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Today's Feature

 

Why the new Panama Canal is exactly what struggling US retailers need right now

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MACY's is the most recent retailer to have its results impacted by the west coast port dispute. This may seem like a transient, one time problem, but the truth is, even on a good day the west coast ports are bottlenecks that slow the flow of goods from the point of production in the Far East to the point of demand somewhere in the US. They’re just too busy.

This is the conclusion reached by Paula Rosenblum writing in Forbes magazine. Back in February, she recalls, Michael Kors CEO John Idol cited the risk on the company’s third quarter conference call.  He said: "The port congestion on the west coast continues to pose a risk to incoming shipments." Ralph Lauren CFO Christopher Peterson talked about air freighting product or receiving it on the east coast instead.

Of course, retail isn’t the only industry impacted. Automakers and other manufacturers rely on parts and products coming from China, Japan and other Asian countries for their finished goods supply. Unfortunately negotiations between union workers and port authorities have devolved into periodic games of "chicken," where dock workers either threaten to strike, execute slowdowns, or really do strike.

This ripples across the supply chain and causes bad business behavior. Some companies will choose to bring merchandise or parts in early, anticipating demand, while others, apparently like Macy’s, will wait and find themselves facing shortages.

This can’t go on forever, and luckily, it isn’t going to have to.

Periodically over the past several years I’ve heard conversations about the Panama Canal expansion project. At long last, the project will be completed in 2016. It turns out this will be a very big deal. My friend and fellow analyst Vinnie Merchandani wrote a short piece explaining just how much more traffic the upgraded canal will take. He believes that the impending expansion will have almost as great an impact on shipping efficiencies as the original canal’s opening in 1914. I can’t argue the logic.

The upgraded canal will have deeper, broader lanes, and an entirely new one to add to its capacity. The new lanes added to the canal will be able to handle most of today’s containerships, and when factoring the new lane into the equation, overall capacity will double. It’s true that there are containerships that won’t fit through the new canal either, but most will.

Containerships built to go through the Panama Canal are called "Panamax’s." The Old Panamax was capable of handling 4,500 TEU. The new Panamax ships will handle 13,000 TEU.

Today, when the west coast ports (29 at last count) are full or otherwise unavailable, shippers have three choices as highlighted above: air freight, wait, or bring goods to the east coast of the US via the Suez Canal. All choices are costly and unpalatable. The Suez Canal is a longer trip and uses more fuel. Air shipping is so expensive that it only works for higher end, lightweight products. It doesn’t work well for cheap or heavy merchandise.  Waiting creates revenue risk. In the world of fast fashion, companies like Macy’s just can’t afford to be late to market.

As Mr Merchandani points out, the states of Florida, Georgia, and South Carolina have been making investments in their ports to handle expected new traffic. In Miami where I live, to facilitate truck traffic to and from the port, the city built a tunnel that bypasses the downtown. This is good news for everyone who drives in Miami. Our roads are already hyper-congested. The tunnel will improve, rather than exacerbate a difficult situation. The upgrades to Miami’s port will also take some pressure off of Port Everglades in Fort Lauderdale. This port currently handles more traffic than Miami does. This situation could change.

 

 

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