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Anonymous

IKEA, Wayfair, & Omnichannel Furniture Retail

Wayfair's Pricing Strategy and Mature Gross Margin

Wayfair & CastleGate Logistics Penetration

Former Associate Director, Pricing Strategy and Analytics at Wayfair

Wayfair: Pricing Strategy & Gross Margin

Investor Dialogue: Wayfair

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:00:21} John, what interested you, originally, to join Wayfair in 2016?

{audio:0:00:27} I always keep one eye out in the job market, for fascinating jobs, but I was almost forced into it because I was with a large freight logistics company, and they were bought. Usually, when you are the acquired company, you don’t stay around very long. I had a great severance package and then started looking. This opportunity with Wayfair came up, where they were looking to understand the ocean supply chain better and what their options should be. 

{audio:0:00:59} At the time, Wayfair was probably a $3.5 billion company, in the summer of 2016, when I interviewed. I had the pleasure of being interviewed by one of the co-founders, Niraj Shah; how wonderful was that. Now Wayfair is a $14 billion company and I’m not so sure that people get that opportunity any longer.

{audio:0:01:26} How was that interview with Niraj?

{audio:0:01:28} He was trying to understand how we could go about starting an ocean supply chain. He was asking how it would work and how it could be done. There were really two parts to that answer. The first part is, since Wayfair doesn’t own the goods, but they do the fulfillment or want to control that side of the process, you needed to go out and get an NVOCC license with the Federal Maritime Commission. I met the qualifications to do that because, not only do you apply for the license, you have to have what’s referred to as a qualifying individual. Within the Federal Maritime Commission regulations, they describe what those qualifications are and I met them.

{audio:0:02:19} It’s a bit archaic, in a way. Not only do you have to meet the qualifications, but you have to have people write letters of recommendation to your good, kind nature, values and experience that you’ve got. The other way is taking a test and being certified or licensed. So, I became the qualifying individual.

{audio:0:02:37} The other thing that I said to Mr Shah was, if Wayfair is going to grow the way that you feel the growth is going to come, there is really only one way to do a startup and that’s to work your way through the top, down. We wanted to handle the ocean containers directly, with ocean contracts direct with the carriers. We did not want to work through an NVOCC, a freight forwarder, who is only another layer of cost. We did not feel as if they brought the value in that made us want to hire a third party.

{audio:0:03:13} I said, you need to go through the top and make noise. No disrespect to the local people but maybe you become one of that person’s priorities and they go their boss. He has his own five priorities and maybe you are lucky enough to be one of those five. Then you go to the vice president level and up and, by the time it gets to the upper level, you’re not a part of their vision and their growth and you’ve been tossed to the side. I always joked and said I was the little brother, busting into the big brother’s room. I would go in and say, if we’re going to do business together, we are going to start with your executives and your C-suite, because I need their endorsement. That unlocked all sorts of doors for us. It really made things happen for us.

{audio:0:03:58} When I was doing this, back in 2017, we got the NVOCC license – last week of April, first week of May – I went out, the month before, to what’s called TPM, a trans-Pacific market event that JOC holds. I was negotiating with ocean carriers and dray carriers for contracts, directly, from a position of having zero containers; no freight. But I was successful at doing that and successful at telling the story. I travelled with my iPad and my charts and graphs and showed our growth curve. Enough people – not everybody; I think a lot of people thought I was nuts – bought the story and bought into it that we could get started and really position ourselves to grow, while being connected at the top. 

{audio:0:04:51} Niraj was totally on board for that. Wayfair has regular meetings, at the C-suite level, once a year, and I would do the same thing now, with Perch. When you are a startup, to me, it’s the way you’ve got to set yourself up. You have got to make yourself a priority, especially in this environment.

{audio:0:05:11} You actually joined Wayfair pre-CastleGate?

{audio:0:05:21} My role and responsibility was to start CastleGate Global Logistics; not CastleGate Fulfilment as that is another aspect. There were three officers of CastleGate Global Logistics and I was one of them. The qualifying individual, under FMC regulations, has to be an officer of the company.

{audio:0:05:43} How does Wayfair organize the other parts of the supply chain process?

