A Normalizing Retail Market May Not Bode Well For Small Trucking Fleets
The trucking industry supports more jobs today than ever before, set in an environment increasingly turning sour for small trucking fleets that haul retail on the spot market
A hearty welcome to the 50th edition of The Logistics Rundown, a weekly digest that aims to put some perspective on what’s brewing within the logistics industry. This is a space where we religiously dissect market trends, chat with industry thought leaders, highlight supply chain innovation, celebrate startups, and share news nuggets.
As trucking spot rates continue to fall over the last few months, trucking fleets dependent on the spot market are struggling to come to terms with the ballooning costs to run operations — whacked by a combination of spiking fuel prices, falling freight rates, high insurance premiums, inflated equipment costs, and rising labor rates.
A supercharged retail environment made labor a scarce resource, buoying up logistics labor wages and multiplying the cost of fulfillment for retail shippers as warehousing and transport segments cost more money to operate than before. The pandemic disrupted the lives of logistics labor, with a chunk of them migrating out of the industry, never to return again. Logistics segments like warehousing and last-mile delivery had more takers in the post-pandemic normal, even as segments like long-haul trucking suffered.
A supercharged retail environment made labor a scarce resource, buoying up logistics labor wages and multiplying the cost of fulfillment for retail shippers as warehousing and transport segments cost more money to operate than before.
But all said and done, the logistics industry — and truck transportation segment in particular — has fared much better at attracting labor than the rest of the economy. A lot of the perceived pressure in finding labor has to do with stiflingly high demand rather than a drop in supply.
While overall job numbers in the country are inching to pre-pandemic levels, the total truck transportation jobs crossed pre-pandemic levels last December, continuing to chart new territory. FRED truck transportation job numbers, particularly in April, have been stellar. Seasonally adjusted, there are currently 1,564,100 jobs in the trucking market, an industry record.
Regardless of the market’s apparent success at gaining employees, there are reasons to be concerned as spot freight prices continue to tumble. “Many of these new hires would be drivers who were owner-operators a while before. Because the rates have come down to such a low inflection point considering operational costs, drivers are now choosing to go and work for larger trucking companies rather than work for themselves. We see that shift right now,” said Michael Rofman, head of Mazars transportation and logistics group. True to that, the FRED employment numbers do not add owner-operators and independent drivers to its list.
Having provided tax and consulting services to family-owned and owner-operated businesses in trucking, Rofman understands the financial element of running successful fleet operations. “To stay the course, fleets need to have financial discipline and know their true operating cost. When owner-operators become small fleets, they forget that they are fundamentally different companies in terms of the spend,” he pointed out.
“An owner-operator knows exactly what his spend is because it’s all cash-driven. But as a small fleet, the costs start blending, and it’s hard to arrive at your true cost of operations. While answering questions on total revenue is relatively easy, knowing who’s your most profitable customer, your employee costs, and overhead costs can get tricky. As long as the true costs to running operations remain hazy, fleets can fall below breakeven and go under in the worst cases.”
To ensure visibility into operations, Rofman suggested adopting technology into workflows. Augmenting the back office with automation tools can help understand costs more granularly. Workflow visibility will provide fleets tangible reactionary time to adapt operations to changing conditions, fireproofing their business better and floating out the rainy days.
But the dreary situation is not all on the carriers themselves. Bottlenecks with financing working capital for small fleets and independent operators can significantly deter expanding operations when the situation is right. As shippers take weeks to settle invoices, small fleets turn to invoice factoring to finance operations. Traditional financing is out of reach for most small fleets as they cannot afford lines of credit because of their size or because they haven’t been established long enough.
Traditional financing is out of reach for most small fleets as they cannot afford lines of credit because of their size or because they haven’t been established long enough.
The Fed’s policies are another headwind. Higher interest rates over this year led to increased borrowing costs, as fleets felt the heat of reducing working capital. As interest rates rise, the carrying cost to that component of the borrowed money out on the street increases.
