., that is one of the world’s largest shippers associations for textile, apparel and footwear importers. The group provides members with discounted ocean freight rates. “We already had substantial increases last year,” Wiesenmaier said.

But shipping lines said they need the rate hikes to make up for big revenue losses in recent years.

“Basically the carriers this year are recovering from what was one of the worst years last year in the industry,” said Bob Sappio, APL’s senior vice president of transpacific trade. “My company lost more than $330 million last year and $80 million the year before that.hellip; If you look at the freight rates, we are still not level, by many hundreds of dollars, with the freight rates of 1999.”

Weathering the increases

For apparel companies, shipping costs are a growing piece of the expense pie as more clothing makers look to Asia to sew their garments.

When ocean freight rates went up last May, most clothing companies felt they could not pass the additional cost to their retail customers, who have been trying to lure shoppers in with big sales every other week. But retailers may find that their vendors cannot keep doing this.

“We had to absorb the costs last time because there is so much competition out there,” said John Inn, co-owner of Los Angeles– based juniors apparel company Bubblegum USA, whose shipping rates went up approximately 25 percent, about $500 to $700 per 40-foot container, depending on the contract. Inn imports 60 percent of his line.

“But we’re going to have to do something to pass it on to the consumers,” he said. “We’ve been talking with buyers to let them be aware of it.”

Some companies decided to keep costs down by switching ocean carriers. They hunted for smaller, more-economical shipping lines whose rates didn’t go up as much as the 14 major shipping lines.

“We found that by shopping our rates around, we were able to offset a lot of the rate increases we might have experienced,” said Ed Redding, executive vice president of importing and sourcing at Calabasas, Calif.–based John Paul Richard Inc. “Instead of giving our business to a big carrier, we got estimates from five carriers, which saves money but can be a pain in the neck to do.”

John Paul Richard, which has revenues that exceed $100 million, imports 80 percent of its line, approximately 1,000 containers.

Hazards of switching

However, with timely apparel deliveries a make-or-break proposition, some companies are hesitant to switch to smaller shipping lines.

“Your first consideration is if you can’t get the rate you want from Carrier A, you go to Carrier B,” said Wiesenmaier of the American Importer Shippers Association. “Those carriers outside the 14 shipping lines that make up the Transpacific Stabilization Agreement don’t typically carry apparel.”

Smaller shipping lines have been known to stay in port until their ocean vessels are full. And they have made unexpected detours to other ports, causing delays to their final destinations.

“Apparel shipments are always urgent, and there is always a rush,” Wiesenmaier said. “Most apparel importers are picky when they select their carriers to get the right transit time and arrival date. Service is more important than rates.”

Rising competition

The major shipping lines have another advantage. They are all foreign-owned companies exempt from U.S. antitrust regulations. Freight forwarders complain that ocean carriers have been using this exemption to keep shipping rates high.

But that may change. Cargo consolidators, known as non-vessel operating common carriers, have asked the Federal Maritime Commission (FMC) in Washington, D.C., to grant them permission to sign confidential service contracts with their customers. The use of confidential service contracts by ocean carriers has been a hot topic since the passage of the Ocean Shipping Reform Act in 1998. The legislation gave shipping lines the right to sign confidential contracts with importers and exporters and keep negotiated shipping rates a secret. But non-vessel carriers do not have the same privileges.

Consolidators say this puts them at a disadvantage because most importers and exporters do not want their competition to know the rates they are paying. So they stick with the major shipping lines. Some of the major consolidators petitioning the FMC include Bax Global Inc., United Parcel Service Inc. and FedEx Corp.