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John's 2016 Logistics Crystal Ball
The new year brings a lot of prognosticating, so let’s look at where the logistics world is now and where it’s going in 2016. It is a confusing forecast because there are so many unknowns.
The consumer is feeling good as home prices continue to escalate and the employment situation appears to have solidified. I expect to see wage growth in 2016 as skilled labor is in short supply and employers hike wages to retain talent.
The preliminary holiday sales readings are good, with the MasterCard SpendingPulse report saying retail sales were up 7.9 percent between Black Friday and Christmas Eve compared to 2015 sales. Continuing its growth trend, e-commerce grew 20 percent in the period.
Amazon continues to roll as it added over 3 million new Prime subscribers.
We need to wait and see what the inventory level situation is at the retail and wholesale levels as that will affect the trucking industry in 2016. If these levels dropped, we should expect replenishment activity, which will boost transportation companies.
December activity for U.S. manufacturers was disappointing as the Institute for Supply Management said its index of factory activity fell from 48.6 in November to 48.2. Any reading below 50 signifies contraction. The slow world economy, low oil prices and a strong dollar share the blame.
Continued weakness in Chinese manufacturing is being watched closely as it signals a slower economy in China and elsewhere as Chinese exports languish. Europe is slow as is Canada; Brazil and Russia are in a recession, and the beat goes on.
Despite this, the U.S. economy will continue its slow recovery with a GDP of 2.5 to 3 percent. Capital is still cheap for manufacturers, gas is cheap for consumers, hiring is robust and consumers are buying, all adding up to a good U.S. economy to start the year.
That’s all well and good, John, but what does this mean for logistics in 2016?
Thanks for asking. It’s an election year so the crystal ball is cloudy, but here are some clues.
UPS and FedEx have demonstrated that even though they gear up for the holiday peak shipping period, they still struggle. Costs are rising and there is no magic wand that helps e-retail customers put a package under their tree when they order on December 23.
Expect parcel carriers to lose business to Amazon as it expands its own internal delivery capabilities. Amazon has already developed its own package sortation centers across the country. With shipping now costing Amazon 11.7 percent of its revenue, up from 10.4 percent in 2014, it will insource as much air cargo and trucking as it can. It has already introduced its own Uber-type delivery program in targeted cities.
Speaking of Uber, it too has developed a package delivery capability. The last mile delivery service will evolve in 2016 across all companies.
Bottom line, with the continued growth of e-commerce, developing the infrastructure to handle tens of millions of parcels is a challenge and there is no silver bullet that will allow capacity to catch up to volume, especially when a winter storm hits a region the week before Christmas.
Sufficient volume will keep flowing and provide carrier networks with adequate work but there is some slack in the system. In 2014 LTL carriers enjoyed overflow volume from truckload carriers as capacity was extremely tight everywhere. That volume dried up in 2015.
LTL carriers have retained pricing strength and are enjoying low fuel costs that tilt profitability in their favor. Look for carriers to watch freight classification and go after shippers misrepresenting the true freight class while being selective in their discounting. Accessorial charges are always a profit center for LTL haulers so if you are negotiating contracts, pay careful attention to these details.
Look for these carriers to seek out acquisitions to supplement their toolbox of services. Whether it is freight brokerage or international capabilities, M&A will continue to be strong in 2016.
This industry segment has been softer since the 2014 crush in capacity. Driver recruitment and retention will mean higher wages in 2016 as the ATA predicts the industry will be short as many as 70,000 drivers by the end of this year.
The list of governmental regulations will force continued expenditures for compliance as we are now 23 months away from electronic onboard recorders becoming required equipment. Higher fuel efficiency engines with cleaner exhaust likewise will cost more.
The good news is that, so far, the weather is cooperating as the El Nino effect is making for a warmer but wetter winter. Unlike the severe winters of the last two years, trucks are moving well.
Pricing strength is muted by a softer freight market, for now. If inventories remain high on the wholesale and retail levels, this market will remain soft and rate increases will be muted. If inventories get under control and consumer spending increases, we could see a great second half of the year for truckload carriers.
If you are a shipper, be sure to maintain your carrier relationships because it could get hairy in the fourth quarter of 2016 and capacity could be tight.
Without the coal, oil and gas industry traffic that drove good volume for the carload segment in the first half of 2015, railroads are struggling with lower volume. With the glut of oil in the U.S., the question is: Now that oil can actually be exported, will we see increased production and shipping? Time will tell.
Intermodal will continue to be a bright spot for railroads, although slower imports in the short term will be a speed bump to regaining the kind of volume seen in 2014. Once again, import container traffic will be driven by consumer spending and related inventories.
The soft truckload market will also keep intermodal from taking off in the short term as competitive rates from truckload carriers will counterbalance aggressive intermodal pricing.
Rails will continue to focus on their metrics, working on improving train velocity, reducing yard dwell time, and better asset utilization. And they will have to do it while dealing with lower shipment volume.
Space constraints will drive up the cost of the cost of industrial real estate in 2016. New speculative construction is occurring in most markets and lease rates are climbing in this lessor’s market.
Skilled warehouse workers are also scarce and wages will creep up to reflect the tighter market. The Affordable Care Act’s employer mandate kicks in this year, requiring that all businesses with 50 or more FTE employees provide health insurance to at least 95 percent of their full-time employees and dependents up to age 26, or pay a fee.
For many companies, this will result in higher operating costs that will be reflected in handling rate increases.
Mergers and Acquisitions
2015 was a crazy year for M&A and I don’t expect 2016 to be any different. XPO went on a buying spree with several acquisitions. Most notable to me was XPO entering Europe by buying French freight group Norbert Dentressangle SA. Conway and Menlo Logistics were acquired in the fourth quarter to create a $15 billion company. Amazing.
UPS paid about $1.8 billion for Coyote Logistics and Danish 3PL DSV bought UTi Worldwide for $1.35 billion. Geodis, a $6.1 billion French 3PL, bought OHL for about $800 million. This is but a small portion of a long list of deals.
While I think XPO will take some time to digest these big acquisitions, I don’t think Brad Jacobs is done. Expect the unexpected in the M&A game in 2016.
Whether it’s autonomous trucks, drone delivery or robotics, I expect to see strides made in all aspects of technology. Business intelligence will continue to improve and turn big data into useable information for users, allowing for quicker decisions and operational improvements.
The higher cost of wages and benefits will begin to make robotics and automation more cost-justified as technology becomes less expensive.
Here at Wagner Logistics
We are entering our 70th year of business so expect to hear more about that in the coming months as we prepare to celebrate. Wagner has adapted over the years to provide the services our customers want and remain relevant in the marketplace. We survived several recessions, and continue to live up to the service promise made to every customer who signs with us.
2015 was a good year for Wagner and I expect 2016 to be even better. If you have a distribution center project or transportation requirement, please reach out for a conversation. As we say every day, Bring It!
Have a great day,
John Wagner Jr.