The Stories Customers Tell Us About Their Freight Forwarding Business

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Margins are under increasing pressure

Margins are under increasing pressure

Rob, the Financial Controller, gazed at the obvious trend revealed by his latest “Margins by site and by customer” spreadsheet. Not good news. Time to confront the CEO, again. Perhaps Rob could catch Steve as he organized his morning coffee…

“Glad you made the time to meet with me, Steve. Look at these graphs.” Rob wasted no time getting comfortable on the break room sofa. In one swift movement, he glided into the spot next to the CEO and held his tablet at an angle so Steve could see the report clearly. “You need to see this before our executives' meeting at ten. I know that you are excited by all the revenue being brought in by the freight we are moving for the new global manufacturing accounts Jeff is signing up, but just look at this.”

Steve set his coffee on a side table and leaned in for a better look. “What's the thick black line?” he asked, squinting.

“That's our margin. We're now in our third consecutive quarter of shrinking margins and the shrinking is accelerating.”

Steve put his hand on Rob’s shoulder and smiled. “Rob, don’t worry. You’re a numbers guy. I shouldn’t have to explain this to you. What we lose on margin, we’ll more than make up for in volume.”

“But that’s just what I’m trying to tell you, Steve. We are not making it up in volume. Our costs are high per job, and the penalties and charges can be more that the profit on a job. Steve, our quarterly EBITDA is trending down and will probably go negative sometime in our third quarter.”

“Rob, Jeff assures me that our margins will go up as soon as we get familiar with the new accounts and start finding ways to consolidate their freight.”

“And how long did Jeff say that should take, Steve?”

“One quarter, max two.”

“Steve, the first of Jeff’s new high volume accounts were brought on three quarters ago – exactly when our already declining EBITDA line started trending more sharply down.”

“Rob, what do you want us to do?” Steve sunk back into the sofa. He raised a hand and let it hang in the air helplessly to make his point. “Freight forwarding isn’t what it used to be. I don’t know how anyone makes money anymore. It used to be such a nice ten percent margin business in the good old days, but now there’s so much competition, and the customers see us as a commodity. We even got run out of the agriculture accounts by the big boys. That used to be our niche, Rob!”

Steve shook his head. His hand fell to his lap. “No one knew agri better than we did,” he said, a little softer now. “I thought our boutique-style service would’ve carried us, but the big boys just crushed our price with the volume discounts they get with the carriers. No, Rob, we have to make this work. We need the volume. We need the revenue, even if the margins are terrible, just to pay for our staff. We may just have to make our profits on other accounts and keep these accounts to cover our staff costs.”

Rob knew how passionately Steve felt about the subject, about any subject, actually. He could see his boss needed a good dose of positive thinking. He wasn’t sure he could supply any but he would try.

“Steve, there has to be a better way,” he said. “Jeff had a meeting with his sales team yesterday, and he tells me that they’re having to discount or offer exceptional credit terms or other incentives across the board to get customers right now. We aren’t finding high margin business anywhere at the moment. It can't go on, Steve. We have t--”

“Yes, yes, I know. We have to turn this around. But how?”

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The forwarder's dilemma

Analysis of the Pressure on margins issue

Margins being under pressure across the whole business is a result of job mix changing and per job profits declining. Steve is faced with a choice when it comes to improving the overall margin. Either does he chase higher volumes and become a bigger operation so that the cumulative margin grows, or does he refuse volume discounts and lose volume market to return to a smaller but higher per job margin operation.

Naturally Steve wants the best of both possibilities, but Rob is making it clear that he is failing to get either. This is not a good place to be in business and as Steve comments “We have to turn this around.”

Forwarders who grow all experience the volume pricing dilemma. When forwarders start off they often provide a specialised service to a niche of customers. As a forwarder grows the business takes on more and more jobs outside of the niche and the company finds itself competing more and more for volumes. Margins start to erode.

Surviving the transition between small specialist forwarder and large volume forwarder is a real challenge and it is what Steve is facing now as CEO. How to be more productive so that the benefit of winning the higher volumes makes a positive difference to the bottom line.

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