Logistics: from bargaining power to Brexit

For the US trucking market, pricing is one of the foremost concerns. Last year [2018], the trucking sector was able to negotiate strong price increases, with some charging 10% to 15% higher rates than previous contracts. But the situation has now switched. As a former executive at Swift Transportation – one of America’s largest full truckload carriers – put it, the customer is now “out for blood” after paying high rates in 2018. This reversal is having a major impact on US haulage firms’ ability to negotiate rates. Last year, for example, Swift was able to raise its rate per loaded mile by 15%. Now, the company is seeing low single digits and taking concessions on about 25% of its contracts.

Pricing is a particular problem in the spot market, which is where commodities are bought and sold for immediate delivery. This type of business has seen rates go down by 9-10% per loaded mile, according to the former Swift employee. While spot truck pricing is expected to firm up in the final quarter of this year, especially as Black Friday and the holiday season get under way, any carrier that heavily participates in the spot market and doesn’t have a diversified portfolio that includes longer-term contracts could face difficulties.

One of these firms could be USA Truck. According to a former logistics specialist at the company, USA Truck is struggling to execute a sufficient balance between its spot and contract business, which could be a major disadvantage in what is currently a competitive environment. The company is seemingly unable to succeed in both spaces. Due to several factors, including its limited fleet size, USA Truck is not as agile as its peers when it comes to moving effectively between the two markets. Additionally, because its strategic customers are vital to its ongoing stability, USA Truck is unable to take advantage of the spot market when it is most favourable.

The weak Q2 results declared by most publicly traded trucking companies are based on a fairly strong economy and minor declines in demand. If the economy enters into a recession in the next 1-2 years, which is already viewed as a possibility, it should be questioned how trucking companies that are struggling with a modest downturn will perform if it becomes more significant and sustained.

Aside from pricing, US trucking and logistics companies are contending with new regulations. The industry is debating the impact of the Assembly 5 Bill, which was passed by the California Senate in September. The bill, which will limit a company’s ability to classify workers as independent contractors rather than employees, could have huge implications for some transport firms. A former executive at an American digital freight company, Convey, said the legislation could result in many digital freight companies being fined for hiring independent contractors and owner-operators as far back as three years ago. This will be made worse by the fact that many of these firms have limited funding (normally under USD 5m) to deal with the fines. The legislation could spread to other states – especially those with major port cities that have a left-leaning government such as Seattle.

In the UK, pricing is faring slightly better, with trucking firms seeming to have more bargaining power. This is in part due to the much-publicised problems that fast-food chain KFC encountered in 2018 when it switched from an established haulage company to using DHL to save on costs. The switch to a cheaper firm resulted in chaos, namely the closure of over 500 stores. Consequently, the UK trucking industry has huge leverage when it comes to negotiating prices and higher margins.

However, the UK logistics sector is also seeing a major shift from open-book to closed-book contracts – which gives clients more certainty on price, according to a former director at Eddie Stobart. An open-book contract involves billing customers on the actual cost of services at an agreed margin, whereas closed contracts do not divulge operating costs and use an agreed rate. The margins trucking firms can get for closed-book contracts are still healthy. For companies like Stobart, which operate closed-books across multiple clients, the margins could be in the double digits. For the small to medium closed-book operators, the margins are still likely to be attractive, at around 7% to 8%.

But one problem for UK trucking companies is payment terms. Standard payment terms used to be between 28 and 30 days about a decade ago, but customers are now requesting as much as 60- or 90-day payment terms. “That hurts the industry significantly, not just Eddie Stobart,” the former Stobart employee said. Although around 60% of Eddie Stobart’s retail contracts are on the standard 30-day payment terms, the former director warns that these contracts are all at risk of heading towards 60 days or more.

The impact of Brexit also needs to be considered. For Eddie Stobart and other companies like it, however, this can bring advantages and disadvantages. For one, Eddie Stobart could benefit if clients stockpile products in the UK. It would provide a short-term benefit for the company’s warehouse business, as the bill depends on the units or pallets used. However, like many other UK freight companies, Eddie Stobart subcontracts some of its work to continental drivers from Europe. Post-Brexit, the possible absence of these drivers will put added pressure on the UK trucking industry, which is already experiencing a driver shortage.

This shortfall is estimated at between 60,000 and 80,000 drivers in the UK. To address this, Eddie Stobart is operating training schools in an attempt to boost the number of Class 1 drivers. But it costs thousands of pounds for each course, and there is no guarantee that the new drivers will remain loyal to the company after becoming more qualified. It remains to be seen whether this investment will be strategically sound.

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