One of the largest owners of shopping mall real estate in the United States, Simon Property Group, has been talking to Amazon about transforming its anchor department stores into Amazon distribution hubs, according to the Wall Street Journal. This sounds like good news for Amazon, property owners and local tax and employment opportunities. But is there a downside?

As retailers struggle with re-opening strategies it’s clear the new normal will be something we have never experienced.  Consumers in many areas of the world have tightened their wallets and eliminated discretionary spending because of lost jobs, lower wages and uncertainty about how long the COVID-19 pandemic will last.

If necessity is the mother of invention a worldwide pandemic is the mother of cutting through government red tape.  Vaccine approvals are basically getting rubber stamped and that’s a good thing.  Automated vehicles are ramping up in anticipation of increased demand in this new environment as well.  UPS will use drones to fill prescriptions for residents of The Villages in Florida, one of the country’s biggest retirement communities, amid a lock down to halt the corona virus.  The time-sensitive 

It’s no secret, in any business relationship, that the easier the relationship between customer and provider the more smoothly things run. In a shipper/provider relationship this is particularly important. The intricacies of logistics can be very challenging given the nature of all the moving parts; desirability of lanes, pickup and delivery restrictions, equipment availability and all the issues that can happen on the way to a 1000 mile delivery.  We have discussed the importance of becoming a preferred shipper in previous blogs. The impact of carrier relations on your supply chain is more important now than ever. Several factors are putting pressure on carrier/shipper relationships and performance. Fluctuating fuel costs, capacity issues, driver shortages, and carriers that abruptly go out of business can all take a toll on a shipper’s ability to get the right products to the right customer within the right time frame. Take the time to make some manageable changes to your supply chain protocols to improve operations, moral and overall supply chain efficiency.

Some Easy Fixes

There needs to be a culture shift in vendor relations, particularly when it comes to carriers. Historically, truckers have been treated as second-class citizens when it comes to, for example, driver accommodation and respect for one’s time. A reasonably comfortable waiting area for the driver is an inexpensive and easily implemented enhancement to the driver experience. Minimizing loading time is also an easy, low cost, improvement to loading and unloading dock protocol. 

Celadon Transport, a division of the Celadon group filed for bankruptcy protection this week just days after two former officials were charged in an accounting fraud scheme. The Chapter 11 bankruptcy filing by the Indianapolis based Celadon Group left more than 3,000 drivers jobless and, in many cases, stranded drivers across the U.S. after their company gas cards were cancelled.  Another 500 administrative jobs are expected to be eliminated through the bankruptcy.

Celadon's former president and chief operating officer, William Meek, 39, and its former chief financial officer, Bobby Lee Peavler, 40, were indicted on conspiracy and other charges. They knew the value of a substantial portion of Celadon's trucks had declined and that many trucks had serious mechanical issues that made them unattractive to drivers, according to the indictment.

Earlier this year, Celadon agreed to pay $42.2 million to settle securities fraud allegations stemming from falsely reporting profits and assets. The company's stock was trading at less than 3 cents a share on Monday, down from a 52-week high of $2.83 last April 11. Celadon said it was the largest provider of international truckload services in North America, and its bankruptcy filing means 3,300 trucks and 10,000 trailers will stop rolling.

Among the big companies that failed in 2019 are New England Motor Freight, which employed more than 1,400 drivers. HVH Transportation, Falcon Transport and LME have all shuttered operations this year, too. Part of the problem, according to Donald Broughton, principal and managing partner of data firm Broughton Capital, is that spot pricing has dropped, which is hurtful to smaller companies that operate in the spot market instead of the contract market. Spot prices refer to shipping prices as they currently exist.

Trade tariffs, as well as slowdowns in a variety of markets, including housing and auto, contributed to the drop, Broughton had told FOX Business. He predicted companies would continue to fail into 2020 because of the weak pricing environment.

