Date: Tuesday, May 2, 2023
Bed Bath & Beyond filed for bankruptcy protection on April 23 and is closing all 475 of its stores. COVID-era supply chain disruptions played a key role in the company’s demise. Now, the bankrupt retailer is pursuing tens of millions of dollars in claims against container shipping lines, which it alleges did not perform 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.
It’s poised to pursue at least $7.8 million in claims against Taiwan’s Yang Ming, according to a legal filing in the Southern District Court of New York.
The question ahead: With Bed Bath & Beyond (BBB) in Chapter 11 and administrators looking to “maximize the value of the debtors’ estates,” will there be claims against other carriers as well?
Failure to meet minimum quantity commitments
BBB alleged in its FMC complaint that OOCL failed to meet minimum quantity commitments (MQCs) under its 2020 and 2021 service contracts.
The retailer alleged that OOCL gave away BBB’s allocated space “to other shippers to maximize [its] own profits,” forcing BBB “to obtain space on the spot market at enormous expense during a period of unprecedented high spot rates.”
These allegations mirror those made by numerous other cargo shippers in the wake of the supply chain crisis, starting with MCS Industries’ claims against Cosco and MSC in August 2021 and piling up ever since.
BBB had an MQC for 2,100 forty-foot equivalent units under its July 1, 2020-June 30, 2021, contract with OOCL. It said there was a shortfall of 624 FEUs. It calculated that this equated to $2.2 million in additional shipping costs.
BBB had an MQC for 3,796 FEUs under its May 1, 2021-April 30, 2022, service contract. It said OOCL came up 1,363 FEUs short, equating to $9.4 million in extra freight costs.
Peak season surcharges, detention and demurrage charges
BBB is also seeking reparations for peak season surcharges (PSSs) — a new twist in shipper complaints against carriers. It argued that its contract rates were inclusive of PSSs and other surcharges.
BBB cited correspondence from an OOCL employee who stated, “We admit to being short against expectations … Consider paying a PSS [which would] put BBB in position to secure extra space.” PSSs proposed by OOCL were as high as $5,800 per FEU, said BBB in its complaint.
After the retailer agreed to a PSS in December 2020, it said the OOCL employee responded eight minutes later: “No worries! We are releasing the bookings.”
BBB alleged that OOCL was “auctioning its space to the highest bidder rather than meeting service commitments.” The retailer also cited correspondence from an OOCL employee stating that on one voyage “what extra space [that] was available has been released to the open market” — i.e., the spot market.
OOCL has yet to file its response to the retailer’s allegations with the FMC.
BBB said it paid $7.1 million in PSS charges to OOCL during its 2020 contract period and $6.6 million during its 2021 contract period — and insisted it should get that money back.
BBB also maintained that OOCL assessed demurrage and detention charges “for periods of time in which [BBB’s] ability to pick up containers at the ports or return empty containers were constrained due to circumstances outside [its] control.”
Numerous shippers have also filed claims against ocean carriers related to detention and demurrage charges incurred during the supply chain crunch.
BBB said it paid OOCL $1.5 million in demurrage charges and $4.9 million in detention charges between August 2021 and June 2022. It argued that “a substantial majority of the charges … were unjustly and unreasonably assessed.”
Additional claims submitted to Yang Ming
Meanwhile, Yang Ming filed a case against BBB in New York on April 20 seeking a declaratory judgment that it does not owe the retailer for failing to meet its MQC.
Yang Ming said BBB has submitted a claim for $7.8 million “plus alleged lost profits and other consequential damages in an unspecified amount.”
The dispute relates to BBB’s service contract for May 1, 2021-April 30, 2022, which had an MQC of 1,000 FEUs. According to Yang Ming, the contract stated that “in the event of the carrier’s failure to meet the annual MQC … the shipper may reduce the annual MQC by the amount of the shortfall.”
Yang Ming claimed that “this agreement provided no basis for pursuing money damages for such shortfalls. However, BBB continues to press its claim and warn of litigation.”
In response to the carrier’s request for declaratory judgment, BBB said in a court filing Thursday that any action against it would require the bankruptcy judge to provide relief from the Chapter 11 automatic stay.
Hard hit by supply chain crisis
The spike in consumer demand during the pandemic supercharged earnings for container lines as well as retailers like Amazon (NYSE: AMZN) — but not for Bed Bath & Beyond, which was heavily dependent on its brick-and-mortar stores.
Holly Etlin, chief restructuring officer of BBB, cited the negative impact of 2020 lockdown closures on the company’s stores in her Chapter 11 declaration.
She also pointed to fallout from a pre-COVID corporate decision to shift from selling well-known national brands to private-label brands, following the hiring of Target veteran Mark Tritton as CEO in 2019 — a decision that increased BBB’s exposure to container shipping at exactly the wrong time.
When the pandemic struck, the shift to private-label brands “resulted in longer lead times to produce and ship to stores compared to the more easily accessible national brands.”
Bed Bath & Beyond had also changed its domestic distribution strategy under Tritton. “The distribution strategy was not equipped for these changes to the upstream supply chain, nor resilient in the face of the pandemic-related issues that occurred at the Port of Los Angeles.
“The company wound up with empty shelves as factory closures and shipping bottlenecks delayed the arrival of the new private-label goods. [BBB] was not able to achieve sufficient levels of inventory to meet demand over the important 2021 holiday season.”
According to Etlin, “During the third quarter of 2021, an estimated $100 million of sales were not fulfilled due to out-of-stocks, and in the fourth quarter of 2021, an estimated $175 million of sales were not delivered.”
Still reliant on supply chain amid Chapter 11
Tritton was pushed out in June 2022 and the company shifted away from private-label brands. But by the 2022 holiday season, it “did not have the financial flexibility to restock inventory levels due to persistently deteriorating liquidity and tightening vendor credit,” Etlin said.
Its stores were almost 35% out of stock by December 2022. “Following a holiday season in which sales fell nearly 50% from the same period the year before, [BBB] triggered multiple events of default under its financing facilities,” she said.
A last-ditch effort to sell heavily discounted equity didn’t provide enough “runway,” necessitating the Chapter 11 filings of the parent company and its subsidiaries. The company’s stock (NASDAQ: BBBY) will be delisted Wednesday.
Ironically, as damages are sought from container shipping lines for alleged transgressions in 2020-22, Etlin underscored the importance of their continued services. She said the functioning of supply chains “is critical to the efficient administration of these Chapter 11 cases. The debtors can ill afford severe disruption to their flow of merchandise at this critical juncture.”
As a result, Bed Bath & Beyond has secured court authorization to continue paying “warehousemen, freight vendors, ocean carriers, common or contract carriers, customs brokers and other shipping service providers” amid the bankruptcy proceedings.