I’m honored to be able to speak with many logistics business owners and leaders. And the most common things that I hear today are related to cargo shortages and decreased prices. The situation here is not extraordinary, as we had a growth period, and now we will have a downturn. However, the depth of it is still not apparent, as it will depend on the monetary policies and other things that businesses can’t control and impact. But of course, there were things that logistics business leaders were able to impact, which could help them overcome today’s issues. And those companies who did the needed homework will live through this downturn period more efficiently and set up the stage for future growth.
In this article, we will talk about homework that those lucky companies did and provide advice on what to do next.
Homework that needed to be done to better prepare for the downturn in the market
First, we will identify the most critical things struggling companies haven’t done in the booming market already.
1. Those companies haven’t paid attention to new business development
The sales cycle in the logistics sector is quite long. Depending on the size of the client, it can take a year or more (we are talking about long-term contracts, which everyone wants now). In other words, if sales representatives ignored new business developement in 2022 or haven’t done this without consistency and only began selling more actively in 2023, new customers, particularly with exceptions, will appear only in 2024.
So now, when existing customers’ volumes and freight prices are decreasing, and if there is no replenishment, the income falls faster than those companies that spent enough time and effort to find new customers already in the year 2022.
2. Those companies have over-speculated the spot market
The SPOT market has been fantastic for the last two years, talking from the perspective of freight prices. And everyone in the market wanted to benefit as much as possible. But, of course, there were some exceptions. For example, this situation was tragic for some expedition companies with fixed contracts before the spot peak. But generally speaking, many logistics businesses (sea, air, land carriers, and intermediaries, you name it) wanted to carve out more and more of this market, abandoning contractual customers.
The theory is simple: when we have a carrier market, one can earn more on SPOT, while long-term direct contracts are more beneficial during regular and recessionary times. Therefore, companies must correctly choose the balance between SPOT and the contract market to ensure risk management. And those companies who had chosen the right balance are now better of than those who haven’t.
3. Those companies haven’t invested in diversification and services width
We believe that a narrow range of services and a small circle of customers is a risky venture not only during a recession but generally within the changing logistics landscape (a.k.a. logistics market concentration and other logistics market trends).
Talking about our topic, those companies that have diversified their customer base, delivery locations, and services are better hedged during a market downturn because there will always be customer segments, services, or lanes that will grow even in a falling market.
For example, companies can look for opportunities in Turkey if Germany’s manufacturing is decreasing. Or if volumes within the furniture segment are decreasing, the solar panel market is oppositely growing. Or if FTL loads market is falling, LTL loads may increase because shippers are now paying attention to their cash flow. Stories about declining and growing services can be found in each logistics niche (air, sea, land, 3PL, etc.) and market (USA, Europe, Asia, etc.).