{audio:0:05:47} CastleGate Global Logistics, at first-mile side. CastleGate Fulfilment is fulfilling the orders, pulling them off the shelf, getting them out the door. I always tell people that my responsibility ended when I banged the container up on the inbound side of the fulfillment center; that’s first mile. 

{audio:0:06:08} Can we walk through the first mile? Let’s say I’m a supplier and I’m shipping a product, via CastleGate. What is the first step in that process?

{audio:0:06:17} One of the unique things about an Amazon or a Wayfair, these platforms that want to control the supply chain, because it’s in their best interests, is that they already have visibility to the order. They’re coaching on inventory levels, to these small sellers and telling them they should really order some more of that X product, because of the lead time. It envelopes nicely into the whole process. 

{audio:0:06:53} We had visibility to the factories, although there was reluctance for us to see factory information. But, at least in the case of the US, there are all sorts of reports or services you can subscribe to that collect import data. I subscribed to these services and I used to tell the supplier, on the phone, that their factories were doing X, Y and Z. You want to be polite and it wouldn’t serve Wayfair – or other companies – well at all to build this huge reputation that you are going to go to factories and steal them.

{audio:0:07:31} We would manage the whole process, including confirming the order number and ready dates, with the factory. We would book it or they would say, it’s not going to be ready on 12 March; it’s now going to be ready on 27 April. Or they might say, did we say 12 March; it was ready a week ago.

{audio:0:07:45} How integrated are you, in the suppliers’ production flow relative to Amazon, for example?

{audio:0:07:54} It’s relative to the relationship of the individual seller partner. Firstly, are they big enough that it becomes really critical for you to understand that, because it gets messy. You need to get in there and get close to the factories and ready dates, working with the seller. In a way, we’re really close with them. We’re close with them already; there’s a different group, within Wayfair, that would just say, when is this order going to ship? That was more on the fulfilment side, because they are keeping track of inventory levels. We really became a key part.

{audio:0:08:35} What’s the value? First of all, we’re buying from volume versus the little guy. Secondly, it was a no-brainer for the seller to use this first-mile service, because they didn’t have to do anything anymore. They didn’t have to worry about tracking a container on the water, making sure it gated in. They didn’t have to worry about the customs clearance process, because we’d manage that, as well. They also didn’t have to worry about the dray and the appointments at the warehouse. They didn’t have to worry about anything. 

{audio:0:09:06} To quote one of my favorite sellers, it makes total sense for me to do this; I absolutely want to do this, even if it’s slightly more expensive – and it wasn’t – than what I’m paying right now. I want to focus on five star ratings on the website, quality products and, as those products grow, I want to focus on going out and sourcing more products and putting new products up on the website. That was his entrepreneur side; he didn’t want to get involved in this messy logistics aspect.

{audio:0:09:38} This particular seller grew from 20 containers, the year I met him, to 800 containers, within 48 months. Even from the fulfilment standpoint, he’s got to go out and get two or three warehouses. Now he is going to spend his time making sure those bills get paid, flying around, managing team members. He was very happy to have us provide this service. We were buying at volume and negotiating our contracts in a different way from a standard NVOCC.

{audio:0:10:11} It doesn’t take a rocket scientist to figure out what the motivation of these platforms are, whether it be Amazon, Wayfair or Shopify. The motivation is that you’ve got to keep the cost down. If it’s a type of a relationship where the seller brings it in, you sell it and you turn around and buy it, there’s a wholesale markup. If you can’t control any of the miles – but the first mile in my case – and if you can’t keep transportation costs down, especially in today’s environment, the wholesale cost goes up. That means your sale price goes up – or it doesn’t – and it all flows to the bottom line.

{audio:0:10:46} Just going back to the first mile, what is the difference, if any, between how Amazon or Wayfair would integrate or work with the supplier, in terms of understanding their production lines and the information and data you have on the suppliers? Is there a major difference, given that Wayfair is specifically furniture, versus Amazon?

{audio:0:11:11} I don’t think so. I think it’s all ice-cream, but one version is vanilla and the other is chocolate. I think it’s very similar. There are stylistic differences and, probably, any differences are easily changed if you decide that something isn’t working well.

{audio:0:11:31} If I’m a supplier and I’m shipping product via CastleGate, where do I ship it to? 

