Are Freight Forwarders Stuck in a Perpetual Pricing War?
Excessive Capacity, Declining Prices, Falling Demand are Sinking the Global Industry’s Profits
It happens every single day in boardrooms across the world. Shipping executives huddle in the morning and decide how much they must lower prices in order to remain competitive and attempt to turn a profit.
Unfortunately, the vast majority of these decisions are made based on a short-term view of driving volume. They also rely on a stunning amount of gut instinct rather than hard data. The cycle results in a race to the bottom of an irrational price war that is completely unsustainable.
In fact, we’ve already seen one shipper disappear. Last fall, Hanjin Shipping, South Korea’s biggest container carrier and the world’s seventh-largest, filed for receivership, leaving 66 of its ships, loaded with $14.5 billion worth of goods, stranded at sea. Furthermore, consolidation is occurring across the industry, best illustrated by the merger of Japan’s three largest carriers in November of 2016. More bankruptcies & consolidation are sure to come.
To better understand the freighting landscape – and avoid Hanjin’s fate – shipping companies must understand what determines the price of their cargo. The following pressures are the main culprits in today’s price war.
Irrational Competition. The global shipping industry has been in survival mode. As overall capacity has increased, competitors constantly try to undercut each other with lower prices in an effort to drive volume in the short term. Companies are largely unaware of potential opportunities to increase prices (and profits) due to a lack of strong analytics.
Overall Declining Demand. Between too many vessels being built (and not enough scrapped) and the global economy weakening following the Great Recession, freighting companies have seen a continual decline in demand for the past several years. Additionally, due to a lack of forward-thinking in both the type of cargo vessels and the products in them, companies are sometimes forced to sail empty containers across hundreds or thousands of miles of ocean at a loss.
But what can container shipping lines do to break the cycle and strengthen their business models?
The two best strategies for companies to implement are data-driven segmentation and better forecasting. More often than not, freighters will still be facing downward pricing pressure in most markets. But a segmented pricing strategy based on a mix of competitor, market, and internal data will show companies exactly how low they need to go and when.
This kind of predictive analysis will allow companies to more accurately predict price response, mitigating the risk of pricing actions by eliminating some of the unknown around price sensitivity. For other markets, such as commodities, companies can cherry pick opportunities for higher-margin prices and increase overall profitability.
For example, sending a container from Shanghai to Europe costs half what it did in 2014, according to figures from the Chinese city’s shipping exchange. In this case, companies will largely have to take the price reduction since it’s a popular route and there are fixed goods each party wants.
However, in locations where markets have bounced back, there is an opportunity to better optimize what products are being shipped and at what time, so that containers are not sailing empty, but filled in both directions with profitable products. Along many routes to Latin America, companies send non-refrigerated containers that cannot carry back produce, resulting in a big missed opportunity on the return routes. If companies could find a better balance in the types of cargo they sent to this region, they would see a significant increase in volume and profits.
The situation is reminiscent of the hospitality industry following the 9/11 attacks. Many hotels dropped prices drastically as people became much less likely to travel in the immediate aftermath, but prices stayed low for years. Price optimization analysis showed there were opportunities for some locations to maintain higher prices, even when hotels were at low occupancy levels. This data-driven insight into customer price sensitivity was a boon for one major hotel chain, allowing them to price rooms at their properties at pre-2000 levels for the first time in over half a decade.
For container shipping companies to truly succeed in 2017 and beyond, they need to think bigger picture and longer term rather than just being concerned about their next quarter’s earnings. By understanding both where they need to be tactically aggressive or more competitive based on market-specific data, shippers can ensure they’re not simply driving volume while leaving money on the tables.
To survive, shippers must pick their battles, look at all the potential trade-offs, and rely on multiple sources of data and insight in order to emerge successfully from this pricing war.
Michael Bentley is a partner at Revenue Analytics. He manages client relationships and leads engagements with Fortune 500 clients on pricing and Revenue Management strategy, analytics and business process issues.
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