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July 5, 2018

Can Increased Shipping Costs Put the Brakes On The Economy?

MHT Partners  | Consumer Investment Bank

Consumer packaged-goods’ (CPG) companies nationwide are experiencing shrinking margins as the cost of shipping their products has increased substantially over the last year. Coca-Cola reported that their first quarter freight costs were up 20% in their North American division over the same period last year. This burden is being felt across the industry, with consumer goods’ companies Procter & Gamble and Hasbro, as well as food companies Danone and Nestle, citing rising freight costs as negatively impacting their 2018 financial performance.

The rising freight costs are a combination of two issues: supply and demand around shipping availability and gas prices. Retailers and manufacturers have been struggling to find freight providers in recent months as shipping volumes have surged in a growing U.S. economy. As the broader economy has continued on its upward trajectory, railways and truck fleets haven’t moved in lockstep, and the price of their transportation services has increased substantially as a result. In addition to a paucity of freight, gas prices have climbed significantly. Since the beginning of the year, the average price of a gallon of gas has climbed by over $0.45, which cuts directly into profits.

With apparently no near-term relief in sight, many industry players such as General Mills, B&G Foods, and Hormel Foods are considering raising their own prices to pass along the spiked shipping costs to consumers. Tyson Foods, for example, has reported that they plan to incorporate price increases in the second half of 2018 in order to return their margins to historic levels. Of course, these increases simply reflect the impact of inflation one might expect in an economy as hot as the U.S.’, and which has been quite moderate for a very long time.

With rising consumer goods prices on the horizon as CPG companies pass along the costs to consumers, it remains to be seen what impact these rising costs will have on the broader economy. What is not in question, however, is that shipping firms will seek to take advantage of the current environment and reap profits while they are able.

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