Rejoice – Because of Low Shipping Rates, We’re in a Seller’s Market Again

The recent news that FedEx completely missed its revenue targets this year threw all of us in logistics for a loop.?

FedEx didn’t just miss earnings by a small margin either, they came in $300 million short on revenue from ground transport. CEO Raj Subramaniam even went to the news predicting a global recession.

Everyone seems to be expecting things to get worse and worse and worse. It’s easy to see why – shipping prices are down dramatically from their COVID heights and seem like they might continue to fall.?

But I would be more cautious about crying “global recession.” What happened last year was not normal and there has to be fallout from that. That’s natural economics.

While shipping has definitely decreased, I think there are three reasons and two of them aren’t inflation:

1. Inflation has hit western economies like the UK and the US hard.
2. Most brands moved their volume earlier in the year.
3. Ocean carriers released many clients from their reliable contract rates to take advantage of spot rates last year.

I want to qualify Raj’s argument about a global recession by putting this slowdown into perspective. There’s good news in there: While things are doom and gloom over at the shipping companies, the average seller is about to have a much better Q4 than last year.

Let’s get into it.

Why Rates Went Crazy During COVID

I’ve already written on this topic extensively in previous posts. But, in a nutshell, last year’s shipping prices skyrocketed because carriers like FedEx rushed to put their clients on spot rates rather than contracts.

For those new to logistics, the shipping market is priced two ways:

• Contract rates - These are the classic deal where a client and a shipper agree on a set price for shipping X amount of goods for Y amount of time. These are win-win since sellers get predictable prices and shipping companies get recurring revenue.
• Spot rates - Are for everyone who doesn’t work with a contract. You contact the carrier whenever you need goods shipped and they ship at whatever market rate they have set for that day.

During COVID spot rates went out of control. And I mean they were absolutely untenable. A normal container that might cost $3,000 to ship at normal spot rates went for as much as $20,000 at the end of last year.

Carriers couldn’t resist rates like that. Many - like FedEx - diluted their contract rates with spot rates so they could bring in more revenue. They would strike strange deals for the year with clauses like “500 containers at contract rates and then everything else at spot.”

However, cutting loose so many reliable customers is now coming back to haunt shipping providers.

Right now, the market has gone the other way. Demand has plummeted and so have spot rates. Carriers like FedEx are now trying to get more contract volume back into their portfolios. That’s hard to do when last year they told people they had to do these strange contract-plus-spot combinations. Spot rates are great now, so clients want those new contracts to remain in place.

There’s been a message slide for carriers. Throughout COVID, they expected partners to believe rates were high because that’s just what things cost. Now that rates have come crashing down to attract demand, it’s obvious that wasn’t true.

Everyone heard this message loud and clear - and businesses don’t want to cooperate anymore.

Why We’re Seeing Demand For Shipping Falling

As I mentioned earlier, one of the biggest reasons demand for shipping is low (besides a potential recession in the West) is that most people already moved their goods last year in 2021.

You’ll recall the news heating up about warehouse space running out earlier in 2022. That happened for two reasons:

1. Surging consumer demand for home goods because of lockdowns caused businesses to rush to stock shelves. In many cases, they overstocked.
2. Businesses were so afraid of climbing shipping rates that they shipped all of their goods ahead of time and in bulk. Many large businesses even bought extra warehouse space just in case.?

Now there’s a glut of goods in warehouses. Even if these businesses wanted to move, most can’t afford to.

This has also taught brands another valuable lesson: From now on, brands are going to be much more cautious about stocking warehouses. While just-in-time (JIT) shipping is risky, so is leaving goods in warehouses for extended periods (stuff deteriorates and wanders off).

Why I’m Optimistic This Isn’t a Recession

Carriers are obviously worried because they overestimated shipping revenues for the coming year. However, it’s still worth noting prices remain much higher than they ever were before COVID. Carriers are making a handsome profit though they may need to scale back some – and we haven’t even seen what the Q3 rush looks like yet.

In the meantime, we’re seeing a much better environment for sellers trying to ship goods:

• Ports are operating like general markets again.
• Most sellers have already put goods in warehouses ahead of the Q3 rush.
• Shipping prices are much more normal.

I don't believe these current rates or packed warehouses are the new normal, but it's helping ease the pressure across the supply chain. As pressure eases things become easier for everyone.?

And sellers may not even need to worry about shrinking markets. While we are seeing high inflation in the West, consumer markets in up-and-coming markets India and Vietnam may take some of the Slack from the US and the UK.

I close with this: Shipping is far from dead and this is very likely a market correction – one that giant shippers like FedEx did little to prepare for.