By Wayne Chargualaf
The wholesale industry is a key part of Guam’s connection to the world.
“Primarily we’re importers as wholesalers, as opposed to distributing manufactured goods,” Edward J. Calvo, general manager of Island Wines and Spirits and assistant general manager of Mid Pac Distributors Inc., says. Since most of the goods the island consumes are brought from off-island by wholesalers, Guam Business magazine spoke with representatives from five wholesale companies to get a snapshot of an industry whose health has significant implications for the health of Guam’s economy overall.
For the most part, all agree that the wholesale industry has been positively affected by a rebounding tourism industry. Much of the wholesale industry’s business comes from supplying the hotels and food service establishments that serve tourists who visit Guam.
“For us, the last year has been very strong,” James S. Herbert III, general manager for Triple J Five Star Wholesale says. “I think obviously due to the increase in tourist arrivals — and the hotels have been experiencing pretty high occupancy — there seems to be some recovery in the Japan market, airlines are adding flights for the spring.”
Although the Japan market recovered and visitors from Korea increased in 2018, there is still a difference in perspective on what this means. Korean visitors tend to spend less per person and be more widely dispersed, compared to Japanese visitors who have historically spent more and would travel in groups, often as part of a tour package. Those with a more optimistic view think Guam should embrace and adapt to the new market.
Although Calvo counts himself as among those with an optimistic view, he also says he hopes Guam moves to develop a third, sustainable market.
“Russia didn’t really work out, China is still struggling, but I think the Philippines is a great opportunity for the upper tier shopping market,” he says. “I think that’s a great market for Guam and I think that will affect our economy.”
Michael B. Brown, regional sales manager for Coca-Cola Beverage Co. (Guam) and Foremost Foods Inc., takes a balanced but still cautious view of the current tourism market.
“I think the uptick in visitors is in the count, so the number of visitors getting off the planes is more than before, but the amount they’re spending in the local community per person has actually gone down,” Brown says. “I think that different food service folks — hotels, resorts — are trying to get as creative as they can to capture and keep people consuming food and enjoying themselves on-property, and in those instances we do see some positive growth.”
In spite of this positive effect, there was general consensus that the industry is somewhat stable, if a bit flat. The past year’s performance was good, but the note of optimism was tempered by caution.
Calvo says that even with good tourism numbers, the economy is still somewhat fragile, which affects the industry.
“As long as hotels are full then consumption is good, but the spending power is still pretty weak and 2018 was a tough year I think in terms of consumer confidence,” he says. “I’d say that overall the industry is still pretty price sensitive. Things are flat at best.”
Frank S.N. Shimizu, president of Ambros Inc., says that although it’s important to track trends, it’s equally important to remember that the wholesale industry is complex and there are several components to the cost of doing business on Guam.
“When a cost factor such as fuel, ocean freight, taxes are reduced or removed, the item’s price to the consumer does not necessarily decrease by that amount,” Shimizu says. “Why? Because there may be a dozen or more other cost drivers that increase each year and affect the product’s landed cost.”
Port handling charges, wharfage fees, supplier and manufacturer price increases, various types of insurance, employee salaries and utilities are among the cost drivers Shimizu names.
“We’re always keeping an eye on fuel costs in terms of increasing our cost of goods to get the product to the region from wherever it’s coming from and looking at the landscape of the global scene in terms of shipping lines and getting the best freight cost,” Calvo says. “That’s always one of the first things affecting price of goods.”
Competition from off-island exporters is also a challenge to Guam’s wholesale industry, according to Shimizu. He says that large retailers such as Walmart, Costco, Kmart and others have their own distribution centers where they can purchase in mass quantities from manufacturers and stock those items for distribution to their stores. Guam distributors must beat or at least match distribution center prices in order for them to sell to “Big Box” retailers, otherwise the retailers will source from distribution centers.
“Guam distributors do fight an uphill battle,” he says.
Local businesses must also compete with the military, whose commissary and exchange services don’t pay the same shipping on products bought from the U.S. mainland This results in lower prices and is the reason many locals often seek some way to buy goods on the military bases, usually through a friend or relative with base privileges.
“We’d love to see the military push more business to the local [community],” Brown says. “We don’t want our fighting men and women to pay more than they have to, I understand that. But something’s got to give. I’m not sure what it is, but that’s a tough nut to crack.”
Another potential cost driver is the government. As anyone operating in a mixed economy knows, government regulations to protect the community’s interests sometimes conflict with the business models of firms within the community, increasing the costs of goods and services that the community consumes. Governments and firms thus engage in an endless dance to find just the right balance of regulation and freedom for businesses and Guam is no exception.
