Retailers, suppliers feel heat over backup of holiday cargo

NEW YORK (AP) _ With the start of holiday shopping just weeks away, toy companies and other purveyors of seasonal merchandise are living through a nightmare _ merchandise that's stranded aboard cargo

Wednesday, November 10th 2004, 2:41 pm

By: News On 6

NEW YORK (AP) _ With the start of holiday shopping just weeks away, toy companies and other purveyors of seasonal merchandise are living through a nightmare _ merchandise that's stranded aboard cargo ships amid the gridlock at two West Coast ports.

``This is terrible. There are a lot of order cancellations'' from retailers tired of waiting for their deliveries, said Isaac Larian, president and chief executive officer of MGA Entertainment Inc., maker of the popular Bratz dolls.

The backlog _ the result of an ever-growing flood of cargo from Asia into the twin ports of Los Angeles and Long Beach _ means some toys and other merchandise will be in short supply this season, even as manufacturers and retailers take steps to ease the problem.

Larian said some retailers have canceled orders with MGA Entertainment over the past month because his company missed delivery deadlines, and he predicted MGA Entertainment's fourth-quarter results will suffer.

MGA Entertainment and other companies including Spin Master Ltd. are resorting to such strategies as flying in hot products from Asia, but that won't make up for all the merchandise still tied up at the docks. And so some retailers are just giving up.

``If stores can't get it in the right place and at the right time, they would rather do without,'' said John Taylor, toy analyst at Arcadia Investment Corp., based in Portland, Oregon.

The twin ports have become the nation's main entry point for cargo containers. About 43 percent of all 20-foot containers from the Far East arrives at these ports, according to Peter H. Powell, chairman of the National Customs Brokers and Forwarders Association of America, which oversees activities at the nation's ports. He estimates that this season the cargo volume to the West Coast ports has increased 10 percent to 13 percent from a year ago _ when congestion was already a problem.

It's not just imported goods that are causing the pileup. With U.S. exports increasing _ they reached a record $97.5 billion in September, the Commerce Department reported Wednesday _ there's more outbound cargo for the ports to handle.

More dock workers are being hired, allowing the ports to become 24-hour operations, but there's still a labor shortage, and some ships wait at least a week to be unloaded. Powell said the work force increase will help, but it's a temporary solution that doesn't take into account future growth in imports.

The congestion affects companies across the economy, but the toy business is taking a particular hard blow because 80 percent of its products sold in the United States are made in Asia. And holiday sales account for up to 60 percent of toy makers' annual sales.

Since the problem is unlikely to be resolved anytime soon, retailers might need to consider other long-term options besides the Los Angeles-area ports. Alternatives include ordering good earlier next year, or rerouting cargo to other U.S. ports.

They also have the option of flying merchandise in, but Larian noted that airlifting the season's most popular toys from Hong Kong and China wipes away 10 percent to 20 percent of the products' profit margins.

Charlie Woo, CEO of Megatoys Inc. _ a Los Angeles-based toy company that makes baby dolls, dollhouses and radio-controlled cars _ is in a similar predicament, as the backup of his merchandise has worsened over the past few days. About 20 percent of the company's holiday merchandise is either on the ships or sitting on the docks.

``I have been talking to (stores),'' he said, hoping to forestall cancellations, but he fears a 5 percent to 10 percent drop in holiday sales this year.

Companies need to ``be thinking now'' about long-term solutions, according to Ken Walker, principal at Kurt Salmon Associates, a retail consulting company, who is working with various retail clients on ways to solve the problem.

But every alternative comes with risks. For example, ordering merchandise earlier adds to inventory costs.

And if companies decide to reroute their products to eastern ports like New Orleans, New York and Norfolk Va., they have to add another seven to 10 days to their timetable, Powell said. Furthermore, companies need to find ports that will be big enough for the larger fleet of vessels that now carry 8,000 twenty-foot containers, he said, much larger than the older ships that carry 2,500 to 4,500 twenty-foot containers, Powell said.

Another possibility is having toys manufactured in countries beyond Asia. But looking for new places to make products is complicated and time-consuming. Companies must develop new relationships with factories and make sure they produce high-quality products.

Some retailers such as Sears, Roebuck and Co. started rethinking other alternatives months ago, after realizing that the congestion wasn't improving. Chris Brathwaite, a spokesman at Sears, said a portion of this season's cargo is being diverted to other ports, and that Sears has expedited truck deliveries to ensure that advertised merchandise made it to stores on time.

Larian, of Van Nuys, Calif.-based MGA Entertainment, said his company is thinking about rerouting the cargo to different ports like Seattle and Vancouver next year. But that will mean downsizing three warehouses in the Los Angeles region and building others closer to the new ports, which will add costs that will have to be passed on to the consumers, he said.