The peak shipping season that occurs in the fourth quarter of every year poses significant challenges to shippers and their partners who must move surging freight volumes. On the other side, carriers who have positioned their assets well can seize opportunities to haul urgent, high-priced loads.
In the middle, of course, are the brokers — the intermediaries who commit to managing turbulent freight volumes and sourcing the capacity necessary to move it. In many ways, brokerages and 3PLs have to possess the most accurate information about freight markets, because they are responsible for pricing both sides of the deal.
Transportation analysts show strong fourth quarter volumes based on macroeconomics but e-commerce and shifting consumer spending patterns — expectations of next or two-day delivery in mid-December — have introduced a level of inherent volatility. The changing structure of supply chain networks increasingly emphasizes linehaul rather than direct-to-store delivery. Moves are becoming shorter, more frequent, and tend to run on tighter schedules.
Overall warehouse square footage is growing rapidly, while the size of the average warehouse is shrinking as facilities are being built closer to population centers. CBRE reported that the industrial availability rate — a measure of properties that are vacant or soon to be vacant — fell for the 33rd straight quarter to 7.1%, the lowest in eighteen years.
With that in mind, we talked to executives at Arrive Logistics, a technology-enabled freight brokerage headquartered in Austin, Texas with offices in Chicago and Chattanooga. As one of the fastest growing brokerages in the nation, we sought their insight on how evolving trends in retail have changed the way the fourth quarter looks from a freight perspective and how brokerages stay on top of the market.
FreightWaves spoke to David Spencer, Director of Business Intelligence, Eric Lien, EVP of the Enterprise Channel, and Duke Begy, EVP of Customer Sales, by phone.
“We’re looking at a somewhat changing marketplace in which we’ll continue seeing balance creep back into the market as we exit 2018 and go through the first half of 2019. That trend is coming. Across the industry, we’ve seen a shift in demand in the first couple of weeks of the fourth quarter but the fact is we’re coming up on a holiday season and there will be quite a bit of consumer activity, inventories will need to be replenished,” Lien said. Additionally, low unemployment and high consumer confidence both point to a robust peak season.
Current contract freight rates are elevated because they were negotiated in Q4 2017 and Q1 2018, which were both exceptionally strong quarters with high demand and tight capacity. In many cases, carriers and 3PLs were able to secure double-digit rate increases, enough to keep them around to honor their service commitments through the back half of this year. That has pushed tender rejections and spot rates down relative to contract prices. According to DAT’s RateView tool, dry van linehaul spot rates crossed back under contract rates in February, and while that spread narrowed during the June/July freight surge, by September it widened to the point where average spot rates were at a 23 cts per mile discount to contract rates.
The spread between contract and spot rates represents an opportunity for 3PLs with high volume contracted accounts. Stifel equities analyst Bruce Chan addressed that very topic in a research note on C.H. Robinson, published October 11.
“Earlier in the cycle — through 2017 and 1H18, we saw NAST gross margin pressure as a result of transportation costs rising faster than pricing,” Chan wrote. “But entering 4Q18, assuming the market stabilizes and capacity cost increases plateau, we estimate that 80%+ percent of contracts have been repriced, so gross margins should begin to inflect.”
Less retail freight this holiday season will be pushed onto the spot market, but the problem is that even retail shippers who experience Q4 surges every year have trouble predicting exactly how much trucking capacity they’ll need and where they’ll need it. Lien noted the unpredictability of major retail lanes creates opportunities in the spot market as shippers deviate from their routing guides and core carriers.
“We spoke with a customer last week who has very consistent volumes the first three quarters of the year that they manage with drop trailers set up — one to three loads a week in any given lane. But in Q4, it’s five to fifteen loads per week,” said Begy. “We work to position capacity for those shippers and we overlay that where we have core carrier density. We provide an overflow game plan because when their primary asset-based carriers don’t have the capacity, they lean on Arrive Logistics to make deliveries.”
Lien said that in his role running the Enterprise Channel at Arrive Logistics, he has the chance to form long-term, collaborative relationships with Arrive Logistics’ higher volume & service sensitive customers.
“Our Enterprise customers begin planning for Q4 well in advance and we’re a part of that process,” Lien said. “Collaborative planning is dependent on a forecasted demand, which inherently carries varying degrees of uncertainty. This uncertainty needs to be absorbed in the operational plans. When it’s crunch time the winners at the end of the day are typically the businesses that best communicate. The commitment to open, transparent shipper and carrier communications are what sets Arrive Logistics apart.”
While inbound container volumes are suggesting a very strong peak season — the Port of Long Beach had a record FY 2018, topping 8M TEUs — there is evidence that capacity is gradually being added to the market. According to the Bureau of Labor Statistics data, about 31K drivers have been added in the past year.
At some point, the capacity problem will start to inflect and the market will normalize, pulling rates back down. Goldman Sachs equities analyst Matt Reustle addressed this issue in a recent note on the trucking industry.
“While we may see rate relief as trucking supply comes online, we expect rates to remain +12% versus the 2014 - 2017 range absent a macro shock ($1.71/mile vs. 2018 YTD avg of $1.88/mile),” Reustle wrote. “Given demand trends remain strong, we do not expect a normalized environment until mid-2019 at the earliest.”
But what does that softening look like from a broker’s perspective?
“We’re at the price point where carriers are going to fulfill their commitments on contract freight and service them well,” Spencer said. “I don’t see an overwhelming amount of spot freight or tender rejections but I see that brokers and carriers are securing the lanes they’ve been aggressive on. Based on our expectations of a softer demand to capacity ratio, decreased pressures on rates will be felt in Q1 and Q2.”
Arrive believes that a softer demand to capacity ratio will establish a favorable market for contract freight in the first half of next year, Spencer said. That means awarding freight to reliable carriers should result in somewhat predictable transportation costs, with only surge and one-off transportation needs having to be quoted on a spot basis (pending a major capacity event).
“We expect many carriers and brokers who are currently feeling the decreased demand, particularly in the spot market, to make a push to win contract freight,” Spencer concluded.