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Will high trucking costs eventually run over food companies' ability to grow?

Monday, August 13, 2018   (0 Comments)
Posted by: Jessi Devenyns,

Dive Brief:
  • A trucking shortage in the United States has caused freight prices to soar upwards of 20% and extending an the year-over-year gains to an unprecedented 17 straight months, according to The Wall Street Journal.
  • With shipping costs rising and freight volumes outpacing the supply of available trucks, food distributors are scrambling to find a solution to slow the financial burden on their overall earnings. Many manufacturers — including Dean Foods, Tyson, Del Monte, Kellogg and US Foods — said higher transportation and logistics costs weighed on earnings in the most recent quarter.
  • "If you have a supply chain that was built heavily on taking advantage of transactional interactions with your carrier base, you’re paying a pretty penny right now,” Derek Leathers, chief executive of Omaha, Nebraska-based Werner Enterprises Inc., one of the largest U.S. trucking companies, said at an investor conference in late June, according to The Journal.
Dive Insight:
Although freight can often take a backseat when it comes to thinking about food trends, it is a powerful force that can — and will — dictate the prices of products in the future.

After paring down their fleets in the last several years, when the freight market began to rebound in mid-2017, both shipping companies and manufacturers found there were not enough heavy-duty trucks to go around.

Although The Wall Street Journal reports that carriers now are ordering new equipment at record levels, they are also having trouble hiring additional drivers to drive the new freighters.

And the financial costs are staggering.

"Rising freight costs have been a challenge for all of our businesses. We now expect freight to be about $270 million more this year compared to last year,” Tyson CEO Thomas Hayes noted in an earnings call. 

Similarly, Dean Foods cut its full-year earnings outlook in part because it simply can’t move its goods for anything close to what is expected to pay this year.

Rising transportation have been especially complicated because they coincide with a volatile period in the food industry, when changing consumer tastes and increasing commodity costs are already squeezing companies. At the same time, the food industry is competing with everyone else for the use of trucks.

Trucking is at the heart of the food industry because without being able to transport products to the customer, the whole supply chain would become moot. Unfortunately for manufacturers, because of the essential nature of this task, they are obliged to pay the accompanying fees — especially when it comes to refrigerated trucks and those that transport organic produce.

Both these specialty categories have made shipping even more nuanced. Organic products must be carefully separated from non-organics if the truck is shared, then properly refrigerated and monitored until they are delivered to the warehouse. Organics tie into cold chain transport because organic produce has a shorter shelf life. 

E-commerce is a bigger driver of the complexity. It's shifted the entire industry by demanding that manufacturers get products to customers on short schedules and in the same condition as if everything was selected at the store by the customer herself. Often, this had meant trucks were shipped out without being filled to capacity.

With today’s prices, however, that is no longer an option. Instead of parceling out inventory into regional warehouses, the trend now is to fragment inventory around the world in order to be closer to the customer, shortening transit time.

Although shipping costs are cyclical, there are indications that these higher fees are here to stay.

"The increases aren’t coming as fast as they were a year ago, but it took us a solid nine months to realize...that these increases are indeed being permanently secured with metal bolts to our costs,” J&J Snack Foods Corp. Chief Executive Gerald Shreiber said in an earnings call last month.

To cope, some manufacturers are passing the costs along to their customers, some are taking the hit on their quarterly earnings, and others are taking the matter in-house. Dean Foods CEO Ralph Scozzafava said in an earnings call that the company's goal is to centralize shipping and make sure that trucks "do it with the fullest trucks traveling the shortest distance as possible.”

This idea is not just applicable to shipping either. The port of Virginia is part of a pilot program for in-transit cold treatment. This means South American fruits can be imported directly to Virginia, instead of routing ships to Northeast ports before they offload the fruit to ship it to Southern states.

While companies are being creative in ways to flatten the spiking costs related to transportation, their efforts may not be enough. The strain on the transport sector may ultimately hold back companies' ability to grow.

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