320 | Where’s My Stuff?: Breaks in the global supply chain disrupt hotel projects, increase costs

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CONTAINER CRISIS: Logistics specialists say manufacturers in Europe and Asia are having difficulty finding empty shipping containers to load with product and ship to the U.S. Many of the containers have been sitting empty in ports or elsewhere since the coronavirus pandemic halted manufacturing and cargo ships had nothing to transport. In addition, the e-commerce boom has increased demand for overseas goods, driving up the cost to rent the containers by thousands of dollars. Meantime, traffic jams at U.S. ports are more than doubling delivery timelines of hotel FF&E and other products.

Hoteliers face long delays in delivery of FF&E and other products

Hospitality procurement specialists are seeing business ramp up as the U.S. hotel industry begins its post-pandemic revival.

Occupancy is in an upward trajectory, with an average of 57 percent, reports STR.

In response, property owners and managers are in the midst of capital improvement projects, ordering new FF&E. And franchisers expect to lift pandemic-induced waivers on PIPs.

In addition, 5,000 hotel development projects were underway at the beginning of the year, reports Lodging Econometrics. Nearly 700 hotels are on track to open before the end of 2021.

Despite the pending post-pandemic revival in the U.S. hotel industry, owners, managers and developers face challenges in getting projects completed on time because of historical maritime traffic jams at U.S. ports and shipping delays from overseas manufacturers.

The global supply chain has been in a state of disruption for more than a year. The coronavirus pandemic is the major reason for the kink in the distribution chain, while the Ever Given crisis in the Suez Canal exacerbated the problem.

WHERE’S MY STUFF? This photo illustration depicts the Ever Given run aground on March 23 in the Suez Canal. Before it was freed six days later, the mishap had caused a backlog of more than 400 cargo ships and weeks-long delays in deliveries of goods and products to businesses worldwide, including those in the U.S. However, the event is not the only problem that’s breaking the global supply chain and increasing costs and subsequent delays in hotel improvement and development projects, say procurement and logistics specialists. Shipping companies in Asia and Europe are contending with a boatload of challenges, including a lack of containers, traffic jams at West Coast ports and increased costs. Episode 320 of Lodging Leaders podcast features logistics and procurement specialists who relate what the problems mean to the U.S. hotel industry.

Container Crisis

The Ever Given container ship was 85 percent filled to capacity on March 23 when it ran aground in Egypt’s Suez Canal. Besides holding up the delivery of its own cargo, the mishap created a backlog of more than 400 cargo ships with nearly sixty-five thousand 65,000 containers.

American Shipping reports the containers were filled with such things as consumer products, construction materials, machinery and industrial parts, furniture, textile goods and food products.

More than 16,000 of the containers were bound for the U.S., where the goods were earmarked for industries that have seen a dearth of supplies for the past year.

While the Suez Canal traffic jam has cleared, the short-lived problem will have a long-term effect on global shipping, say experts such as Mark Friesen, a partner in Beyer Brown & Associates, a hospitality procurement company based in Florida.

“The containers are expected to arrive at different ports, even after they’ve been emptied,” Friesen said. “And when those containers don’t have the ability to get back into the system and get reloaded and set on other ships, it does have a ripple effect everywhere.”

While most of the world’s eyes were trained on the Suez Canal last month, they didn’t see the backlog of cargo ships along the U.S. West Coast, which became a pandemic-induced problem months before the Ever Given ran aground.

The situation has further exacerbated the unavailability of containers, which is driving up shipping costs and contributing to the ripple effect that Friesen talks about.

Containers typically cost about $2,000 to rent but Friesen and others are seeing that price jump to $5,000 and even $10,000 in some cases.

Darlene Henke, co-founder, president and CEO of Audit Logistics, a freight and warehouse management service based in Colorado, said moving empty containers to fulfillment sites is a global game of skill.

Last April, Audit Logistics charted a 12 percent decline in global trade as the pandemic forced manufacturers to close and the public sheltered at home.

“By the time we got to May, ocean carriers around the world were seeing a huge drop in capacity because goods weren’t moving in and global trade wasn’t happening at the rate that it was before,” Henke said. “A lot of the ocean carriers started to do what we call blank sailings, which is where ships scheduled to leave out of ports in Asia or Europe didn’t have any goods to transport. So they started canceling sailings of different ocean cargo vessels to reduce capacity.”

Trade began to revive a bit in June but the docking of ships and the offloading of empty containers the month before left shippers scrambling to find available containers.

“It was like the chess pieces had all been arranged in different areas of the world and they weren’t in the correct places,” Henke said. “And so when we speed that up to today, what we’re seeing overall is a delay in shipping because manufacturers overseas are not able to get containers to load their goods on. And then when they are able to find containers to get their goods on board, the ocean carriers are backed up with containers, waiting to be loaded on the ships. And it’s creating a big supply chain issue that’s affecting all countries all around the world right now.”

Henke said the Suez Canal fiasco only compounded the problem as 19 percent of the world’s cargo moves through the 120-mile-long waterway.

In the U.S., backups at West Coast ports are impacting the nation’s hospitality industry.

The problem is not only delaying the shipping of goods and products needed to do business, but also lengthening the time it takes for hotel owners, designers and developers to receive materials for new construction or brand-mandated PIPs.