Last year, one of the wholesale industry’s biggest challenges came from Bill 230-34, which, among other measures, proposed to help fund Guam Memorial Hospital by ending the industry’s exemption from the gross receipts tax. Wholesalers — and the rest of Guam’s business community — pushed back, saying the well-intentioned bill would cause more harm than good by raising the cost of living.
“This past year was kind of the year of taxes,” Herbert says. “As far as taxes for the wholesale industry, we don’t necessarily see that but our customers do, so they have to pass that on to consumers.”
Although Bill 230-34 died in committee, wholesalers are still wrestling with the implications of Public Law 33-106, which was passed in 2015 but has only begun to be implemented in 2017. The law imposes weight limits on containers coming in from the port to reduce wear on roads and increase their longevity. Container-bearing trucks are weighed at the Truck Enforcement Screening Station — or TESS — to ensure compliance and gives Department of Public Works and Department of Revenue and Taxation officials authority to stop, inspect and weight commercial vehicles on Guam’s roads. Violations carry a fine of $100 to $1,000 depending on the circumstances, although permits may be granted to operate vehicles of excess size and weight under limited conditions.
“What that does to our pricing is we can’t load as much merchandise in the container and it increases landed costs,” Herbert says.
Herminio S. Queja, general manager of Micronesian Brokers Inc., says that although the law is well-intentioned, he thinks it should be revised to make it more appropriate for local conditions.
“I’m hopeful the legislature will recognize the need to revise the law so that cost of goods coming into this market won’t be increased by a law that doesn’t reflect the needs of this community,” he says.
One way the law doesn’t quite comport with the realities of Guam is its failure to account for the shifting weight distribution of cargo during sea transit, according to Jose Fernandez, sales manager for Coca-Cola Beverage Co. (Guam) and Foremost Foods Inc.
“It throws off the measurements — the weight distribution,” Fernandez says. “When it’s loaded wherever it’s coming from, it needs to be evenly distributed.”
The government, according to Brown, has been accommodating because both they and the wholesalers are still trying to get used to the law.
“They haven’t yet come down hard yet, but over time we’ve been able to see shortfalls and areas where we can pick up the slack and we’re doing that, so I don’t think we’re having any issues as of today,” Brown says.
Calvo admits that regulations are a fact of life that businesses must factor into their operations.
“[DPW] has a tough job to do to keep our roads driveable,” he says. “I’m not going to say I’m thrilled about additional costs, but we understand it’s part of what they have to deal with.”
An example of costs driven by the federal government is the Jones Act, according to Brown.
“The Jones Act versus different legislative things that are out there that are impacting our cost of bringing products to the island from the U.S. mainland; something’s got to give,” he says. “Right now, if you bring a 20-foot container here it’s $6,000 or $7,000 dry. You bring a 40-foot chill it’s more than $10,000. That’s a lot of money to ship. That’s $1,000 a day. It’s tough.”
Of course, a new administration on island will have a significant effect on all aspects of the island’s economy, all agreed it’s far too soon to make any judgments.
Since Gov. Lourdes A. Leon Guerrero is a businesswoman, Calvo says he hopes there’s continued attention on helping the business community.
“I think that’s something we’re all hopeful for,” Calvo says.
Whatever the source, costs are a fact of life in business and a common response to an increase in one area is to reduce costs in another idea by increasing efficiency. Because of this, technological change, as always, remains at the forefront of everyone’s minds throughout the industry as wholesalers seek to find ever more efficient ways to serve their customers and maintain a competitive edge.
All of the representatives Guam Business spoke with agreed that to remain competitive in the industry, technology such as digital, paperless operations, leveraging the internet and embracing social media are important to remaining competitive. An example of using technology to increase workflow efficiency is the Power Warehouse system adopted by MBI about one year ago.
“Today our employees put on what we call a Vocollect, log in and the system tells you where to go in the warehouse,” Queja says. “When you get there you give the system a code and the system will tell you if you’re in the right place. Our forklift operators work off of tablets and everything is task-driven. It’s a wonderful system.”
Although all those interviewed agreed the industry must learn to embrace the march of technology’s inevitable waves of disruptions and innovations, the general consensus about the future of Guam’s wholesale industry is that there’s room for growth as long as firms don’t lose sight of the fundamentals.
“We definitely try to forecast trends as best as possible,” Calvo says. “As marketers we don’t always just make up our minds that this is what we’re bringing to Guam and you guys should like it. It’s about listening to the market, so really the market will dictate what the trends are, what is in demand and what we need to forecast to provide that.”
Fernandez says that as overwhelming as wholesale can be, it’s still an enjoyable business to be in.
“It’s a fun industry,” he says. “And it’s continuously growing. We’ve got the military buildup coming up, so we look forward to seeing where that’s going to take us. It’s always exciting. And busy.”