Good customers advantaged when demand outstrips supply
Inflation, and with it, living costs and wages, are on their way up. This is not good news and many who weren’t around in the 1970s and 1980s, when inflation rates peaked above 12 percent, have no experience in dealing with this economic hit.
We’re a long way from those bad old days, but in the second quarter of this year the annual inflation rate hit 3.3 percent, from 1.5 percent in the first quarter – the highest annual rate since 2011. Economists predict this is just the beginning as the real costs of heavy Government spending will be seen in rising inflation.
This comes during the time of Covid, which has also hit the supply chain significantly with high demand, and low supply. With our indefinitely closed border – even to Australia; our small size as an international market; and our distant location from any other market, New Zealand will not fare well in the next couple of years when it comes to getting goods in and out of the country. Exports were already down 25 percent in the first quarter of this year.
As we maintain Fortress New Zealand while the rest of the world opens up, we will be very much on our own. There are not enough people contributing to the economy here for that to be a good thing.
The silver lining of knowing what is coming, in a time of much uncertainty otherwise, is we can prepare in advance, as best we can. Now is the time to set up business practices and structures to be best positioned to ride the wave.
In the road freight transport industry, the balance of power is shifting. Where many operators have been at the beck and call of customers who continue to drive prices and conditions down to the frankly, unreasonable and unsustainable, it’s time for smart operators to rethink those relationships.
When the supply side is constrained, long-term relationships matter. I’ll deliver to you, because you’ve been good to me for years, but not to you, who always try to screw me over with threats of taking away my work and giving it to my competitor down the road. The reality is, those who continually undercut others won’t survive the rapidly increasing cost of doing business.
We have seen the worst of the uneven balance of power in the whole of the supply chain in the release this week of the Commerce Commission’s draft report into competition in the retail grocery sector. It has found that the duopoly of Woolworths NZ and Foodstuffs, without real competition, are able to exercise their buying power to push excess risks, costs and uncertainty onto suppliers. That can ruin small businesses. It’s their way or the highway and transport operators have been caught up in that.
The report is very detailed and the Road Transport Forum will be commenting on it when we have digested it, but the idea of an industry Code of Conduct allowing suppliers to bargain collectively has appeal.
As the influences on the economy shift, road freight transport operators are going to have to get real about their business costs and increase their prices.
It has been reported that 83% of retailers expect to increase their prices. If you don’t pass on the costs you are incurring, they will go straight to your bottom line and eventually, you will go out of business.
In my travels this week I have been hearing operators are already feeling the pinch of the limited supply of people and equipment. With people not allowed into New Zealand and equipment impacted by the supply chain issues, established carriers can’t fulfil some of their long-term contracts. I’m keen to hear from others of you across New Zealand whether this is a common issue for your business.
In that scenario, if you have to ditch customers, you are going to hold on to the customers who enable you to run a business that can pay you and the staff. Remember, wages are going to go up as the inflation and cost of living goes up.
This also presents the opportunity for operators to use their own networks and technology that can improve efficiency. This might be worth exploring as an industry.
There is always opportunity if you know where to look for it, as many who have been in the road freight transport business a long time will be aware. In the long term, the rocky road ahead may in fact, provide a better path to a sustainable business for many transport operators.
Buckle up and take control of the ride ahead.
– Nick Leggett, CEO, Road Transport Forum