High freight costs are taking a bite out of profits for consumer goods companies, forcing them to weigh whether to raise prices or absorb the hit to their bottom lines.
Makers of products from toys to breakfast cereal to toothpaste to soda have complained in recent weeks that higher freight and shipping expenses are eating into their profit margins. And perhaps more worrisome, particularly for large packaged food and beverage companies: The driver shortage not only is expected to persist through at least the rest of 2018, it’s already hampering their ability to get their products into consumers’ hands in a timely manner.
“Some beer suppliers reported trucking supply tightness as having been among the factors affecting their inability to respond to unexpectedly high demand in May,” Beer Institute Chief Economist Michael Uhrich wrote in a monthly update to members on Friday. “Trucking supply tightness has been a growing concern for many industries recently, as qualified commercial drivers have been in short supply.”
The inability to move goods on schedule raises the specter of a vicious cycle. Any breakdown in the supply chain has consequences down the line, inevitably resulting in lost sales. Efforts among shippers to stave off dueling hits to their top and bottom lines have set off a race to secure trucks, placing additional strain on supply at a time when demand is high due to seasonal spikes in consumption of produce, food and beverages.
“There are 10 truckloads waiting to be moved for every driver available right now,” says Holly Pixler, senior director of transportation and logistics for MillerCoors. “So not only is this a bottom-line issue, it’s an availability issue. If I can’t secure a driver to go to a site, I’m literally not going to be able to deliver beer. We haven’t gotten to that point yet, but it’s something every shipper is concerned about right now.”
For its part, MillerCoors has been working to mitigate the effects, Pixler says. The company relies on third-party carriers to move products from its breweries to the independent wholesalers that supply retailers.
It has expanded its base of carriers, increased its use of non-truckload shipping via alternatives such as intermodal and rail, and continues to work with its breweries and wholesalers to ensure efficient loading and receiving processes.
As long as the driver shortage persists, carriers will retain significant price leverage, especially on routes that involve pickups and deliveries where drivers encounter delays or poor service, Pixler says.
The culprit of the trucking capacity shortage: A surging U.S. economy.
As the economy improves, consumer spending rises and freight volumes follow. Add to that a higher percentage of consumer purchases moving via trucks because of the continued double-digit growth of e-commerce and available transportation capacity gets even tighter.
Then there’s the red-hot rate of new home construction, which is at its highest rate since 2007. Housing construction ties up even more trucks because of its reliance on bulky goods such as lumber, drywall and other construction materials. On top of that, it keeps more drivers off long-haul routes because they can stay closer to home and pick up plenty of work on local construction. Economists expect new housing starts to rise even more this year.
Compounding the problem is a low unemployment rate, creating a tight labor market that’s caused a severe shortage of qualified commercial drivers, as well as a new federal rule requiring drivers to electronically track their hours behind the wheel.
All of these factors are conspiring against long-haul trucking. “I think we’re all happy the U.S. economy is doing so well, but it’s making it really, really tough” for food and beverage companies to get their products to consumers, Pixler says.
Indeed, companies including Hasbro, Tyson Foods, Kellogg, Sysco, Mondelez International, Coca-Cola and Monster have cited high freight costs in analyst calls recently. Over the four-month period ending in April, 148 companies in the S&P 500 have mentioned “freight,” “shipping,” or “trucking” on their earnings calls, double the number from a year ago, according to data from financial research platform Sentieo cited by CNN Money.
There’s little relief in sight. Without an influx of new drivers, the American Trucking Associations, an industry trade group, predicts the industry will be short by 63,000 drivers by the end of the year and up to 170,000 by 2026.
“We are short just under 51,000 drivers. When you’re short 51,000 on a base of 500,000, that’s a lot,” the associations’ chief economist, Bob Costello, said at a conference in February, according to Transportation Topics. “If things don’t change, and we continue up this progression, by 2026, we will be at 170,000 drivers short. If we get there, not only is our industry in a world of hurt, our economy is in a world of hurt.”