Additional pain for the industry could be coming next year in the form of labor laws designed to protect contracted workers from being misclassified. In California, for example, starting in January a law will go into effect that will make it harder for companies to classify workers as contractors, which the California Trucking Association has said could put 70,000 owner-operators in the state out of work. The group has sued to prevent the law from taking effect.

New Jersey is considering similar presumption-of-employment status legislation, which has caused alarm among the state’s trucking industry, as well.

What Shipper Can Do To Protect Shipments

The thousands of trucks stranded Celadon trucks likely have customers shipments onboard which will not be delivered anytime soon.  Getting that freight delivered will likely cost significantly more than the original rate.  The most damaging aspect of getting caught in a bankruptcy like this one is that thousands of customers supply chain has been significantly disrupted.

The best way to protect yourself against insolvent and even under achieving carriers is to vette them annually.  Review financial statements, credit ratings, customer experiences on social media and verifiable on time percentages.  Another option is to employ a 3^rd party Logistics Firm to help with routing decisions.  At Land Link Traffic Systems carrier vetting is a standard procedure.  We take every precaution to route our customers freight with a financially healthy carrier with above average performance.

The boom in online stores is increasing the demand for parcel delivery services, particularly in the big cities. New York, Chicago and Los Angeles are experiencing serious traffic issues due to the amount of parcel delivery vans clogging the city streets. Add to this the number of ride share drivers in any metropolitan area daily and it is easy to see how things are getting congested.

Consumers today are spending less time in local stores and more time online, buying not only retail items but also groceries from Peapod, office supplies from Postmates and whatever they need from Amazon. According to the National Capital Region Transportation Planning Board, it’s estimated that, on average, every person in the U.S. generates demand for roughly 60 tons of freight each year. In 2010, the United States Post Service overtook both FedEx and UPS as the largest parcel-delivery service in the country and delivered 3.1 billion packages nationwide. Last year, the USPS delivered more than 5.1 billion packages. The growth in e-commerce is fueling a rise in the number of delivery vehicles box trucks, smaller vans and cars alike on city streets.

While truck traffic currently represents about 7% of urban traffic in American cities, it bears a disproportionate congestion cost of $28 billion, or about 17 percent of the total U.S. congestion costs in wasted hours and gas. Cities, struggling to keep up with the deluge of delivery drivers, are seeing their curb space and streets overtaken by delivery vehicles, to say nothing of the bonus pollution and road wear produced thanks to a deluge of Amazon Prime orders.

The problem, really, is that we now live in a world where the brick-and-mortar stores are only one part of the retail equation and, as many a “retail apocalypse” story is warning, they are a shrinking part. Demand is being driven by people in their individual homes and apartments ordering smaller amounts of goods with higher frequency: groceries one day, several items from Amazon the next. As more goods are ordered, more delivery trucks are dispatched on narrow city streets. Often, the box trucks will double-park in a two-lane street if there’s no loading zone to pull into, snarling traffic behind them.

Many American cities are also playing catch-up as they try to understand these new urban delivery challenges and systems. That’s due in part to the failures of urban planning and the nature of the trucking business. While matters of public policy like public transit, bike lanes and walkability fall within the purview of planning boards and municipal departments of transportation, freight has always been a purely private-sector enterprise. Cities don’t have reliable data on the number of delivery trucks coursing through their streets; let alone planning for them.

Looking For Solutions

Cities can’t just ticket their way out of the delivery-truck problem. For big commercial delivery companies, parking fines are just part of the cost of doing business. UPS paid New York City $18.7 million in parking fines in 2006. In 2011 in Washington, D.C., UPS alone received just shy of 32,000 tickets.

If enhanced enforcement isn’t the answer, diverting delivery traffic might be. Seattle is taking an inventory of all the remaining alley space in the city. Instead of letting developers extend housing lots into the alleys, they might be used to accommodate some of the incoming delivery traffic.