{audio:0:11:42} It depends upon the size of the orders and the motivation of the platform. As you get bigger, you start to put your own offices and your own people there, but you start with an origin booking agent. We share the data with the booking agent, about ready dates, the factories, the SKUs and the order numbers. They are contacting the factories and confirming whether X order is ready to go, today. We take care of that. Honestly, if the seller was doing it directly, they would be doing it, again, through a freight forwarder, but they are just one more hands-on level involved in it. But for us, we can say, we’ve got this. If anything, we come back to them and go, hey, you know your orders aren’t ready? So then they get involved, on an exception basis, as opposed to the routine stuff.

{audio:0:12:34} Is there a difference in the minimum, between a third-party logistics pair and Wayfair? 

{audio:0:12:53} In the industry, there is full container, FCL, and there is LCL, less than container load. Any other freight forwarder or NVOCC – everybody uses the word freight forwarder but they should really use NVOCC because there is a legal difference between the two – can move LCL just the same as a platform can. BCOs (Beneficial Cargo Owner), direct buyers, such as Walmart and all those brands, in some cases, will have what they call a buyer’s consolidation; that’s a standard industry term. They might have four small orders that they are bringing into a container freight station at origin, in Shanghai; they build it into a full container and they move it. 

{audio:0:13:44} That is very cost-effective. If I buy and build a buyer’s consol, I’m paying that same contract rate that I have with the ocean carrier direct. Say it’s $10,000, to the West Coast today, to move one full container. If I take four small shipments, put them in that container and move one full container, it’s still $10,000. An NVOCC that is moving an LCL shipment for you is going to buy it at the same rate and then they’ve got to make a profit somehow, so they are going to mark it up. Your $10,000 container is maybe now $14,000. If you’ve got enough volume, as a BCO, you want to try to do buyer’s consolidations. 

{audio:0:14:42} The only extra cost is that you’re going to have the cost of the container freight station which might be, roughly, $15 per CBM, to process the container on your behalf. That is still way cheaper. You are still paying that $15 per CBM, even on an LCL shipment, with an NVOCC. We’re moving towards buyer’s consolidations. CastleGate, and others, do buyer’s consolidations. You can go and see them, through these databases that you can subscribe to. 

{audio:0:15:17} As far as the question as to whether there is a minimum order, it depends on the rest of the story. Ideally, Perch might source from 400 factories and maybe 100 of them are in the NTN. Out of that, some of the items that we sell might be small. Certainly, a lot of the items on Amazon are small. It is very easy to get these large orders that still aren’t adequate to fill a full ocean container.

{audio:0:15:45} How do you think the shift to buyer’s consolidation is going to change Wayfair?

{audio:0:15:50} It doesn’t, really. It allows them to do some flexible things in their network where they want to front position the goods. I think that it keeps the cost down. It allows them to continue the same advantages they have. When I say ‘they’, I’m really speaking generically, to all these platforms. It is an advantage to the seller on these platforms, in the same way in that they don’t have to get involved at all; it’s all taken care of.

{audio:0:16:25} What advantages could Wayfair have over Amazon, in the first mile?

{audio:0:16:39} I would say, one of the biggest differences is that Amazon is just so big, versus Wayfair, so maybe they have an advantage there. At the same time, maybe they don’t; maybe the size is a challenge. Everything presents a different puzzle to solve. Wayfair, of course, have built out that final mile network, for large items, which is a very unique thing; it’s huge that they’ve built that out. That is a distinct advantage; although, there is probably an Amazon truck that goes up and down my small suburban town street, three times a day.

{audio:0:17:23} If I just think of the first mile, an item comes from a supplier, it goes to a consolidation center, shipped to the port, into the container, etc. It is hard to see how Wayfair could have an advantage, compared to Amazon, given the scale they have in that first mile process?

{audio:0:17:40} I would suggest that both of their advantages are versus other people that are going to NVOs; the cost is crazy, right now. The advantage is to maintain equality and then what your model is. Do you want to be a traditional freight forwarder or do you want to really digitize this? There is this vision that tech is going to solve it all and we’re not going to have to get our hands on it.

{audio:0:18:10} I go back to the analogy that it’s all ice cream, but it’s different flavors, different approaches. Maybe one decides to go with a year-long contract structure, to provide real cost predictability with the sellers. These are small sellers, so cost predictability is of value to them; they can focus on other things. Otherwise, they are in the spot market and they are all a bunch of Las Vegas gamblers, rolling the dice to see if they’re going to get a great rate this month. Right now, there are no great rates.

