Online automotive aftermarket retailer U.S. Auto Parts has decided to cease imports of accessory grilles into the U.S. to avoid future supply chain disruptions. The grilles had been flagged by U.S. border officials as counterfeit and infringing patents, but also holding container loads of non-flagged products in doing so.
The situation has been ongoing since earlier this year, and in April 2018, U.S. Auto Parts filed a lawsuit against the United States Department of Homeland Security in the U.S. Court of International Trade.
The lawsuit sought relief from an enhanced bonding requirement previously being imposed on U.S. Auto Parts by the United States Customs and Border Protection, an agency of the Department of Homeland Security, and arising from allegations that certain grilles imported by U.S. Auto Parts were allegedly counterfeit and infringed trademarks held by the original automobile manufacturers.
On May 25, 2018, the Court granted U.S. Auto Parts’ motion for preliminary injunction and ordered that Customs would be restrained from enforcing any type of enhanced bonding requirement on U.S. Auto Parts in order to obtain entry of its shipments intothe United States, and further ordered Customs to use its best efforts to process all of U.S. Auto Parts’ import products not implicated by Customs’ underlying trademark infringement allegations in a timely manner. As of the end of July, all of the remaining shipping containers which were being held up at the Port of Norfolk due to the customs issue were released to U.S. Auto Parts.
“During the second quarter, our sales and profitability were impacted by the customs issue discussed last quarter as well as a continued decline in e-commerce traffic. Although the seized automotive grilles accounted for less than 1% of our annual revenue, Customs was holding approximately 200 of our shipping containers that carried many of our other products and did not release the containers in an expeditious timeframe. As a result, we had significantly lower in-stock rates for both private label and branded products, as well as higher port and carrier fees associated with the unreleased product and increased legal costs associated with the product seizures and the bonding litigation. These factors culminated in lower sales, gross margins and higher operating expenses for the second quarter.
“Subsequent to the quarter, as of the end of July, the last of our shipping containers were released as ordered by the court. However, in an effort to avoid future supply chain disruptions, we have ceased importing automotive grilles from outside the U.S and begun to procure alternative sources. This will reduce both revenue and gross margins over the near-term as our entire grille category accounts for approximately three percent of total revenue. The amortization treatment of port and carrier fees will also continue to impact gross margins and operating expenses for the next three quarters.
“Despite the challenges associated with the customs issue, we have continued to focus on executing our core initiatives of revitalizing our e-commerce sites and expanding our marketplace channel partnerships. We are in the process of enhancing our marketing capabilities through consulting engagements and leadership changes, with the goal of reversing the traffic trends on our e-commerce sites. We also recently signed an agreement with a major global retailer to begin selling our branded and private label products through their online marketplace. This expansive marketplace presents a tremendous opportunity for us to sell automotive products to a large, new customer base. We remain committed to serving our customers wherever they go to shop for online aftermarket automotive parts, be it through our own e-commerce sites or 3rd party marketplace channels.”