Champagne taste on a beer budget

door: Bart Banning

There’s been a lot of talk in recent months about the lagging profitability of the logistics sector. Everyone involved, whether they’re shipping companies or carriers, acknowledges that logistical companies are delivering a top performance daily, but they don’t benefit from healthy pricing.
This has created a strange and worrisome situation in the sector. I still remember the days of the economic crisis when price elasticity was huge. Because of falling demand, logistical companies were flooded with ‘requests’ to lower their prices. The value of contracts had become negotiable and there was no stability in pricing.

Recent reports by the Dutch (TLN) and Belgian Transport Operators Associations (UTPR) and consulting firm PwC say it all. Even in these times of economic growth, the sector’s profitability is not showing any increases. Has the concept of price elasticity in goods transport changed in 2018? The Dutch Road Haulage Organisation for National and International Transport (Niwo) tells us that we need to make allowance for another sharp increase in costs in 2019. What if profitability doesn’t show any improvement even then? That would impact supply chains in the shipping industry – all guarantees would be off the table. The days of cheap transport are over in my opinion.

And you’re wrong if you think that it’s just the profitability of small businesses that’s lagging. A recent article by Dutch logistics guru Walther Ploos van Amstel tells us that food shipping companies aren’t reaping the benefits of the economic growth either. Their financial performance leaves much to be desired as well. And they’re no small fry. The title of Mr Ploos van Amstel’s article says it all: ‘Give us this day our daily bread’. Will we actually be given our daily bread if things don’t change soon? That’s a legitimate question. Should all logistics providers introduce a business cycle fee then? Perhaps they should, I don’t know. But what I do know is that this situation isn’t right.
So, the logistics sector is putting in hard graft, but at the end of the day there’s not enough money to go around to pay the rising costs of purchase. Added to that there’s the matter of improving its profitability, which is sorely needed for continued investments in innovation and carbon reduction measures. This is not a sustainable business model. Clearly, there’s a spanner in the logistical pricing works. Some are even speaking of an imminent shake-out. They might be right: if you can’t make money in a booming economy, when will you be able to?

Carriers and shipping companies each have a responsibility. It takes two to tango, after all. You can only sell transport services below cost in special circumstances, such as in an economic crisis. This is not the time to do so, and definitely not on a structural basis. An understanding of customer return and proper costing are required for negotiating the right price. But shipping companies also have a role to play in fair pricing. A beer budget will only buy you terrible champagne. But champagne taste is what the logistical sector is offering daily with its budget only allowing for beer. The conclusion is simple: the budget must be upped.

As a financier of the sector, we engage in a dialogue about this topic with our customers, as we do with the sector association. It goes without saying that we’re alert to developments in financial performance, and we have to be critical of course. At the same time, it would be crazy if carriers were unable to meet their logistical obligations, or – even worse – simply throw in the towel. This would lead to supply chains grinding to a halt and huge problems arising right away; logistics operates by the clock, remember? That would be a nightmare, especially with the holiday season drawing near.

Our economic outlook for 2019 continues to be positive. So the pressure’s still on. The strategic importance of a guaranteed supply chain is massive for shipping companies, carriers and consumers. But it does come at a price. Many contracts are due to be renegotiated. Fair pricing for logistical services should be the number one priority for sustainable transport in 2019. I call upon everyone to engage in tough, but fair negotiations, based on correct data and costing, with due respect for each other’s positions and regard for sound business growth.

That sound growth is essential to allow us to work together on resolving the much larger issues, such as sustainability, digitalisation and the transformation to the circular economy. These are crucial agenda items that should not remain on the shelf. Creating a better world for tomorrow, by working on a sustainable and financially sound logistics sector today.