Inflation is a hot topic this year. Whether for personal finance or industry, we are all being affected by rising costs. It’s unlikely you’ve escaped conversation specifically about rising grocery prices in the past 6 months, and it’s no wonder why. Canada’s Food Price Report 2023, estimates that the average family of four will spend $1065 more for their annual cost on groceries than they did in 2022 (read more here) and the struggle is not limited to Canada. American news outlets are publishing similar stories about the state of grocery prices. This CBS news article headlines “Prices falling, but not for food. Groceries remain ‘pain point.’”
So, what’s causing us so much ‘pain’ in our grocery bills?
Many causes attributed to inflated prices are not specifically related to the supply chain. For example, some people believe we should increase competition in the food industry to mitigate companies charging more simply because ‘they can.’ Consumers have also identified a phenomenon called ‘shrinkflation,’ where a product's price does not change, however, the size or weight of the good decreases substantially. There are also natural environmental impacts, where sometimes farming shortages create huge lulls in the production of certain products, driving the prices sky-high. Siracha sauce is a great recent example of this, if you've noticed the recent shortage.
Of course, none of these reasons for price increases are directly tied to the supply chain. For the purpose of this newsletter and our industry, let's start with the most obvious reason people suggest that the supply chain has affected their grocery prices: Per-mile freight costs:
Common thinking: Fuel is pricey these days and with all these covid supply chain delays, transportation companies must be busy. Shipping products must be more expensive, and because freight is costing more to move, it makes sense that the goods in the store are also costing more, especially if they have to come from far away.
Our take: There are several sources that transportation providers and shippers utilize to track the spot market or dedicated rates such as DAT Analytics, FreightWaves, and Baltic index (for ocean). Historical rates are also provided by these companies.
Current data shows that consistent ocean rates are only 2-4% above 2019 pre-pandemic rates, and over-the-road (OTR) rates on the spot and dedicated market are in line with or below 2019 rates.
Transportation generally is one of the largest contributors to rising costs and inflation for shippers. Yet, lower than 2019 OTR rates and slightly increased ocean rates do not account for today’s grocery store prices. Yes, the pandemic did see much higher rates than we are seeing now in 2023, but higher than normal shipping costs are not a feasible excuse for such inflated prices today with rates down.
You might ask: if it’s not the per-mile cost of transportation, then what in the supply chain is affecting food prices?
There are a lot of nuances here, especially between different products (dry goods, seasonal fruit & veg, refrigerated & frozen goods) all operating in their own micro supply chain markets. However, I think a great example of seeing sneaky ways that the supply chain is affecting pricing is by looking at things like compliance fines. Compliance fines were implemented with grocery retailers many years ago and essentially are enforced upon shippers or carriers for ‘non-compliance’ to shipping requirements as outlined by the retailer.
Some compliance fines could be:
- Late fees - if a carrier (and therefore shipper) are late to a retailer they pay a fine for each PO on the trailer.
- Shrink wrap fine - if shrink warp is damaged, a fine can apply.
- Overage and shortages - if the shipper had 44 cartons on 2 pallets - 2 pallets have to show up with 44 on each, and if not there is a fine or the shipment can be rejected.
- Lumper fees - retailers have lumpers to unload the freight and this is paid by the shipper or transportation company.
- Missed delivery fine - this is one of the largest fees and can be paid by the shipper or transportation provider depending on circumstances.
Not a compliance fine but also worth noting is that the majority of transportation companies have added an additional delivery charge to shippers to account for waiting time at delivery (even with an appointment). Truck drivers sometimes find themselves waiting hours at a dock with their shipment for the retailer to unload – and this costs the transportation provider money.
Without a doubt, shippers are building these fees and compliance fines into their costs. To my knowledge, some are paying millions in compliance fines throughout a calendar year to major grocery retailers. Worse, there’s really no choice in the matter. If shippers want their products to reach the market, they need to meet the gatekeeping retailers’ expectations or sell elsewhere.
In my opinion, the hidden reality of some of these rising costs really comes down to shippers experiencing fees for inefficiency and service failures. Though mistakes and human error are unavoidable at times, our industry can focus on efficiency and consistent services to do our part in keeping inflation and rising costs down. Reliable on-time service, fewer claims, efficient appointments at retailers, and better transportation relationships all have a shot at driving down some of these costs.
Shippers, carriers’ brokers... do you have similar experiences? Do we believe the compliance fines contribute to inflation on our grocery store shelves?
Always interested in the reader's perspective.
See you next week!
Bill Robinson