Another factor hitting small fleets really hard is the difficulty in acquiring new equipment, thanks to equipment shortage. While trucking fleets clamored for new equipment last year to capture gains from the favorable market, OEMs struggled to service the piling orders as manufacturing stalled due to a lack of auto parts and accessories. As waiting times were significantly longer than what fleets were used to, it jacked up used equipment prices, like trailers and chassis.
But not all is lost for truckers. “We saw the market surge over the last couple of years, but demand is starting to normalize. When you look back pre-pandemic, demand remained consistent with supply because shippers looked for efficiencies within their inventories, holding to just-in-time workflows,” said Rofman. “The slow transition in procurement strategies to becoming a mix of just-in-time and just-in-case has meant the overall size of inventories that shippers hold have seen growth.”
The slow transition in procurement strategies to becoming a mix of just-in-time and just-in-case has meant the overall size of inventories that shippers hold have seen growth.
However, even before retail consumer demand started to plateau, shippers were actively looking for ways to reduce their need for freight capacity, to alleviate the burden of high freight costs. “They did this by increased consolidation. Shippers are more efficient today, which is evident if you follow the imports. There are a lot fewer 20-footers and a lot more 40-footers, pointing towards consolidation. When you do this, the number of trucks needed to move these containers comes down, weeding out real inefficiencies in the market,” said Rofman.
And on top of that, consumer retail spending is falling, of course. The Bureau of Economic Analysis (BEA) data on real sales in retail trade showed that sales declined in March ‘22, falling 1.2% from February. That said, the retail sales numbers are still higher than the pre-pandemic trendline, as seen in this chart from Jason Miller.
With import orders into China still remaining lower than anticipated for this peak shipping season, and inventory levels rising quickly within the US, it could be about time the market starts normalizing. While the trucking industry at-large has little to be concerned about, small fleets hauling within the dry van spot market may need to focus more on their operations to see where they stand.
The Weekly Roundup
Since the beginning of March, total dry bulk congestion levels at China’s mainland ports have risen between 30-40% according to S&P Commodities at Sea. While Shanghai congestion levels have eased in May due to ships diverted to other ports, overall congestion remains high as vessel queue times continue to grow at alternate ports. With low backhaul rates to Asia, container demand far exceeds capacity, exacerbating current supply chain challenges.
Companies are turning away from long-standing just-in-time (JIT) practices of lean inventory counts in favor of a more robust just-in-case system. This comes after a series of major disruptive events to the global supply chain, coupled with pervasive delays and supply chain congestion. Due to current lockdown protocols, some 300,000 shipping containers have yet to leave the port of Shanghai. Some experts say that ocean freight disruption could be worse this summer than in 2021.
Foxconn, a major assembling company for Apple products has announced that the lockdowns have not impacted operations as much as they originally anticipated. Shortly after the COVID lockdowns began, the company paused operations in its Shenzhen location, which serves as a major Chinese manufacturing hub. While the lockdowns have impacted overall earnings, Apple has posted better than expected earnings for April and May.
Rising inflation has led to stagnation and shrinking for ultrafast delivery services. The most recent announcement was that the global instant delivery startup, Getir, will be issuing a massive layoff, upwards of 14% of its global workforce. This announcement came in the wake of a rival startup, Gorillas, which announced it would be cutting its labor force in half. Getir has announced that it will be curbing expansion plans but does not intend to pull out of any markets at this time.
…said who?
“These fuel costs are the biggest thing we’re facing right now. It’s causing us to look more closely at where a project is and what it takes to ship there. We’re trying to use rail as much as we can, which saves a little bit. But that isn’t always possible. Otherwise all we can do is pass the cost along to our customers.”
- Jake Phipps, CEO of Phipps & Co., a manufacturer of building materials for real-estate developers, commenting on how big a factor fuel prices play in them taking up new projects
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