Companies that depend on freight transportation to fulfill core business functions could report disappointing quarterly results due to staggeringly high transportation costs. This could be the case for manufacturers of food and consumer packaged goods, according to one insider with a bird’s-eye view of the industry.
Anshu Prasad, co-founder and CEO of Leaf Logistics, a New York City-based startup specializing in the forward contracting of freight, detailed that thesis in an interview with FreightWaves.
Prasad’s company helps shippers and carriers manage fluctuations in the transportation market through its Leaf Adapt software that provides guidance into market pricing and capacity dynamics. The company also facilitates the execution of forward freight contracts, allowing shippers and carriers to lock in capacity/freight at future dates with set rates, on its Leaf Flex platform.
Transportation costs wreaking havoc on budgets
High consumer demand and the inability of most modes of transportation to produce incremental capacity to meet the need has sent transportation rates soaring. Supply chain and transportation managers are scrambling to find capacity solutions and to explain bloated expense entries for shipping costs. This dynamic has been front and center over the past six to eight months for most companies reliant on transportation providers to get goods to the market.
“Maybe a shipper planned for 5% to 10% of their freight in spot, but then they end up living with 20% to 25% of their freight in spot,” Prasad said.
Prasad noted that one of Leaf’s customers is paying 700% of its current contracted ocean shipping rate on some lanes from Asia to Europe. “There’s just no way to insulate your budget against that. I absolutely think that we’re going to see the impacts of those six, seven months in the numbers that get reported.”
Prasad said that spikes in transportation costs can be perilous for companies like food and CPG producers, which already operate on relatively thin margins and pay for transportation into retailers’ facilities.
Leaf works with many companies upstream from the consumer like food producers and pharmaceutical and chemicals companies. Prasad noted the cost of transportation for its customers represents roughly 4% to 5% of sales and missing a budget by 25% “is a big deal” for a $100 million to $200 million shipper.
Shippers have tossed out the routing guides for certain lanes as loads are routinely rejected by their top carrier partners. Some of Leaf’s customers are seeing tender acceptance on negotiated rates as low as 20% to 30%. “That means they’re in the market for spot like 60-70% of the time, which is not just expensive, it’s a ton of work that they’re not budgeted for. There’s not enough people to go chase trucks all day at level.”
Overall, Prasad said bid compliance is closer to 60% to 70%.
Some retailers have an easier path
The story may be easier for retailers with high exposure to household essentials, like food and beverage and other consumables. Big increases in sales are likely to allow the sector to better absorb freight cost increases. Estimates for several of these outfits gapped higher over the past 90 days as better-than-expected retail sales data flowed in.
According to the National Retail Federation, retail sales during the November and December holiday shopping season increased 8.3% year-over-year to a new record at $790 billion. During the October-ended fiscal third quarter, the last period reported for most retailers, several companies posted triple-digit growth in e-commerce activity. It appears similar trends were seen in the latest period.
However, Prasad cautioned that retailers with “surging e-commerce demand and severely diminished store sales had to adapt their supply chains very quickly. Many who needed additional final-mile capacity to support surging e-commerce sales suffered through rising costs and caps on capacity.” He believes these retailers “will likely see an impact to margins and may also have lost sales and frustrated customers in the process.”
While retailers were successful bringing in inventory during the third quarter, sales growth outpaced inventory additions by at least 2-to-1 at many of the largest chains. These companies quickly expanded e-commerce and omnichannel offerings in the early days of the pandemic, and commentary suggests a restocking may take a couple of quarters to execute.
Some of Leaf’s retail customers said they have been in a peak-season environment since last February. “I think we’re still in it,” Prasad continued. He believes there is still a “reckoning” to come regarding capacity and rates.
Visibility may be increasing volatility
Prasad believes that increased visibility into transportation markets due to an abundance of near- and real-time data may be driving volatility higher. It’s helpful to have decision-making tools at your fingertips to be able to react quickly to fluctuations in capacity, but the availability of data is also leading to an increase in the number of times the same lane of freight gets bid. He said he’s seeing some shippers submit four or five requests for proposals on portions of their freight every year.
Some managers view volatility as inherent and have taken a reactive approach to the market, hence the multiple rebids, which Prasad believes may actually be hurting budget compliance.
Missing shipments when capacity can’t be found incurs costs and penalties from retailers. Plus, there’s also the loss of revenue that needs to factor into the equation. “If that product doesn’t make it to Walmart, you have a different, bigger problem in your transport budget,” Prasad said.
The volatility often results in losses as budgets are missed, forcing companies to take actions to offset the impacts. That usually means headcount reductions, according to Prasad. He said these “hurricane-like” events are happening more often and contends that it is a structural issue as the industry grapples with pay hikes, insurance headwinds and a lack of drivers.
Missing cost expectations, losing revenue opportunities and disappointing customers are all “C-level problems.” He believes shippers that consistently miss customer expectations and find themselves “further down the list of reliable carriers” are experiencing an “existential threat.” He said these issues are “more consequential than the couple of pennies you’d save riding the curve more tightly.”
Visibility is more relevant for the spot portion of a shipper’s freight portfolio but not for the other 80% to 90% of its contracted freight, Prasad added. He sees timing the market as “a fool’s errand,” but also contended that waiting for the pricing puts and takes in the cyclical transportation industry to smooth out is “gambling.”
Retailers like Walmart (NYSE: WMT) and Target (NYSE: TGT), and others with high household goods exposure, are expected to report solid results beginning next week. However, companies operating on tight margins, such as manufacturers, could find themselves explaining spikes in transportation costs to investors again.
While the topic may be hidden in broader discussions regarding commodity inflation on earnings calls, Prasad said many of the internal talks happening among shippers are squarely focused on efforts to not just minimize freight costs but also the volatility in costs.