{audio:0:18:42} The key component, in all these cases, is the simplicity for the seller. You’ve got this cost component, but the simplicity for the seller is that they don’t have to get involved. They’ve got a world-class supply chain available to them, in both cases, and they are a guy moving 10 containers a year.

{audio:0:18:58} Can we walk through the alternative? Let’s say that Amazon and Wayfair are clearly best in class. This alternative of going through a third-party freight forwarder or NVOCC; how much of a headache is that really? Where do I have to ship my product, if I’m going through a third-party freight forwarder?

{audio:0:19:17} In a way, it all works the same. You still have an origin partner, in country, that is coordinating with a factory, to pick up an order. These are all FOB Incoterms, if people are familiar with Incoterms; it is the factory’s responsibility to gate it in at the port. Much of that works the same. Maybe the NVOCC performs the customs clearance and the dray. 

{audio:0:19:47} They would make the case that they control everything, as well. But there are risks in there, along the way. In today’s environment, those NVOCCs are struggling to get space; they may not get space in the timeframe they need it. Chinese New Year has just happened, so the big rush, prior to Lunar New Year has just taken place. What if you have products that are hot sellers at Easter? You might have missed the selling season. If that is your selling season, you just missed it for a year.

{audio:0:20:27} Much of the process is the same but it’s a different price point and it’s different capabilities to acquire space. The spot market in ocean freight is always a bidder’s market; it’s always slightly an auction type environment. I recently read the book Moneyball; I tell people I feel like Billy Beane. He’s trading players back and forth. That is what freight forwarders do.

{audio:0:20:58} Don’t the third-party freight forwarders, the NVOCCs, have scale as well? They are also putting a lot of volume through the carriers.

{audio:0:21:08} Some of them do but let’s talk about the current environment and whether it stays current, or if it’s a new trend, a new level that the industry is settled at. First of all, especially for the little sellers, I’ve had multiple ocean carriers tell me that they will not sign any contracts for less than 2,000 or 2,500 containers, this year. One said they were not signing any new customers this year. Others have said, we will no longer do a named account. For those that aren’t familiar with what a named account is, any freight forwarder can go to an ocean carrier and sign an agreement. Typically, that agreement runs at FAK rates. They agree to give a carrier a certain number of containers every week, every sailing, every voyage; there are different versions. That rate structure fluctuates. However, you can put what is called a named account on that contract. You could put XYZ furniture on the account and now, you can get an MQC (minimum quantity commitment) and you can get a fixed rate for that. Ocean carriers are not doing named accounts at all. If you’re not an existing named account, from the past, you’re not getting a named account. 

{audio:0:22:36} I asked a large freight forwarder two weeks ago – a top trans-Pacific 3PL – if it was possible to become a named account on your agreement? The answer was no. That doesn’t mean that nobody is getting them but we’re talking industry level here. I did have somebody offer me to be a named account. They have a very small allocation for named accounts of about 50 containers. It was from the front end, in Asia. One thing that is very important to understand is that there are no US carriers any more, so you have to deal with the Asian carriers, in Asia and the European carriers, in Europe. Your buying agent or, if you are fortunate enough one, your procurement office should be maintaining relationships, not just with the factories or sourcing from different places, but also with the ocean carrier, on the front end.

{audio:0:23:36} The named account that I was offered, was from a contract on the front end, from Asia to the US, through my network – I know a lot of people and have been doing this for a long time – and it was actually on a carrier that told me they wouldn’t do any named accounts. These big NVOs aren’t necessarily in any better position to get you a fixed rate level. They’re just as vulnerable to the up and down of the spot market, as well. 

{audio:0:24:05} I was the guy negotiating these deals. I was able to convince ocean carriers that we were moving goods that are selling on our company. Yes, we had to go and become an NVOCC, but you should treat us as a BCO. Some carriers walked away from that, but I had enough carriers that were willing to do, that we got special attention. Amazon, with Amazon Global, and Wayfair, with CastleGate Logistics, have been successful at doing something similar.

{audio:0:24:36} Why is it crucial to be treated as a BCO?

