Retailers & Shippers Benefit from Trucking Overcapacity and Lagging Demand

The trucking sector experienced significant challenges in the first quarter of 2024.

The current state of the U.S. domestic freight market presents a mixed bag of opportunities and challenges for shippers and truckers. Shippers, like retailers and ecommerce companies, are reaping the benefits of trucking overcapacity and lagging demand.

Meanwhile truckers are grappling with one of the most prolonged downturns in recent memory. This article delves into the key aspects of these dynamics and what they mean for the industry.

Retailers and Other Shippers Benefit from Trucking Overcapacity

The ongoing trucking overcapacity has created favorable conditions for retailers, and other shippers, who are now able to leverage lower transportation costs. Key takeaways include:

  1. Cost Savings: shippers are benefiting from reduced freight rates due to the oversupply of trucks.
  2. Improved Service Levels: With more trucks available, shippers can secure more reliable and timely deliveries across TL, LTL, and small parcel options.
  3. Inventory Management: Lower transportation costs enable better inventory management and flexibility.
  4. Competitive Advantage: Cost savings in logistics can be passed on to consumers, enhancing competitive positioning.
  5. Strategic Planning: Shippers can plan more efficiently with predictable and stable freight costs.

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Truckers Face a Tough Market

Meanwhile, truckers are experiencing significant challenges. The oversupply of drivers, who were drawn into the industry during the COVID-19-driven boom in freight demand, is now competing for limited cargo. This is driving down prices and impacting profitability.

The declining employment numbers indicate that small companies and independent owner-operators, who entered the market during the high-demand period, are now exiting as profits shrink.

In an interview with the WSJ, Paul Svindland, CEO of STG Logistics stated "Having drivers leaving the market is a positive thing because that's how we get rates back up,".

The freight sector has been struggling with weak demand and low cargo rates for about two years, leading to the collapse of several large companies, including Yellow and Convoy, as well as many smaller operators like Arnold Transportation.

Impacts on the Broader Freight Sector

The broader freight sector has not been immune to the downturn affecting truckers. One of the most significant impacts has been on freight brokers, who act as intermediaries matching loads from shippers to available trucks. The following data and excerpts are a view from the following WSJ article.

According to the Transportation Intermediaries Association (TIA), the number of shipments handled by brokers fell by 3.7% in the first quarter of 2024 compared to the previous quarter, and by 8.9% year-over-year.

This decline is not just in volume but also in value, with the invoice amount per shipment dropping 4.4% sequentially and a striking 13.8% from the year before. This steep decline in pricing underscores the intense competition and reduced demand within the market.

Furthermore, the American Trucking Associations' (ATA) for-hire truck tonnage index, a critical indicator of freight activity, fell 1.5% in April, marking the 14th consecutive year-over-year decline. This persistent drop in volume highlights the ongoing softness in the market, which has led to significant capacity exiting the industry.

Bob Costello, ATA's chief economist, emphasized that without a rebound in freight demand, more capacity is likely to leave the market, exacerbating the challenges for remaining operators.

The struggle is also evident in the financial health of logistics firms. Many companies, particularly smaller ones, are finding it difficult to sustain operations amid falling rates and volumes. The collapse of major players such as Yellow, one of the nation's oldest carriers, and Convoy, a tech-focused freight broker, reflects the severe pressures within the sector.

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The shuttering of these companies not only disrupts their immediate operations but also sends ripples through the supply chain, affecting shippers, receivers, and related service providers.

These conditions have forced companies to innovate and seek efficiencies aggressively. For example, some logistics providers are investing in technology to optimize routing and load management, aiming to reduce operational costs and improve service reliability.

Others are exploring partnerships and mergers to consolidate resources and strengthen their market positions. The emphasis is on surviving the downturn and positioning for a future upturn, which industry experts believe is on the horizon.

Signs of a Potential Turnaround

Despite the current challenges, there are signs that the freight market may soon experience the beginning of a turnaround. Industry research groups, including ACT Research, have noted indicators that suggest rising freight demand could be imminent.

Increased consumer spending is a significant factor, as higher retail activity leads to more goods being transported. While the current economy shows signs of softening, along with consumer spending. Some of the confidence in a turnaround stem from some retailers beginning to restock their inventories after a prolonged period of caution.

The ACT Research report highlights that, after a two-year downturn, the market is likely to begin a rebound within the next few months. This optimism is partly based on historical patterns where prolonged periods of low demand are often followed by a significant uptick as market conditions stabilize and confidence returns. The anticipated increase in freight demand will provide much-needed relief to trucking companies and related businesses that have struggled during the downturn.

Furthermore, expected improvements in economic indicators such as employment rates and consumer confidence are projected to bolster freight activity. As consumer spending and sentiment improves, spending on goods typically increases, driving up the need for transportation services. This potential resurgence in demand could help stabilize freight rates and improve profitability for trucking companies and brokers alike.

Strategic Implications for all Shippers

For businesses operating within this fluctuating market, understanding these dynamics is crucial. Retailers should continue to capitalize on the current trucking overcapacity to optimize their supply chains and reduce costs. By securing favorable freight rates and ensuring reliable transportation services, retailers can enhance their competitive positioning and pass cost savings onto consumers.

Trucking companies, on the other hand, must navigate this period of low demand by focusing on efficiency, cost management, and strategic planning. Companies can consider diversifying their service offerings, investing in technology to improve operational efficiency, and exploring new markets or customer segments. Strategic partnerships and alliances can also provide opportunities to share resources and mitigate risks.

For freight brokers, adapting to the changing market conditions is essential. This might involve leveraging advanced analytics to better match loads with available capacity, optimizing pricing strategies to stay competitive, and investing in customer relationship management to maintain and grow their client base. By staying agile and responsive to market trends, brokers can better manage the volatility and position themselves for future growth.

How Retailers and Shipper Should Approach the Market

During the Covid era, package and truckload volumes increased substantially due to consumer demand. During this time, most all shippers saw sizable increases in freight costs as carriers struggled with the demand. These rate increases were substantial double digit increases that impacted overall profitability.

Here’s what is important for shippers to consider, and how to approach renegotiating freight contracts.

  • The economy and consumer spending are showing signs of fatigue. This is resulting in lower volumes for all carriers.
  • The current overcapacity and driver shortages, along with lower volumes, are opening the door for renegotiating freight contracts with carriers.
  • Carriers must grow volumes, and this means aggressively targeting the competition.
  • Companies have been able to renegotiate carrier contracts, driving down costs by as much as 18-25% - mitigating the double digit increases during Covid.
  • Package characteristics, volumes, shipping methods, etc. all still matter. Even your geographic location can have an impact on your negotiations.
  • Always consult with a freight expert before jumping in. An expert can help you develop realistic expectations on potential savings and develop a sound approach.
  • You have to understand your current agreements. For many companies, there will be contractual language around early termination, etc. An expert can help you navigate these costs during negotiations with rival carriers.

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