OUT AT SEA: A live camera feed on April 22 at the Port of Los Angeles shows 24 container ships delivering goods from overseas manufacturers waiting to dock and unload. Darlene Henke of Audit Logistics said the number of ships has decreased from 38 in January.

Shipping Bottlenecks

It’s taking days for overseas manufacturers to get shipping containers delivered to their sites. Once that’s accomplished and the containers are loaded, they face a backup at the ports, Henke said.

In the U.S., inbound cargo is bottlenecked at the West Coast ports, where most cargo arrives from Asia, which is from where most hospitality goods are imported.

What used to take 14 days for product to sale from Asia to the U.S. is now taking up to 30 days, Henke said.

“If we go back before the COVID pandemic, a ship would arrive into the L.A. port area and it was required sometimes to sit outside the port and what they call a birthing stage, which is when it’s allowed to come into the port and actually dock and get unloaded.” Pre-pandemic that process took one or two days, Henke said. Now it can take 14 to 15 days.

Henke has access to live camera feed at the Los Angeles port and said the traffic jam at the L.A. port is easing up, but it’s far from over.

High Demand

Henke said the backlog at West Coast ports wasn’t really a concern for the hospitality industry over the past 12 months because the pandemic had so dramatically curbed business performance.

But that’s starting to change.

“We’re seeing a lot of hoteliers coming back online or they’re starting to see positive cashflow into the property. So a lot of the hotel organizations are taking projects off hold. And now all of a sudden, they’re trying to order goods and get things going so that the hotels are newly renovated by the time that travel gets back to hopefully close to a hundred percent,” Henke said.

“There are a lot of active projects where that wasn’t the case six months ago, and now there’s a whole new set of challenges that everyone’s facing as it relates to trying to get FF&E into the United States. And we’re starting to see quite a few delays that unfortunately are trending in a negative way.”

The U.S. has hundreds of shipping ports but the majority of imported goods come in through 30 major ports with Los Angeles at the top in terms of vessels’ container size and capacity.

Other major West Coast ports include Long Beach, Seattle, Tacoma and Oakland.

But there are many other major ports along the East Coast, including New York, Norfolk, Charleston, Savannah and Jacksonville.

Henke advises hotel procurement specialists consider having products shipped to East Coast ports.

“We have been recommending to different hotel clients if they have a project that’s east of the Mississippi River or in Texas, that they have the cargo routed into one of those East Coast ports. The ship has to travel through the Panama Canal and there’s typically about a 10-day transit time that’s added to that [but] once they’re through the Panama Canal, we’re not seeing the congestion on the East Coast ports that we’re still seeing in L.A.”

Shipping companies are not only charging higher rent for containers, they’re also offering preferred placement in the shipping timeline for buyers willing to pay a premium of up to $1,500, Henke said.

But not even that guarantees a speedier turn around because most buyers are paying the premium.

E-Commerce Boom

Henke noted what else is inflating prices. “We are seeing a spike in freight costs specifically out of the L.A. area because of the huge volume that’s coming into all those West coast ports. So trucking companies are raising their prices. When it gets busy, everybody raises their prices.”

Intermodal shipping has been in high demand during the pandemic as consumers fed an e-commerce boom, ordering online goods from food to clothing to furniture to refrigerators and tackling home-improvement projects.

Meantime, surcharges on freight fuel have increased 3 percent to 5 percent since the beginning of this year. And because warehousing space is at a premium, storage costs are in an uptick as well, Henke said.

CapEx Costs

Shipping backlogs, increasing costs and the drop in hotels’ business revenue during the coronavirus pandemic have caused in a shift of renovation timelines at hotels, whether planned by the owners or granted by the brands.

For now, owners and managers have an opportunity to lock in prices now before costs inflate even more, said Friesen.

“A lot of the renovation cycles were postponed by the brands and they gave some variances to owners that were on these renovation cycles that they could use the funds in their CapEx accounts to help with their operations or other financial pressures they had,” Friesen said.

“Once these owners get back into their PIP cycles, which the brands are likely going to enforce and with more regularity, they’re going to be faced with some higher prices.

“I think there’s an opportunity right now for owners, if they want to get ahead of this and not face the steep prices that are coming, for them to get in line as quick as they can, to secure the pricing and products and get their PIPs underway.”

Beyer Brown is a 20-year-old company. Friesen remembers the hotel industry downturn caused by the 9-11 terrorist attacks in 2001 as well as the 2008 real estate crash that kicked off the Great Recession and forced owners to cut back on capital expenditures.

Bjorn Hanson, a professor at the New York University School of Professional Studies Jonathan M. Tisch Center of Hospitality, reports annually on hotel CapEx spending.

In 2008, hotels spent $5.5 billion in property improvements. In 2010, they spent $2.8 billion less.

Capital expenditures began to increase in subsequent years, reaching a high in 2019 of $7.3 billion.

Last year, Hanson reports, CapEx spending fell 75 percent to $2 billion.

Friesen said history proves that even during financially strained times, the hotels that prioritized capital improvements and had something refreshed or new to offer travelers fared better than their competitors when the industry recovered.

“I think the traveler is going to have an even more heightened sense of talk about cleanliness or just experience,” he said. “And I think they are going to be even more critical of the properties that are not keeping up with their renovation cycle or just not investing in keeping their property as clean as what the travelers want to see right now.”

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