{audio:0:24:38} Because you will get that fixed rate contract level. They are really hybrids. I coin that term to people and now, actually, when you talk to the carriers, they will use the term hybrid. 

{audio:0:24:56} Is it hybrid because you are legally an NVOCC, but you are getting the fixed rate, as a BCO? 

{audio:0:25:02} Because we are moving containers that are selling on Wayfair. In all these cases, the only semantics is that they don’t own the goods. They are selling the goods; at some point in the process, they own it, but it’s after the import step.

{audio:0:25:15} Isn’t that the beauty of it, for Wayfair?

{audio:0:25:18} That is the key component of both Amazon and Wayfair. That is how they are the same. Where they are different from an NVOCC is that an NVOCC is buying from a carrier, in the spot market, which they are vulnerable to. They may not get a space allocation. You’ve also got data issues. We built this solid structure, with four or five partners, great connectivity to them and it’s simpler for that small importer. That small importer is not getting a fixed rate contract this year. If there are 100,000 small importers out there, maybe some of them are. It is a very relationship-heavy industry.

{audio:0:26:17} It’s interesting how Wayfair, literally in the last four or five years, have been able to negotiate such big deals, on a fixed rate contract, with carriers, where some of the NVOCCs cannot.

{audio:0:26:29} They look at Wayfair as a BCO. They really are and I would make that case all day long. Those goods are selling on these companies.

{audio:0:26:40} Because the volume is there for Wayfair?

{audio:0:26:45} These items, these SKUs are all selling through Wayfair.com, Amazon.com; I want to be very generic.

{audio:0:26:52} What could be the risk? What could be the reason that the carrier would stop treating Wayfair or Amazon as a BCO?

{audio:0:26:59} The risk to the platforms is that their costs go up dramatically, versus a Walmart or a Target. There is also a risk to the carrier. Here’s my approach to negotiations. I ran large sales organizations in this industry, I know the psyche. My comment is, all you’ve got to do is get one carrier to cave. 

{audio:0:27:39} When I’m negotiating with carriers, there’s a lot fewer than there used to be, but there’s enough of them that I can get one of them to come on board, especially when you’ve got a lot of business and growth. Year one, people were probably skeptical, but we hit what we said we were going to. I think we went from 3,000 to 15,000 to 25,000 to 75,000 containers in a year. The carriers could see that. I had to do a lot of unique things in the contracts that weren’t typical of the industry. 

{audio:0:28:16} Carriers want to give you this MQC that is 20 a week, all year long. 20 times 52 is 1040; that’s it. They don’t want to give you more in September, when you are getting ramped up for the peak selling season and less in February, when nobody is moving a container, because of Lunar New Year. 

{audio:0:28:38} How do you negotiate different peak times with carriers?

{audio:0:28:41} Not everybody agreed to it, but I had a couple of carriers that did. A couple was enough that I could take the ones that didn’t agree to it and put them in at a fixed volume. The ones that agreed to it were getting a lot of business. It’s a no-brainer that, if they did that for me this year, they have clearly made a statement that they want to partner with us, grow with us and ride on the same containership with us. It was worth it for them to do that. The carriers that did it are reaping huge rewards right now.

{audio:0:29:19} You mentioned how the risk to the platforms is that their prices go up further than competitors, such as Walmart and the like. Why would this happen?

{audio:0:29:41} I would say, primarily, just because of their history. They are bigger, they have better buying power and they have more years of honing their strategy, whether that be carrier strategy or procurement strategy. Their infrastructures are massive.

{audio:0:29:59} They also take more inventory risk.

{audio:0:30:02} They are just better at it, I guess. You hear about all those companies chartering their own container ships. They didn’t necessarily do it because they were saving money; they did it because they couldn’t get capacity.

{audio:0:30:13} Let’s say, I’m sending a container today, from Asia to the US, what is the typical breakdown in the costs?

{audio:0:30:24} I’ll give you the easy times costs and then we’ll go back to the tough times. You’ve got the container. Typically, you have minimal costs at origin, if it’s FOB. You might have an ISF fee which is really a customs process but it is done before departure. The origin terminal handling and booking fees, those are costs that are borne by the factory. Even AMS fees should be borne by the factory and it’s usually about $30. Sometimes, people are slippery and the AMS costs come back through to the importer; they shouldn’t. But nobody is worried about a $30 fee right now, because the container rates are about $18,000. You have the container fee and a couple of other line items that might add up to $80. If you are from a direct port, the rates are a certain rate. If you have to hit off an arbitrary port or a feeder port or feeder vessel, then there’s an add-on. 

