https://www.forbes.com/sites/willyshih/2021/02/14/pelotons-recent-moves-foreshadow-big-increases-in-global-supply-chain-costs/?sh=4b3c948a2631(Links to an external site.)

Please read the article in the link and answer the questions below. Article is also pasted at the end.

1. What do you think increased costs in the supply chain means for consumers buying products that are manufactured elsewhere during the next few years? How will it affect spending habits and purchases?

2. Peloton, and many other at home fitness based companies (Ex SWEAT) have seen a successful year as gyms were closed globally. Do you think the fitness industry will see another dramatic shift in the products they offer as the pandemic eases up?

3. The article states: "So it matters less if they spend a lot on expediting shipments or manufacturing locally"Do you think peloton should move their manufacturing to the U.S or spend more on shipping?

Peloton's Recent Moves Foreshadow Big Increases In Global Supply Chain Costs

By: Willy Shih

Peloton Interactive'sPTON+5.6% recentearnings calltold us a lot about increasing costs in global supply chains. It has ben one of the big winners during the Covid-19 pandemic, with connected fitness subscription workouts growing over 300% to 98.1 million in their most recent quarter. Customers have faced "elevated" delivery wait times for its equipment, so the company will spend $100 million on expedited ocean and air shipments to bring its products from Asia. Peloton's equipment is classified by the UN's Harmonized Commodity Description and Coding System underChapter 9506, "Articles & Equipment for General Physical Exercise etc.," and September to November 2020 imports for the category were up more than 120% year over year.

The violent swings in supply and demand for all kinds of products caused by the pandemic exposed weaknesses in the logistics networks that bring imports from Asia. The shutdown of Chinese manufacturing during and after the Lunar New Year one year ago caused many shortages, but then just as Chinese manufacturing started to recover much of the rest of the world went into shutdown. This caused a hugedemand shock- a steep fall in the demand for everything from automobiles to apparel and especially things sold in retail stores. In response, the ocean carriers cancelled ("blanked" in industry parlance) many of their sailings on the major trade lanes through the first half of last year.

The cancellation of most international passenger flights grounded more than half the world's air cargo capacity. Most international passenger flights were flown with equipment like Boeing 777-300s, 787s, Airbus 330s, and 350XWBs which have a lot of cargo capacity beyond just carrying baggage, so this caused a supply crunch.

But then last summer as economies opened up, everybody got busy restocking and ordering holiday inventory. In the second half of the year we saw a record wave of imports overwhelm the ports, especially Los Angeles and Long Beach, which is the primary port of entry for goods coming from Asia to North America. Short-handed distribution centers were slow or unable to unload many imports, which then caused a backup into the ports.

Port congestion and Los Angeles and Long Beach is the worst in memory

Normally the peak season for Los Angeles and Long Beach is from late summer into November, but the past twelve months have been different. According toThe Signal, a daily report from the Port of Los Angeles, import volumes for the week of Feb 14 - 20 are projected to be up 111% from a year ago, and projections for the week of February 21 - 27 are projected to be up 290%, based on shipping manifests for vessels already en route. Right now this port complex is a bottleneck in many American supply chains.

On February 2 there were37 containerships at anchor offshore waiting as many as seven days to unload. When they finally do get a berth, the unloading is being delayed by labor shortages, shortages of truck chassis to receive the containers, and space constraints for handling the surge of traffic. This has extended turnaround times for the vessels, meaning they are late returning to Asia. Some container lines have already cancelled future sailings so that they can get back on some semblance of a schedule.

Inflationary Pressures

The record import demand has pushed costs up significantly for shippers using ocean cargo. The Shanghai Containerized Freight Index quoted an average spot price of $4,088 to deliver a 40 foot equivalent unit (FEU) from Shanghai to the U.S. West Coast at the end of January, up from $1,545 a year earlier. Though international air cargo rates are down somewhat from the peak reached last May, they are still more than double what they were a year ago.

Peloton has said that they are using air cargo to move product from Asia. Their products are heavy and bulky, and that normally costs ten times as much as ocean. They are also using some of the new expedited ocean offerings like Matson'sCLX and CLX+services, and CMA-CGM'sSeapriority Express. Of course these cost more, and we shouldn't forget that rail intermodal carriers like Union PacificUNP were already addingcongestion surchargesfor containers coming out of Los Angeles.

Peloton announced theacquisitionof Precor late last year to boost its domestic manufacturing capacity. While all of this news makes it sound like a big comeback for American manufacturing, Peloton's business model is focused on selling connected exercise subscriptions. The hardware is just an enabler, and making customers wait many weeks to receive their exercise gear increases the risk of them cancelling. So it matters less if they spend a lot on expediting shipments or manufacturing locally.

What is significant is that Peloton is signaling costs other big importers, such as WalmartWMT, Home Depot, Lowes, or Ashley Furniture are facing, and with annual contracts for international cargo coming up for renewal, those costs have to be paid for somewhere. Most likely it will be at the checkout aisle.