Delivery companies are also experimenting with ways to reduce their impact. Late last year, UPS introduced its first “eBike” deliveries in Portland, Oregon. The goal is twofold: Reduce carbon emissions while putting a delivery vehicle on the road small enough to take advantage of curb space. UPS is also integrating across its U.S. routes its new big-data tool, On-Road Integrated Optimization Navigation (ORION). As a UPS driver travels their route, ORION works in the background considering up to 200,000 possible routes before picking the most optimal route for a driver to take to reduce the overall time spent driving around from delivery to delivery. The next generation is going to be a real-time tool taking traffic into account.

UPS currently uses drones to help drivers in rural delivery locations. It’s unclear how practical drone delivery can be in a metropolitan area considering the risk of personal injury, theft and inaccurate consignee deliveries. The solution to the congestion problem will likely come from many angles over the coming years. We simply were not prepared for the online purchasing boom and have never caught up.

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The most recent edition of the Cass Freight Index Report issued this week by Cass Information Systems highlighted another month of freight transportation shipment and expenditure declines in September. The Cass freight index is widely considered the most accurate barometer of industry activity and trends.

September shipments, at 1.199, were up 0.8% compared to August and down 3.4% annually, marking the tenth consecutive month of annual shipment declines.

Shipments initially turned negative in December 2018 for the first time in 24 months, when it fell 0.8%. January and February were down 0.3% and 2.1%, respectively. As previously reported, the December and January shipment readings were up against respective all-time highs reached in December 2017 and January 2018, coupled with stabilizing patterns in nearly all underlying freight flows.

The culprit is generally considered to be weakness in spot market pricing for many transportation services, especially trucking, which is consistent with the negative Cass Shipments Index and, along with airfreight and railroad volume data, strengthens concerns about the economy and the risk of ongoing trade policy disputes. This weakness and decreases in the prime lending rate are supporting arguments for a looming recession.

The CASS report highlighted concerns regarding inflation and concerns about contract pricing and cancellation of transportation equipment orders, with four key factors playing a role, including:

1. Almost all modes of transportation used their pricing power to create    capacity, which first dampened and has now killed pricing power.

2. Spot pricing (not including fuel surcharge) in all three modes of truckload freight (dry van, reefer, and flatbed) has been falling for 15 months. Spot pricing, using dry van rates as a proxy, fell dramatically from its peak in June 2018 (more than $0.50 a mile) to at one point in May falling to more than 30.0%below contract pricing (a level Cass declared unsustainable). The highly discounted pricing available in the spot market has attracted an increased amount of demand, which has deteriorated pricing in the contract market (which is down $0.20 a mile or -9.7% in the last 14 months), and has begun to close the gap between contract and spot.

3. The cost of fuel (and resulting fuel surcharge) is included in the Cass Expenditures Index. Since the cost of diesel has been negative over the last 4 months on a YoY basis (down -5.4% June, down -5.8% in July, down -6.6% in August, down -7.9% in September), it is increasing the negative amount of pricing reported.

4. Whether driven by capacity addition/creation or lower fuel surcharges (or a combination of both, which is our best guess) the Expenditures Index has continued to decline: the September 2019 Index is down -4.5% from its peak in September 2018.

What To Expect

In the first half of 2019, around 640 trucking companies went bankrupt, according to industry data from Broughton Capital LLC. That's more than triple the amount of bankruptcies from the same period last year — 175.

The slow down in trucking has especially affected small carriers, who operate largely on the spot market. Trucking loads can either be picked up on demand through the spot market, or through a pre-arranged contract. The contract market comprises the vast majority of the trucking market, according to the American Trucking Associations.  Trucking has been in a recession since the first half of 2019, according to ACT Research. That fact doesn't surprise truck drivers, dozens of whom have seen their earnings slashed this year.

Spot market rates have crashed in 2019, while contract market rates haven't seen the same dip. According to the most recent Chainanalytics-Cowen Freight Indices report, dry van spot rates are down 16.1% from the same period in 2018. Contract rates in dry van are down 8.1%.

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