{audio:0:31:24} Now you get to the destination port in the US; it’s different in Europe. Different countries, different practices. In the US, upon arrival, the destination terminal handling charges are just a part of the container rate. In Europe and the UK, destination terminal handling charges are a whole separate cost. My team in Europe would say, the seller is telling us their rates are lower with so and so. I told them to ask for a copy of the rate and find out if the destination terminal handling is added or not. Every single time, it was never added in.

{audio:0:32:09} At arrival, you have got four days to get that thing off port. One of the other things I did in my career was run a regional customs brokerage operation in New Jersey. The first day is called day one, so it’s really four calendar days. You can get your shipment released four days before arrival. Any importer on ocean freight should absolutely demand of their broker that that be the case. There are plenty of other things that can go wrong and you need to control the items that you can. That was the big KPI that we held our brokers too.

{audio:0:32:55} What Amazon and Wayfair have done is limited the brokers. They provide the customs brokerage in the supply chain. If we had containers coming in, from 300 different suppliers, you’ve probably got 130 customs brokers. You’ve got customs brokers that are going to be clearing after arrival and it’s chaos. The container arrives, you have the customs entry fee, which is regional and the rates could be anywhere from $85 on the West Coast, maybe $105 or $95 on the East Coast and the eastern half of the US. Now you have duty, the harbor maintenance fee and manufacturer’s processing fees. Those are fees that are based on the classification of your product. They are the same today as they were a few years ago which means they have nothing to do with the spot market and the health of the ocean supply chain.

{audio:0:33:47} That’s about $200 to $300 in total?

{audio:0:33:50} Some things are duty free; it’s very complex. People should have a strong relationship with a trade-focused customs broker and not any old freight forwarder that decided they would do customs brokerage, as well. You need somebody that leads with trade compliance.

{audio:0:34:06} Then you have the tariffs that were put in during the previous administration, which still remain; both administrations like those tariffs. That is out of China only. I literally watched 85% of our goods leave China and, within 48 months, it was down to 55%. There is probably economic data that supports that.

{audio:0:34:28} You then have dray, to the warehouse. Is it a drop and pick? Is it a live unload? That dray transaction, to me, is just as rife with risk of extra costs, if not managed properly, as your vulnerability to the spot market.

{audio:0:34:45} Is dray not included in the first bit, in Asia?

{audio:0:34:48} No; you’re buying FOB so it’s the factory’s responsibility to arrange the trucking. There are different countries that you are sourcing from. Maybe you are in India, Thailand, Indonesia, Brunei, Philippines, Malaysia, Vietnam, Cambodia, China or Singapore. Are you going to take responsibility for that origin trucking? You don’t know what the trucking laws are in those countries, if somebody gets hit by that truck and killed; who is liable and responsible? Leave all that stuff FOB at origin.

{audio:0:35:24} The dray depends on how far you are from port. I’ve seen dray rates, to the Inland Empire, from LA, as low as $700 and as high as $1,650. In those cases, one guy is taking severe advantage and the other is probably below market. Part of it is distance from port and part of it is who your dray partner is and are you paying attention to that dollar amount? That’s a big difference. 

{audio:0:35:55} On average, about $1,000 for dray, in the US, depending on the distance?

{audio:0:36:01} If it’s 10 or 15 miles from port, maybe you are paying $300. But, for example, Savannah out to McDonough, Georgia, which is south of Atlanta, it’s probably about 210 miles, and you’re probably looking at about $1,300 dray rate. Two years ago, before the Covid crisis, that dray rate was $900.

{audio:0:36:26} You’ve got the dray, the fees and then you’ve got the container costs?

