The company’s finance chief is working to offset higher costs as the Red Sea turmoil disrupts global shipping. Price increases, though a last resort, may come.
Build-A-Bear is seeing the effects of the attacks on commercial shipping in the Red Sea on its supply-chain. Shoppers may too.
Shipping costs and the time it takes to get materials needed for the company’s plush bears, cats and bunnies are up because of the disruptions the attacks are causing on ocean transport. Price increases are a last resort behind other responses to higher freight costs, such as rerouting goods and looking for efficiencies elsewhere in the business, the company’s finance chief said.
Depending on how long the conflict lasts, though, consumers may see higher price tags for the St. Louis-based Build-A-Bear’s stuffed animals.
“We are seeing some elevated costs; we don’t believe that’s going to be there in perpetuity, but for the foreseeable future,” Chief Financial Officer Voin Todorovic said.
The conflict is driving up costs and adding delays to some journeys, he said, particularly for shipping to European markets where around 11% of Build-A-Bear’s 359 company-managed stores were located for fiscal year 2023. “We are always looking first at ways to mitigate some of those ongoing costs and to absorb as much as possible, but at some point…we are looking at potentially selectively raising prices,” he said.
Houthi rebels in recent months have targeted cargo ships in the Red Sea in response to Israel’s war in Gaza. More than 50 ships have been attacked since November, including one loaded with fertilizer that sank into the Red Sea and another that resulted in three deaths. It has also caused freight rates to surge this year as vessel operators have sent their ships on longer routes around Africa.
Average worldwide prices have receded from highs early in the year, but remain above prices in late November, when the attacks began, according to data from shipping platform Freightos. The increases are being felt far beyond the disrupted trade routes that link Asia with Europe and the U.S. East Coast. Rates to ship a container across the Pacific, from China to the U.S. West Coast, are up around 163% for the week through March 15 compared with late November, the data show.
“As long as the conflict continues, the rates have to stay inflated,” said Ian Arroyo, chief strategy officer at Freightos. “And it doesn’t look like it’s going to be resolved any time soon.”
Many companies are looking at diverting shipments and considering a combination of ocean and air transport in response. With consumers already stretched, many so far see lifting prices as a last resort, he said, but if higher shipping costs are denting margins, CFOs and others will have to determine when companies can no longer absorb the costs.
“There’s a red line somewhere, the question is where for each retailer,” Arroyo said.
Companies including Mattel, Dick’s Sporting Goods, Gap and Colgate-Palmolive have noted in recent weeks that they are monitoring the conflict in the Red Sea.
Build-A-Bear is considering alternate routes and will look for cost savings elsewhere in the business before passing higher costs on to shoppers, according to CFO Todorovic. The impact on Build-A-Bear’s costs, which Todorovic declined to detail, depends on how long the conflict lasts, he said.
“We are definitely focused on things that we can control with the lowest possible impact, both from the margin as well as from the revenue perspective,” he said. “And we are looking at things that we can [do to] mitigate some of the additional costs before passing it to consumers.”
If the higher costs reach consumer price tags, Build-A-Bear shoppers may not notice, analysts said. The furry animal maker’s inventory changes often, with new partnerships and animals linked to holidays or new movies, making it hard to compare prices across the products, according to Eric Beder, head analyst at Small Cap Consumer Research.
What’s more, Beder said, the company can raise average prices by not discounting. “It’s not the goal,” the analyst said of price increases, but “it can be done subtly.”
The shipping challenges come as demand for toys has been strained with inflation-wary consumers pulling back on buying play things for children.
But analysts said Build-A-Bear is unique in offering an experience for shoppers to create personalized plush animals. This, they said, has helped the company close out three consecutive years with revenue and profit growth. The company’s revenue for the quarter ended in February was up 2.9% to $149.3 million compared with a year earlier. Net retail sales increased 1.5% to $140.2 million for the three month period.
