Perhaps this truck is moving freight at a sustainable rate. (Photo: Jim Allen/FreightWaves)
The trucking industry is known for its volatility. In the first quarter of 2023 alone, nearly 9,000 trucking authorities shuttered.
However, shippers — the parties that use trucking services, such as retailers and manufacturers — seem increasingly fed up with the chaos. While most are slashing how much they’re willing to spend on trucking services in their annual contracts, some aren’t cutting as deep as they could, as executives from four companies told FreightWaves.
Instead, these shippers are looking to double down on better service, like raising “on-time, in-full” requirements. Getting too focused on price could result in shippers being unable to actually get their product where it needs to go — which is, well, ultimately the point of hiring a trucking company.
“You can get sidetracked with some of the obviously attractive rates that are out there,” Travis Paeth, client solutions at Arrive Logistics, told FreightWaves. “In the contract world, the rates are one thing, but it has to come with execution.”
An executive at a large consumer-packaged-goods firm, who asked to not have his name or company’s name published, agrees. He said rates for trucking services at his company declined by about 5% this year compared to last.
That relatively modest cut was on purpose. He said the more trucking companies that get forced out by low rates, the more likely we’ll see another massive upsurge in freight costs in several years.
“If you look at the operating costs of a carrier, a lot of rates are eroding margins to the point of forcing some carriers out of the business,” he said. “We want to avoid that. The minute carriers and drivers start to leave, the supply-and-demand curve starts to flip very dynamically. It’s basic economics. At the end of the day, when you have more demand than supply, you start to get into a price war.”
Should shippers avoid excessively slashing contract rates at a time when spot rates have fallen by 25% year over year, that could help medium-size or large carriers stay in business through this ongoing trucking bloodbath, in which some small fleets are shutting down and some large ones are increasingly reporting poor performance.
Zach Strickland, director of freight market intelligence at FreightWaves, said contract rates have not experienced the freefall he had expected. The most recent data shows spot rates are 59 cents per mile lower than contract rates, assuming a fuel surcharge of $2 per gallon. That is only slightly lower than the spread seen at this time last year.
Declining spot rates should push contract rates lower. However, the spread between spot and contract rates has remained relatively steady through the second half of 2022 (in green) and 2023 (in dark blue). (Chart: FreightWaves SONAR. To learn more about FreightWaves SONAR, click here.)
“Right now, I think we’re in a slow downward trend for contract rates, which are still way above spot rates,” Strickland said. “That spread has sustained a lot longer than it probably should have.”
Shippers who are sick of the chaos might be keeping those contract rates relatively high. They’d rather pay more and stick with a few good carriers than save some cash but get hit with a freight hullabaloo when capacity dries up again.
“A lot of companies do not want to get back to those spikes — especially what we saw in ‘21 where spot rates were up 35% year over year,” said Drew Herpich, chief commercial officer at Nolan Transportation Group. “Companies in general are much more cognizant of their transportation spend than they used to be.”
RFP season is now never-ending
There was once a thing called “RFP season.” It’s been weird the past few years.
Typically, around the fourth quarter, shippers ponder rates and capacity outlooks for the upcoming year. Those shippers send out their “requests for proposals” to a group of carriers. In response, carriers propose rates for each lane that the shipper is offering. After some negotiation, these contracts go into effect in the first quarter of the following year.
That steady process vanished in 2020. Contracts went from annual to quarterly or even monthly in a process called “mini-bids.” For example in mid-2022, when spot rates collapsed, the executive at the large CPG firm said the company’s outside carriers decreased their rates.
That ongoing dialogue is part of the reason that we haven’t seen a full breakdown in contract rates. Some carriers have proactively offered rate cuts during the initial spot market breakdown, Strickland said.
It’s a smart tactic. Rather than waiting for rates to sink lower and lower, those truckers approached their customers and offered to slash their prices to match the spot market. Trucking companies likely figured that rates would sink even lower in the coming months. By getting ahead of that decline, these carriers were able to settle on rates that were not as low as they would have been months later had the shippers reached out to them – when conditions were more firmly in shippers’ favor.
Van spot rates to move a truck are sinking lower. (Chart: FreightWaves SONAR. To learn more about FreightWaves SONAR, click here.)
Julian Van Erlach, senior vice president of global supply chain at FabFitFun, a large subscription box company, said his firm has always pursued monthly freight agreements for long-haul truck movements — something between a pure spot move and an annual contract.
Van Erlach said avoiding the spot market allows the company to maintain its strict delivery schedule. FabFitFun’s warehouses have three- to four-hour delivery windows, so trucks can’t all crowd the loading docks at once.
“We’re not going on a spot basis, because of that service need,” Van Erlach said. “We’re paying purposefully more than that.”
Still, in the spot-slash-contract space where FabFitFun exists, Van Erlach has noted that typical cross-country linehaul rates have declined by $1,000.
‘We’re going for blood’
Ultimately, the problem for many shippers is that they just don’t have enough volume to offer to carriers amid a consumer cutback in durable goods spending. Herpich of Nolan Transportation Group pointed to a Fortune 500 client that has 1,300 fewer shipments a week than it had at this time last year.
That’s not the only reason why retailers, manufacturers, and others are looking to slash their transportation spending. Given elevated freight costs through much of the pandemic, some shippers are taking the chance to get some relief on their transportation budget. One supply chain executive in the homebuilding vertical told FreightWaves that he’s seen truckload rates on one major lane of his fall from $5,000 to $6,000 two years ago to $1,500 to $2,500 today.
“It’s almost a race to the bottom in some ways,” the homebuilding supply chain executive said. “They’re just trying to fill their trucks with business right now.”
Now, he’s seeking multiyear contracts to lock in some unusually low rates. Those contracts would bump up the rates each year, tied to an agreed-upon index. FreightWaves CEO Craig Fuller dubbed it as “shippers’ revenge” in August.
“We’re going for blood,” the supply chain executive told FreightWaves. “They stuck it to us for 2 1/2 years and it’s payback time.”
There are hundreds of thousands of small carriers who will accept low pay for freight moves just to stay in business. However, Herpich said this only hurts shippers in the end.
“What you’ll see happen is a lot of these carriers and brokers today are going cheap because they need the volume and there’s not a lot of demand out there,” Herpich said. “But then what the customer actually inherited is paper rates. It looks great in an Excel sheet or RFP file. It looks like I’m saving a lot of money. But if they can’t service the freight that I need, that’s going to be a bigger problem on the back end.”
Still, the homebuilding shipper’s tactic remains common — even if there is a large shift toward less volatility, according to Paeth of Arrive. His team executes 100 to 150 RFPs each month. Paeth said there are plenty of shippers that are preferring to push for contract rates that are similar to spot rates — or purely opting for the spot market.
That’s better for shippers that are more exposed to a volatile demand environment; a homebuilding firm would certainly qualify for that.
“They beat the hell out of us,” the homebuilding shipper said of the trucking companies. “You saw all the record profits and great money they made. It was all on the shipper’s back.”
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