Short-term contracts are now the norm as shippers and carriers navigate a rocky end to 2022.
“Carriers don’t want to sign off on a six-month deal when they don’t know what will happen in three months,” said Daniel Sokolovsky, founder and CEO of Warp, a middle-mile technology company. Sokolovsky said that his company is dealing only in three-month contracts at this point.
“Bigger shippers had much more negotiating power so they could lock in longer deals [previously],” he added in an interview with Modern Shipper. “[The supply chain disruptions] have locked in the understanding that quarterly deals are a [better deal].”
Warp works to optimize the middle mile for shippers, connecting many retailers to last-mile delivery providers. The changes the recent disruptions have generated though has altered strategies, Sokolovsky said, noting that a lot of carriers, shippers and consumers have learned that the old way of doing things was not sustainable.
Shippers have responded by increasing transparency and communication. “We are seeing a lot more openness amongst big shippers,” Sokolovsky said.
Because of where Warp sits in the supply chain, Sokolovsky has unique insight into market dynamics. He said that some carriers are worried about long-term volumes and as a result have been looking to lock in longer-term contracts, even though rates are low right now.
“I think right now it’s good for carriers to take something that is longer out,” he said. “Right now, a lot of carriers need certainty that they have business six months from now, 12 months from now. From that case alone, there is a reason for longer contracts.”
At the other end, the final mile remains a segment in flux with bankruptcies and mergers taking place as interest rates reach highs not seen in decades. Sokolovsky sees more of this in the future but did note that larger players that are able to buy assets (trucks, warehouses) can do so at a cheaper rate than the current provider is paying for them, potentially giving them a lower-cost asset moving forward.
Sokolosky said he is seeing asset-less businesses struggling because they typically charge a premium for their services, but as volumes have declined, those premiums are falling.
“We are seeing aggregators lose volume,” he said.
Time to optimize the middle mile
In September, FedEx (NYSE: FDX) shocked Wall Street when it withdrew its financial guidance for the rest of its fiscal year and then reported earnings per share fell below expectations. It estimated revenue of $23.5 billion to $24 billion and earnings per diluted share of $2.65 or higher. It cut its fiscal 2023 capital spending by $500 million to $6.3 billion and said it would close more than 90 FedEx Office locations and five corporate office facilities.
The news triggered an avalanche of news articles about falling e-commerce volumes. While everyone involved in e-commerce — Amazon (NASDAQ: AMZN) included — is seeing sales decline, there is no general consensus that consumers are reversing pandemic online shopping. In fact, Deloitte is forecasting e-commerce sales growth of 12.8% to 14.3% this holiday season.
Both UPS (NYSE: UPS) and FedEx have announced 6.9% general tariff rate increases for 2023, which will pressure retailers to seek lower costs in their final miles. Sokolovsky said that a focus on the middle mile is becoming more important in these times. Unfortunately, many retailers and their last-mile carrier partners don’t have access to the middle mile.
“Naturally you’d think that volumes should move away from [FedEx and UPS] to smaller last-mile carriers, but the problem is that many of them don’t have a middle-mile provider,” he said. “We’ve been telling shippers for a few months now, especially those in e-commerce and those delivering to stores, that they should go out and optimize their middle mile.”
Warp is attempting to provide that access to the middle mile, Sokolovsky said.
“For a lot of brokers and carriers out there, they don’t understand what the shipper is shipping, how much they are shipping and [whether] they can use a different vehicle,” he said. “On the carrier side, there are very experienced operators that if they had more information … [could find] savings and opportunities.”
Sokolovsky said shippers and carriers using Warp’s services can often cut 10% or more out of their shipping costs by better understanding how freight moves through their networks.
“A lot of shippers have been blind to the fact that there is a way to optimize your middle mile that doesn’t cost too much,” Sokolovsky said.
Warp is a carrier-agnostic platform, which Sokolovsky said is important as it seeks to help shippers better optimize their freight movements. With the ongoing push to fill e-commerce orders direct from stores, more retailers are shipping smaller freight volumes to physical locations, Sokolovsky said.
“There are a lot of retailers shipping to tiny stores, moving two pallets on a 53-foot truck,” he noted. “Given where inventories are, given what’s happening with brick and mortar … the big push in 2023 is how to optimize direct-store delivery.”
As to how the 2022 holiday peak is going, Sokolovsky said he doesn’t see, as of now, any major shipping disruptions even in the face of high diesel fuel prices and a potential rail strike. One change taking place is inventory movement. There has been no shortage of the excess inventory problems retailers are facing this year, and Sokolovsky said Warp is seeing more inventory moving around the country.
“We’re seeing a lot of inventory repositioning,” he said. “It’s already here. It’s in the United States, but it’s now moving place to place with lots of people liquidating and discounting inventory. Because of that we are getting a lot of moves that are going short distances. What we have seen is that repositioning is happening and it’s moving to lower-cost areas.”
The good news is that as volumes have fallen across the country, this extra movement of freight is not significantly impacting capacity and rates.
“The fall in volumes is outweighing the increase it would be for these types of trips,” Sokolovsky said.
Click for more Modern Shipper articles by Brian Straight.
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