Dive Brief:

• Dollar General is contending with continued high carrier rates and fuel costs, CFO John Garratt said during the company's earnings call Thursday. Increased costs are also stemming from discretionary bonuses for trucking employees, as well as for workers in distribution centers, Garratt said.
• To help mitigate transport costs, the company plans to further expand its private truck fleet, Garratt said. The private fleet accounted for more than 20% of outbound logistics at the end of last year, COO Jeff Owen said on the call.
• The retailer said the recent opening of its dry distribution center in Walton, Kentucky, is expected to help it reduce stem miles and, therefore, costs. It also plans to open two DG Fresh facilities this year, including a combination DG Fresh and dry distribution center in Nebraska, which Owen said should reduce stem miles over time.

Dive Insight:

Pandemic-driven volume increases were responsible for a portion of the increases in transportation and distribution costs, Dollar General said. And buyers aren't expected to let up on spending any time soon.

"With another round of stimulus checks being mailed right now, we expect another large boost in consumer spending over the next few months," National Retail Federation Chief Economist Jack Kleinhenz said in a statement last week.

But high logistics costs can offset gains in sales. In a recent McKinsey survey of CPG companies, 80% said they did not expect transportation costs to decrease this year from 2020's elevated levels.

"We feel great about what we did this year, delivering 77 basis points of gross margin expansion," said Garratt. "But we also, as I mentioned, are seeing in the near term higher distribution and transportation costs. So ... these will weigh in the near term."

Increased volume, mixed with a shortage of trucks and people to drive them, have pushed up truckload rates. Volatility in the trucking market has prompted shippers to focus on procuring reliable carrier capacity.

For some shippers, that means diversification. For others, it means becoming a shipper of choice and leaning on dedicated services, or signing their fleets over to specialists in a conversion to manage capacity.

Dollar General's fleet-bulking strategy would allow it to more frequently skip the third-party pool. Demand surges have kept spot prices elevated.

The pandemic has also put pressure on efficient distribution, though large retailers have been reexamining their networks since before the coronavirus. Surging e-commerce volumes reinforced the need for more capacity.

United Natural Foods and Williams-Sonoma have invested in distribution expansions, with focuses on automation. Dollar General spent $1 billion in capital expenditures in 2020, including planned investments in distribution and transportation, the CFO said.