September 23, 2005

Prices Driving Higher To Transport Fresh-Cut

Like many industries, the produce and fresh-cut business has been hit hard lately by rising transportation costs and truck and driver shortages. Industry insiders weren’t clear about the impact higher costs and fewer trucks would have on the future, but they were sure of one thing: Rising prices will eventually be passed on to the consumer.

“Everything gets passed on to the consumer,” said Mike O’Brien, vice president of produce for Schnuck Markets, a retail chain based in St. Louis. “That’s just how economics works. No company can absorb higher costs.”

Transportation rates have been rising for the last couple of years, due mainly to escalating fuel prices and tighter government regulations. Hurricane Katrina’s recent onslaught only made things worse.

According to the U.S. Energy Information Administration, the retail on-highway diesel price on Sept. 5 was $2.89 per gallon, 30 cents more than the previous week and about a dollar more than the price in the same period the previous year.

There’s been a 94.7 percent increase in fuel costs since 2003, said Mark Petersen, general manager of transportation for C.H. Robinson Worldwide, a transportation, logistics and sourcing company.

Transportation costs for Dierbergs Markets, a retail chain based in Chesterfield, Mo., have gone up 25 percent or higher in the past 12 months, said Steve Duello, director of produce operations.

The fuel dilemma doesn’t leave retailers with many alternatives, besides going out of business.

“You need product for your stores to sustain sales,” Duello said. “If you want it, you need a truck to get it. It’s a burden all the retailers have had to suffer through.”

Fuel prices have slowly been rising over the years, but the process has accelerated during the past year. Rising fuel prices combined with stricter government motor carrier standards have compounded the transportation problem, Duello said.

A shortage of trucks and drivers is part of the problem.

A shortage can be a good sign; the more trucks on the road, the more business is being done. The last few years have seen shortages. This year, there’s even more of a need for trucks, said Charles Gallagher Sr., owner of United Fruit and Produce, a transportation company that provides fresh fruit and vegetables to the foodservice industry.

United has its own trucks, but also contracts with independent owner-operators. Negotiations over pay are not as easy as they used to be, Gallagher said.

“People who supply us the trucks are out of the guarantee business anymore,” he said. “I don’t blame them. Their costs have gone up like everybody else’s.”

Drivers and trucks still cost about the same. It’s the fuel that has gone up, Gallagher said.

“We always get stumbling blocks,” he said. “There are some things we can’t do anything about. I don’t see costs going down anytime soon.”

New federal regulations for truck drivers regarding hours worked will add to freight costs, said O’Brien, the Schnuck Markets vice president.

Hurricane Katrina exacerbated transportation problems, at least temporarily. The hurricane struck the Gulf Coast in late August. Fuel prices went haywire for a few days afterward, and truck shortages increased.

In the opinion of Petersen, C.H. Robinson’s transportation manager, the spike in prices was the result of panic. There wasn’t an actual shortage of fuel, just the perception of a shortage. Prices will stabilize eventually, but will probably stay higher than they were before the hurricane, he said.

The storm and its aftermath diverted much-needed trucks from the produce sector. Things will probably get better, but then the holidays will hit, and there will be another shortage. It’s a constant problem, Duello said.

“Transportation costs are such a huge portion of the cost of goods, there’s really no way to make up for it,” he said. “We’ve been holding back, but eventually we’ll have to pass the costs on. We already have in some cases.”

The current situation is worse than it has ever been, and doesn’t look like it’s going to get better. Shipping costs for product from the West Coast have hit Dierbergs Markets especially hard. The chain does all of its fruit processing in-house, Duello said.

The full financial impact of the hurricane hasn’t yet been felt. As the weeks go by, the costs will add up. High transportation fees aren’t going away, O’Brien said.

Besides passing cost increases on to consumers, retailers don’t have many options. Dierbergs is looking at using railcars, but that’s a difficult proposition for fresh-cut products, which are generally fragile. Railcars might be an option for less perishable items, Duello said.

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