{audio:0:36:32} Yes; let’s get to the ugly part. Say I’m new and I’m doing the research on our costs and we have a whole bunch of different dray partners. In LA, with one carrier, we’re averaging additional costs of about $1,600 on every single container. This is the really messy part of Covid. Everybody is worried about the $18,000 container rate – and don’t get me wrong, that’s very important to worry about – but you’ve got people that are charging for driver waiting time, port congestion, extra days on chassis fees. You’ve got ocean carriers that are charging you for container detention. Currently, there is some legislation that has passed the House of Representatives in the Senate that will, basically, say to the carriers, you can’t charge somebody for container detention when you won’t let them bring the container back to the port.

{audio:0:37:28} It’s really the terminal operators that aren’t letting the containers back to the port but I’m looking at container fees that we’re paying where we’ve been trying to bring the container back for 10 days and there is no place to bring it back to, in LA; it’s chaos. I can tell you, with a high level of confidence, that those big BCOs, and maybe some of the big NVOs, are not paying container detention for not being able to bring that container back. Really, there is zero cost to the ocean carrier for not bringing it back. Those carriers lease the containers at probably a flat rate per year. Some of them own the containers. What is the real cost, if I have a container for three extra days and don’t bring it back to them?

{audio:0:38:17} The answer to that question is, that container is not getting back to Asia. They want to get it back to Asia so they can get more goods back to the US. The reality is, the reason that container is not getting back to Asia right now has nothing to do me not wanting to bring it back to them. I’m trying to bring it back to them and, every day, I’m told that they are not taking containers. Literally, the dray providers – in LA in particular – have to look at where, for example, do the Costco containers go back to today? I’ll bring them to this terminal. Tomorrow, I have to take them to a different terminal. 

{audio:0:38:54} In terms of these detention rates, you can negotiate extra days right now and the carriers are taking a hard line on the extra days. In their mind, it’s motivating you to bring the containers back; again, a container I can’t bring back. Typically, four or five days are off-tariff days. I’ve seen as many as 18 free days, once the containers are off the terminal.

{audio:0:39:15} This is an extra 10% of the cost?

{audio:0:39:18} This is huge. Depending upon the carrier, the detention rate is $200 to $300 a day. If I have it for 10 extra days and it’s $300, that’s $3,000. On invoices, I’ve seen container detentions for $3,000 and that’s not uncommon.

{audio:0:39:36} That would make it $22,000, $23,000 total costs for the container shipping, with fees?

{audio:0:39:43} Right, and some of it is just nonsense. A lot of the little buyers also tend to use smaller freight forwarders; this is a real generalization. The reason for that is that they can’t get the attention of the big NVOCCs. I’m just going to take a side step, for a second. The interesting thing about the industry is, the trans-Pacific market is a big time BCO market, whereas Asia to Europe is a heavy NVO market. There are not a lot of direct contracts, in Europe. That is a whole other conversation, for another day.

{audio:0:40:28} It’s really the big guys that buy volume. By big guys, I mean Kuehne+Nagel, DSV, DHL and so on. Why is that? I’ve asked that question and I’m intrigued by the history of that; that is just the way the industry has evolved. Because the carriers in the US want the direct relationship – they don’t want somebody between them and the BCO – they’ve guarded it, with passion, on the trans-Pacific.

{audio:0:40:59} That’s interesting because that means that Wayfair, Amazon and those platforms could have a big advantage in Europe, if they can buy as a BCO?

{audio:0:41:09} Now they are competing with all the other NVOs, as an NVO, in a way. But you still have the ease of use they get by using an Amazon Global Logistics or CastleGate Global Logistics. It’s a no-brainer, especially if you are a little guy. You’ve got so many other things you are trying to manage in your business. 

{audio:0:41:30} I want to be very careful how I frame this, because I love the small to mid freight forwarders and there are hundreds of them out there. There are real gems in there and you have to know the industry. You have got to talk to a lot of people; you’ve got to get to know people. For some of these gems, there’s nothing wrong with a small NVOCC. But for a lot of them, I’ve seen situations in this environment where somebody questions a rate and, all of a sudden, it comes down $2,000. There are taking advantage of you in an environment where nobody has a clue what a good rate is anymore and you’re begging for space anyway. You blink and they say, did I say $18,000? It’s $16,000. I guarantee you, they are still making good money on the $16,000. Those small guys either aren’t as effective, don’t have the leverage, they’re not as good as processes and they should be hammering the carriers and saying, I’m not paying the detention time on this container. For whatever bad reason, some of them are not as effective on that and they insist on passing that cost onto you.