Two 'strategies' that don't work

Two 'strategies' that don't work

The Journal of Commerce's Oct. 1 cover story presents evidence that the U.S. economic slowdown may already be causing a downturn, perhaps significant, for import cargo volume. Fortunately, for the U.S. economy, the dollar's depreciation has changed the terms of trade and made U.S. exports more competitive.

The silver lining of growing export volumes will not fully compensate container lines for the loss of imports. That's because many exports move in bulk on non-liner vessels, and much of what does move in containers is of lower value and produces rates that only cover repositioning cost.

If the import downturn proves severe and/or prolonged, the way a container carrier reacts to declining volumes will translate positively or negatively onto its bottom line. What's necessary for success in a declining market is different from what works in a stable or expanding market.

During 30 years with a successful global container carrier, I was able to watch carriers during cyclical downturns, and how they adapt (or not) to declining markets. Some carriers successfully stem the tide, even grow. Others decline. The old employee joke, "Floggings will continue until morale improves," brings to mind two similarly nonconstructive "business strategies" that someone on the outside looking in might just surmise are used by less successful carriers trying to "hold on" during market declines. Of course, these two "strategies" are only apparent, not explicit:

-- First "strategy:" Costs will be cut until ships are full. Yes, reductions can be made in operating expenses such as leased-container redelivery, reduction of chartered tonnage, and elimination of marginal port calls and legs. Troubles begin when customer support and relationship functions are cut. An easy cost-cut target is what is paid to the agent. This does not help because an agent's economics do not align completely with the principal's.

For the agent, high-margin business is a customer who needs minimum sales and customer service. All the agent must be staffed to do is receive and load or discharge and deliver the cargo. For the carrier, the good margins come when the customer is willing to pay a premium for pampering or responsive service, or when a customer with steady volumes ships to a destination with plenty of backhaul cargo.

The carrier benefits when the agent sells to these customers, forms a bond of loyalty and creates a relationship strong enough that the customer knows that when a transport problem occurs, the carrier will work it out. Trimmed commissions mean trimmed staffing, and encourage the agent to direct its efforts toward its own profitable cargo mix.

-- Second "strategy:" Rates will be cut until ships are full. When market volumes are down, there is an enormous temptation to swoop in on a competitor's key customer and offer a deal that cannot be refused.

During rate skirmishes, market shares rise and fall but end up little changed. It's the gross revenue that takes the hit. The only certainty from rate cutting is that collective carrier revenue declines in addition to the decline in total market volume.

Capital and expense structures of container carriers do not create a natural floor for rates at a breakeven point. Depreciation expenses are typically large in our industry, which means cash flow from operations can remain solidly positive while the line operates at a loss. Carrying cargo with a positive cash flow but below total cost is like eating the spring seed corn during a hard winter. A carrier with empty slots is momentarily better off accepting cargo at below total cost as long as the rate exceeds marginal out-of-pocket cost. Operating on cash flow alone and/or with near marginal cargo is a short-term fix that will eventually end.

My recommendation is that when faced with softening markets, a carrier should look closely at how customer relations are maintained and how these processes can be cost-effectively strengthened.

Can outside sales executives in-crease the number and range of customers served? How about sales training for inside service persons as well as outside representatives? The focus should be how to sell value to the customer, whose freight cost also in-cludes the costs of delays, claims, and lost sales caused by transport error.

Are telephones answered by a person, not a machine? Do your customers feel welcome dropping into a local office to resolve documentation or other routine issues face-to-face?

There are many possibilities. High touch is the key.