“Repricing” is a word US shippers are hearing frequently as they sit down with trucking and logistics partners to negotiate annual contracts — repricing as in raising rates. With the US economy growing steadily, freight demand and spot rates high, trucking operators and third-party logistics (3PL) operators are demanding, and getting, higher contract rates.
Increasingly, shippers find themselves caught between higher trucking costs and tougher customer requirements, especially delivery schedules with narrow time windows. Businesses are looking for ways to reduce the cost of shipping goods, but those delivery targets in effect tighten truck capacity and enable trucking companies to charge a higher premium.
Some shippers are turning to transportation bids to find better pricing on lanes where costs are rising quickest. Others are digging deeper into routing guides that list primary, secondary, and tertiary carriers by lane to find capacity. They all, sources agree, should be working more closely with motor carriers to find ways to mitigate increasingly steep price increases.
Carriers at the SMC3 2018 JumpStart Conference in Atlanta last week said high-single-digit contractual rate increases are not uncommon, and on certain lanes, double-digit increases.
“I look at some of the rates that are being thrown around out there, and they’re scary,” said Charles W. “Chuck” Clowdis Jr., founder and managing director of Trans-Logistics Group. An analysis of trucking rates by Trans-Logistics showed double-digit increases on many lanes in December and January, especially for carriers offering specialized services and equipment.
Logistics company Transplace sees truck rates on average increasing 4 to 8 percent in shipper freight bids, said Ben Cubitt, senior vice president for engineering and procurement.
However, carrier rate hikes “are very lane specific,” he said. If 4 to 8 percent is the average, prices might decline on some lanes and rise as much 25 percent or more on others. “Shippers have two challenges, one is rate increases and the second is more and more demanding customer delivery times,” Cubitt said. “There’s a lot of fear about rates.”
Anecdotal reports of rate hikes were confirmed in fourth-quarter earnings reports from publicly owned companies. Carriers reported pricing gains, and shippers higher transport costs.
Truckload rates paid by 3PL C.H. Robinson Worldwide rose 15 percent year over year in the fourth quarter. The 3PL boosted its own truckload charges to customers by 14.5 percent. “We continue to be active repricing business where appropriate across all our modes and services as we deal with an extremely fluid marketplace,” CEO John Wiehoff said Wednesday.
“Given the healthy economy, high freight demand, and tight capacity environment we do expect prices to increase in 2018,” Wiehoff said in an earnings call transcribedby Seeking Alpha. C.H. Robinson’s total or gross revenue jumped 16 percent in the fourth quarter to $4 billion while net revenue, after transportation costs, climbed 12.5 percent to $631.8 million.
Schneider National sees “continued pressure” on truckload pricing in 2018, Christopher Lofgren, president and CEO of the truckload carrier, said in an earnings call Thursday. “Our price improved across the board — contract, tier, and spot — as customers responded to driver capacity constraints,” Lofgren said. Truckload rates rose 5 percent on average.
As a result of higher rates and increased volume, Schneider’s fourth-quarter total revenue leaped 11 percent to $1.2 billion, while full-year revenue rose 8.4 percent to $4.4 billion. And 2018 is off to a strong start, Mark Rourke, Schneider chief operating officer, told analysts. “Where we're sitting, really seeing very robust demand is not typical in January,” Rourke said.
As publicly owned companies release fourth-quarter and full-year results, the overall impact of higher freight rates, retail delivery demands, and difficulty finding trucks becomes clearer.
Higher freight rates added a slightly bitter tang to fourth-quarter earnings at Hershey’s. Rising supply chain expenses cut into the chocolate and snack food company’s gross margin. “This year and looking forward to next year, we have had some headwinds,” Patricia Little, chief financial officer, said in an earnings call last Thursday, referring to 2017 and 2018.
“We are seeing the same sort of pressures on freight that many people in the industry are having” as retailers set “ever-higher” delivery goals for vendors, Little told Wall Street analysts. The company’s fourth-quarter revenue declined 1.5 percent, although net profit rose 55 percent. Hershey’s adjusted gross margin dropped from 44.5 percent a year ago to 42.7 percent.
As rates rise in 2018, Hershey’s will prioritize “getting the product onto the shelf even if that means some extra cost in either our manufacturing or distribution network,” she said.
At the Clorox Company, “transportation carrier capacity restraints” led to fewer shipments in the fourth quarter, especially late in the quarter, company officials told Wall Street analysts. Combined with retailer inventory adjustments, lower shipping volumes contributed to a slight reduction in sales. Logistics costs rose 90 basis points, just under 1 percent, in the quarter.
“There is fair bit of volatility I think right now in both transportation and commodity markets,” Steve Robb, chief financial officer for the manufacturer, said Friday in an earnings call. “We’ve been making some fairly significant investments in our supply chain to drive future cost savings and as we get into the second half of the fiscal year, you’ll see less of that,” he said.
Other shippers are investing in supply-chain change. Healthcare and cleaning goods supplier Prestige Brands expanded the number of trucking firms it uses to ensure it had capacity.
“That has initially come at a higher cost,” said Ronald Lombardi, chairman, president, and CEO.
He said Prestige would take “a measured approach” to paring back its carrier base. “We don't want to disrupt our service levels,” he said. That underscores the conflict at the heart of the two challenges mentioned by Cubitt: rising rates and tougher delivery demands.
“Shippers that have tight delivery windows want to be very carrier- and driver-friendly,” he said. “You want to look at the things that will cause you to lose capacity in this market.”
Despite rising freight rates, Cubitt increasingly sees shippers putting their book of business up for bid. “They gulped twice, tested the market, and then decided to bid,” he said. Shippers will still manage costs better through that bidding process than they would through separate negotiations with 25 carriers, he said. Transplace runs bids for shippers.
Service, however, is taking on greater importance. For many shippers, finding a truck is a priority, Cubitt said. “The economy is strong in so many sectors that use trucks,” he said. “Last year you could repair holes in your routing guide pretty easily,” Cubitt said. “This year it’s generally harder. On some lanes, you can go to 50 carriers and not get a ‘yes.’
“If you want your route map to survive, you’ve got to talk to carriers more than ever,” he said. “If there’s a bad delivery time, they can reject it, because they can cover other freight.”