The last four years have been a wild roller coaster ride in the trucking industry. The market shifts have been dramatic, from pre-covid struggles to a covid driven boom to a post-covid bust. And now, it may be time to prepare for yet another bump in the road.
It’s all about the rise and fall of the spot market
Just four short years ago, the trucking industry struggled with low freight volumes when the unprecedented COVID pandemic turned our world upside down. Things quickly went from bad to worse. The industry suffered even more significant losses, with consumer demand collapsing in early 2020 as the first wave of the pandemic hit. Then, as much of the nation’s workforce shifted to working from home, consumers changed their behavior. They embraced online shopping, which contributed to an increase in e-commerce sales by 43% over the previous year. In response, freight demand began to surge as unexpected consumer spending caught retailers, wholesalers, warehouses, and manufacturers short on inventory.
Suddenly, trucking companies scrambled to keep up with demand as they collected huge profits on spot freight. Spot market rates rose rapidly to unprecedented highs, breaking historical records for the next eighteen months. Hoping to maximize their return on effort, many established trucking companies abandoned contracts to capitalize on this free-for-all market. At the same time, new trucking companies flooded the scene in record numbers.
One of the less desirable outcomes of this boom was that competition skyrocketed to an all-time high. For example, since July 2020, nearly 200,000 new haulers have set up shop. Almost 70% of these new carriers have been one truck companies. For comparison’s sake, the previous record high for 24 months saw just 86,000 new carriers enter the market.
And then, at the start of 2022, everything changed again. Increasing inflation, rising interest rates, and an economy on the edge of a recession brought spot market rates crashing down by over 30% just when fuel costs began to soar. Fast forward to this fall, and we find ourselves facing freight volumes that are now below seasonal expectations and loads that are shifting back to the contract market as shippers seek to regain control over freight rates. As a result, trucking companies that recently enjoyed excessive earnings and profits are now struggling to survive.
Many fear that the next phase of impacts on the trucking industry will be coined the “Great Purge” – a period when more and more operators will abandon the industry if freight volumes drop back to pre-pandemic levels.
It has yet to be determined what 2023 will bring to the market. However, this pattern of fluctuations signals that it may be time to prepare and take action to ensure your future, regardless of whatever lies ahead. With this in mind, here are four strategies to strengthen your company’s readiness for a possible “great purge” in the trucking industry.
Revisit your load acquisition strategy
The best way to weather a decline in spot rates and survive a pending great purge in trucking is to not rely on spot rates – instead, focus on obtaining steady volumes of freight.
Relying on load boards to find freight can be an effective strategy to start your trucking business, but it should be a short-term strategy. Instead, working to find consistent volumes of cargo to haul will build greater resilience than depending on load boards for most of your business’s revenue. Here are actions to consider as you revisit your load acquisition strategy:
Direct from shippers. Compared to the volatility of spot rates, contract rates from shippers remained steady throughout the 2020-2022 spot market cycle. Trucking companies with freight contracts may have missed the wildly lucrative spot market boom but have retained continued, profitable business as the spot market descended back to earth.
Acquiring loads directly from shippers is ideal for building a solid and profitable trucking business. Building a network of shippers with regular freight takes time and effort. Shippers usually grant consistent lanes to contracted carriers. These contracts are awarded through a bidding process that is often only available to larger carriers. Start developing a plan to expand your fleet and contact shippers in your region to promote your trucking company.
Action item: Work to acquire profitable contracts instead of always relying on the spot market. And when you do snag a contract, be sure to treat your contract customers like gold.
Work to expand your broker network. Shippers that might not allow owner-operators or small carriers to bid on contracted lanes will enable brokers to place bids because of their network of truckers. Independent truckers should view brokers as an outsourced sales team. While truckers should expect brokers to pay below market rates, the value of having consistent loads can make the broker worth their weight in gold. Ensure that the broker’s rate covers your cost-per-mile and leaves room for profit.
Action item: Contact brokers directly or use the freight you haul from load boards to establish the contact. Offer safe reliable service and LOYALTY. Build relationships with several trusted brokers – the goal is to have a network of brokers that provide a steady, reliable stream of freight.
Know your costs
To survive, you must be profitable. The first step to earning a profit is to know your trucking company’s unique cost-per-mile. After understanding all your costs, you can correctly bid on a load to ensure a profitable haul.
Begin by recording all your expenses. Add all fixed and variable costs for a specific period (a week or a month), then divide the sum by the number of miles your truck(s) drove in that same period. The result will be a dollar figure representing the cost to operate your business for each loaded and unloaded mile your truck(s) drive. Freight rates above this figure will contribute to your bottom-line growth every mile you haul freight. Accepting freight rates below this figure will lose your company money.
Action item: Use a cost-per-mile calculator to record all your expenses and determine your results. Track results regularly and adjust your company’s freight rates as needed to stay profitable.
Don’t run out of cash
On average, shippers and brokers take 42 days to pay invoices. Your trucks need money daily to pay for fuel, insurance, and other over-the-road expenses – don’t run out of cash!
Lacking the funds to keep trucks operating without interruption is a common reason why many trucking companies fail. Hard-running and profitable trucking companies can still face extreme difficulties if they lack sufficient cash reserves to see them through gaps in their cash flow. Develop a cash flow management strategy to ensure continuous access to working capital.
Stability in a turbulent market is a competitive advantage. Trucking companies with a solid business model, plans to acquire a steady stream of quality loads, and who carefully track their cost-per-mile will be the best prepared to weather economic turmoil.
Focus on providing safe, reliable service and be loyal to your customers. Trucking companies that abandoned their freight contracts to chase lucrative spot rates are now scrambling to regain the advantages of steady freight. Use this opportunity to approach new customers and offer a better service that they can count on. Use freight factoring to create reliable cash flow and utilize your factor’s specialized services and expertise to save costs, mitigate bad debt, and help grow your business.
And overall, act like a boy scout and “be prepared.” Successfully navigating what is sure to be a challenging year ahead will position your business for success as other trucking companies struggle to survive the Great Purge.
eCapital first set roots in the trucking industry over 25 years ago. Our industry expertise has evolved over two and half decades and numerous economic cycles. A deep understanding of the market has been shaped by navigating the same turbulent environment and economic volatility that our transportation clients had to endure. eCapital’s growth as a leader in transportation financing results from the industry knowledge, specialized services, and innovations we have developed and shared with our customers. Our industry expertise and resources are available to trucking companies in all stages of development to help strengthen and grow their business through boom years and adversity.
For more information on how we can help your trucking company survive and grow, visit eCapital.com