Sometimes problems come with a silver lining and if any branch of the distribution industry needed one more than all the others it must surely be the pallet exchange networks, where strong volume growth has not been reflected in adequate profit margins. This is a great pity for an industry that has done so much to deliver lower costs for palletised transport while at the same time improving the environment though CO2 emission cuts. The industry has also invested heavily to improve service quality and extend the British-born concept of pallet networks across Europe and so help UK exporters and importers.
Arguably the biggest problem facing the industry today is the chronic shortage of LGV drivers, currently estimated at 60,000, with only 20,000 entering the profession each year and large numbers expected to retire soon. This shortage was not helped by the recent introduction of the Government’s driver certificate of professional competence (CPC). The entry barriers for young drivers (only 5% are under 25) are considerable. The high cost of becoming qualified to drive a large commercial vehicle is a big barrier to entry, according to Richard Burnett, Chief Executive of the Road Haulage Association. Obtaining a truck licence costs between £3,000 and £5,000, a large sum for young people trying to enter the industry, and most haulage businesses are small family companies running on very small margins, so they struggle to fund the training.
Another barrier is the health and safety law which now stops young people from spending a day in a lorry’s cab and getting to see what the job is about. “People don’t get to see what the job is about and don’t get to learn about a career that pays well and has chances to progress.” says Julie Welch, HR Director of Wincanton, which has about 5,500 drivers.
Without a successful, industry-wide initiative to lobby the Government to raise funding to the industry to support apprenticeships and training programmes for LGV drivers the serious driver shortage, now at crisis level, will make itself most painfully obvious in the run up to Christmas, as online shoppers have to wait longer for their orders and pay more for their deliveries because companies will have to fight for qualified drivers. Now that may be good news for boosting new driver entrants but it will put pressure on all pallet exchange network members trying to cope with wafer-thin margins, where it is difficult to raise them.
Just how seriously low the margins are can be gauged by Pallet-Track’s claim that freight rates for its members have not changed since 2004. Rates probably need to rise by 10-15% to prevent even more casualties collapsing, like the UK Mail Group. In paying much more attention to cranking up volumes and ignoring the bottom line networks have created a perfect story of poor returns, says Pallet-Track’s Director, Nigel Parkes. In the past the industry has been unable to pass on the volatility in fuel cost rises to the customers, and while fuel is not so pressing an issue now any future sharp rises could see more casualties unless the freight rates rise.
The driver shortage has meant that businesses have to pay higher fees for agency drivers, which once again the industry cannot easily pass on to customers. Time was when the industry not long ago could get £50 per pallet delivered, yielding around £10-15 profit. Today, that same pallet margin would be in the low single digits, or even at break even. Without an improving climate the networks could live through interesting times, as the old Chinese curse goes, in the run up to Christmas.