Bed Bath & Beyond filed for bankruptcy protection on April 23 and is closing all 475 of its stores. Supply chain disruptions in the COVID era played a major role in the company’s demise. Now, the bankrupt retailer is pursuing claims worth tens of millions of dollars against container shipping lines, which it claims did not operate during the supply chain crisis.
It filed a claim with the Federal Maritime Commission (FMC) on Thursday seeking at least $31.7 million from OOCL, a subsidiary of China’s Cosco.
She is ready to pursue at least $7.8 million in claims against South Korean Yang Ming, according to a legal filing in the Southern District Court in New York.
Next question: With Bed Bath & Beyond (BBB) in Chapter 11 and administrators looking to “maximize the value of debtors’ estates,” will there be claims against other carriers as well?
Failure to meet minimum quantity obligations
In its complaint with FMC, the BBB alleged that OOCL failed to meet minimum quantity obligations (MQCs) under its 2020 and 2021 service contracts.
The retailer alleged that OOCL ceded space for the BBB “to other shippers to maximize it [its] own profits, “forcing BBB” to acquire space in the spot market at enormous cost during a period of unprecedentedly high spot rates. “
These claims mirror those made by many other shippers in the wake of the supply chain crisis, beginning with MCS Industries’ claims against Cosco and MSC in August 2021 and accumulating since then.
BBB had MQC for 2100 forty-foot equivalent units under contract July 1, 2020 to June 30, 2021 with OOCL. It said there was a deficit of 624 consumer units. I calculated that this equated to $2.2 million in additional shipping costs.
BBB had a MQC for 3,796 FEUs under the service contract May 1, 2021 to April 30, 2022. It said the OOCL shortfall was 1,363 FEUs, equivalent to $9.4 million in additional freight costs.
High season surcharges, detention charges and demurrage
The BBB is also seeking damages for peak season surcharges (PSS) — a new development in shipper’s complaints against carriers. It argued that its contract prices were inclusive of special support payments and other surcharges.
The BBB cited correspondence from an OOCL employee who stated, “We admit to falling short against expectations…consider paying PSS [which would] Put the BBB in position to secure additional space. The BBB said in its complaint that the PSS proposed by OOCL was as high as $5,800 per FEU.
After the retailer approved PSS in December 2020, he said an OOCL employee responded eight minutes later: “Don’t worry! We’re taking reservations.”
The BBB alleged that OOCL was “auctioning its space to the highest bidder rather than honoring service obligations”. The retailer also cited correspondence from an OOCL employee stating that on one trip “what an extra space [that] It was put on the open market” – that is, the spot market.
OOCL has not submitted its response to the retailer’s allegations to FMC.
The BBB said it paid $7.1 million in PSS fees to OOCL during the term of its 2020 contract and $6.6 million during the 2021 contract term — and insisted it should get that money back.
The BBB also confirmed that OOCL assessed demurrage fees and detention “for periods of time.” [BBB’s] The ability to pick up containers at ports or return empty containers has been restricted due to external conditions [its] controls.”
Many shippers have also filed lawsuits against shipping companies for detention and demurrage incurred during the supply chain crisis.
The BBB said it paid OOCL $1.5 million in demurrage penalties and $4.9 million in detention fees between August 2021 and June 2022. It argued that “the vast majority of the charges…were assessed unfairly and unreasonably.”
She made additional claims to Yang Ming
Meanwhile, Yang Ming filed suit against BBB in New York on April 20 seeking declaratory judgment that he does not owe the retailer for failing to meet its MQC.
Yang Ming said BBB filed a claim of $7.8 million “plus alleged loss of profits and other consequential damages of an undetermined amount.”
The dispute relates to a BBB service contract for the period from May 1, 2021 to April 30, 2022, which has a MQC of 1,000 FEUs. According to Yang Ming, the contract stated that “in the event that the carrier fails to meet the annual MQC…the shipper may reduce the annual MQC by the amount of the shortfall”.
Yang Ming claimed, “This agreement did not provide any basis for claiming financial damages for these deficiencies. However, BBB continues to press its claim and warn against litigation.”
In response to the carrier’s request for a declaratory judgment, BBB said in a lawsuit Thursday that any action against it would require a bankruptcy judge to file a Chapter 11 relief from the automatic stay.
Hardly hit by the supply chain crisis
The sudden surge in consumer demand during the pandemic has superseded profits for container lines as well as retailers like Amazon (NYSE:AMZN) — but not for Bed Bath & Beyond, which has been relying heavily on its brick-and-mortar stores.
Holly Itlin, BBB’s chief restructuring officer, noted the negative impact the 2020 shutdown had had on the company’s stores in her Chapter 11 announcement.
She also pointed to the ramifications of a company’s pre-COVID decision to shift from selling well-known national brands to private label brands, following the appointment of veteran Mark Tritton as CEO in 2019 — a decision that increased BBB’s exposure to shipping containers at exactly the wrong time.
When the pandemic hit, the shift to private labels “led to longer lead times for production and shipment to stores than for more accessible national brands.”
Bed Bath & Beyond also changed its domestic distribution strategy under Tritton. “The distribution strategy was not equipped for these changes in the upstream supply chain, nor was it resilient in the face of the pandemic-related issues that occurred in the Port of Los Angeles.
The company ended up with empty shelves as factory closures and shipping bottlenecks delayed the arrival of new private-label merchandise. [BBB] It was unable to achieve sufficient inventory levels to meet demand during the important 2021 holiday season.”
According to Itlin, “During the third quarter of 2021, an estimated $100 million in sales were not fulfilled due to out of stock, and in the fourth quarter of 2021, an estimated $175 million in sales were not delivered.”
Still relying on the supply chain through Chapter 11
Tritton was fired in June 2022 and the company has shifted away from private label brands. By the 2022 holiday season, Itlin said, it “didn’t have the financial flexibility to restock inventory levels due to continued deteriorating liquidity and tightening vendor credit.”
And its stores were nearly 35% depleted by December 2022. “After a holiday season in which sales were down nearly 50% from the same period a year earlier, [BBB] It has caused multiple events of default under its financing facilities.
A final attempt to sell the highly discounted stock didn’t provide enough “runway,” necessitating Chapter 11 filings for the parent company and its subsidiaries. The company’s (NASDAQ:BBBY) stock will be delisted Wednesday.
Ironically, with container shipping lines seeking compensation for alleged transgressions in 2020-22, Itlin emphasized the importance of their continued services. She said functioning supply chains “is critical to the effective management of these Chapter 11 cases. Debtors cannot afford to severely disrupt the flow of goods at this critical juncture.”
As a result, Bed Bath & Beyond obtained court permission to continue paying “warehouse keepers, freight forwarders, ocean carriers, joint or contract carriers, customs brokers and other freight service providers” amid the bankruptcy proceedings.
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