With inflation continuing to be the story defining 2022 from a business perspective, companies across almost every industry are trying to find ways to control costs and maintain profitability. For those in the CPG sector, the cost of freight is a critical component with no easy solution—and an area that touches everything from the current labor shortage to pandemic shutdowns in ports, as well as the cost of fuel.
With that in mind, earlier this year we asked a group of CPG business leaders how they felt the cost on intra-US freight would stack up against 2021. As the year comes to a close, it is clear that cost increases have not been as high as predicted, with a recent study from C.H. Robinson noting that a market correction in the second half of the first quarter has been sustained for most of the remainder of the year. However, one of the reasons for those lower-than-anticipated increases has been a shift in the way that many companies have met their freight-related needs—a shift that was driven by those initial projections in the first place. As such, the cost-control strategies outlined by those leaders in response to rising prices are a good place to begin to understand how individual decisions can impact macro trends, as well as a playbook for those seeking to make similar inroads in 2023.
In terms of problems being faced, most executives were on the same page—with driver shortages rather than gas prices registering as the key concern for many. “The absence of drivers is significant,” said one leader.
Amazon is really picking up and they are sucking up a lot of humans that used to have to do long haul and can now do short haul.”
Of course, fuel costs were also a frequently-cited issue—albeit one that is out of the control of most executives; the only option available to leaders seeking to retain profitability seems to be to pass through the costs to consumers.
Additionally, warehousing costs are another key concern for the post-pandemic economy. With ecommerce booming and global supply chains still suffering from COVID shutdowns in international markets, warehouse space is at a premium both at ports and in major cities across the US. As a result, one recent analysis noted that “in the busiest markets in the US, industrial vacancies are hovering around 1%.”
While each of these issues represents a challenge for CPG firms, one executive pointed out that, “at the same time it’s an opportunity.” Interestingly, for many the key issue was not cost, but rather “business continuity due to lack of drivers”—a sentiment that underlines the need for creative thinking.
“The hero is the one that is building long term alliances through thick and thin,” said one leader—a sentiment that applies across a variety of different freight-related issues. For example, while some companies have shifted to dedicated third party carriers (with tightly focused contracts), others have opted to build out their own fleets and hire drivers directly. Still others have attempted to offset costs by sharing loads with competitors, and by restructuring logistics to reduce miles for long-distance freight. “We are partnering more with customers,” said one executive. “And looking at how to build orders that are optimized to a customer’s facilities locations.”
“Getting creative and scrappy is important,” said one leader—a sentiment echoed by a colleague who noted that their business was “looking at driverless trucks” as well as “alternate fuels with expected 50% reduction in costs.” A competitor, meanwhile, was investigating “investing in a school to recruit and train drivers.”
Conclusions
CPG leaders look set to face many of the same problems discussed above for the foreseeable future. Both warehouse space and human capital are issues that only a drop in demand for goods will impact in the short term. Add in the unpredictable nature of fuel prices and you have a recipe for continued innovation on everything from long haul planning to last mile delivery. A function that many have taken for granted in the not-too-distant past seems ripe for additional focus and reinvention in the months and years ahead.
These market insights from Carpe Diem Global Partners are gathered from the firm’s extensive client work leading Board, CEO, CXO, and CHRO executive search engagements for public and private multinational companies. For deeper, custom insights, contact Jeff DeFazio at Jdefazio@carpediempartners.com.