There are good times ahead but we’re not out of the woods yet!

Hi there, in January, I sent out a State of the Nation update predicting a less impactful increase in labour and freight costs this year vs last, I was tacitly referring to the last couple of years being brutal but now improving. I also stated my concerns around facility costs, which were shooting up significantly off the back of unprecedented space shortages last year. I am usually reasonably accurate with a lot of my predictions and we are definitely improving YoY but not quite as much as I hoped back in Jan (close though, not miles off) anyway I want to send this out feeling the need to discuss/set expectations and provide some background in anticipation of the July APA and discuss some options we are working on and you can help with/consider.

First, some great news…

• The labour crisis is impacting us far far less this year
  • Absenteeism is heading in the right direction
    • Read an article a couple of weeks ago about Waikato Hospital which was down 40 staff. Their strategy was literally “God help us”, which reminded me of last year, we are well out of that stage/phase thank goodness.
      • At a macro level, we no longer have a staff shortage issue
• Inflation seems to be topping out, globally things seem to be calming.
• International Forwarding rates have plummeted back to pre-covid levels.
• House Prices have dropped 20% from that insane surge the last two years.
• Staff morale is climbing back to pre-covid and clients, across the board are the happiest they have been for a couple of years.
• KPIs are back to pre-pandemic level. (yahoo) 

Things keeping me awake at night

• Whilst there are more staff in the market, they are largely quite poor quality, companies are holding onto the good ones.
• We are still facing significant wage pressure
  • Auckland Airport announced a couple of weeks ago in a Herald article they were raising their minimum wage from $23.52 to $30.00 per hour as they are desperate to fill 400 roles. 
  • MBIE last month released an official notice that the Bus Transport Industry has passed the first phase of the FPA (This new Fair Pay Agreement got passed into law by the Labour government late last year and requires (forces) industries to work with Unions (SCS is one of the only union-free 3PLs in NZ atm)). All indications are they will also raise either starting rates to $30.00 to fill significant staff shortages.
    • This new FPA will eventually get to Logistics and Transport but I can’t see that happening in the short term. 
  • We have lost a handful of really good staff for the first time ever.
• Sick days are up, double pre-covid (from an average of 3/person/year to an average of 6) this  cost is material. 

• What’s happening with this engineered recession?  I feel we are already in it.
• I am seeing increases across logistics (freight and 3PL) ranging from as low as 5% (rare) to as high as 16% (also rare) with the majority landing between 7-8% where CPI in NZ is currently tracking just north of 7%.
• Commercial Property Prices increased 28% in the last 2 years (CBRE report) average commercial prices for facilities like we lease have gone from ~140/sqm to ~180/sqm. We are in the middle of very robust conversations with Goodman (we are a top 10 client of theirs) who are seeking large increases, it’s bad timing as we have a bunch of facilities at the market review phase of the lease cycle (happens every 5 years). Last year and the beginning of this year commercial warehouse costs have shot through the roof. 

Offsetting these concerns

• In terms of lease costs Goodman is now less than 50% of our lease property portfolio so whatever increase we end up negotiating we will spread to reduce the impact significantly.
  • We are building a strong case to pay considerably lower than their proposal based on our strong belief that the market is unreasonably inflated atm (similar to the housing bubble that has now popped) we’re supporting this position with a lot of research, have  engaged consultants and are building a robust strategy for our counteroffer, I’m optimistic based on the work we’ve done; Phil will be following up this email asking for your help to support our belief inventory levels are now dropping and we’ve identified a flood of new commercial properties hitting the market (starting now) over the next two years which will remove the heat from the market…Phil will fill you in on the details and how you can help us help you. 
• In terms of labour, our staff turnover peaked last year, it was so disruptive, however, we’ve spent a lot of energy focussing on this and it’s back where it should be (under 10%). We are working hard to defend recruitment attempts and strategies we implemented a couple of years ago (Gym, Wellness training, Career training) are by and large working.
• We have a solid track record of beating CPI by 1% over most of our 21 years of trading and we’re hell-bent on maintaining that record, or close to, this year also.
  

More good news

• Over the last 12 months, we’ve created and are rolling out a state-of-the-art technology driven decant process which is materially reducing the time to process large order drops which are enabling us to reduce labour costs materially which we can bank to offset labour increases.
• The Philippines outsourcing project is proving a winner helping us manage costs, in the last two months we have moved further back-end accounting processes to our PHP provider (if you’re keen to learn from us we’ve learnt heaps across consolidated BPO and distributed models on how to make this work)
• Our LMS is going through a bottom-up review which will result in higher productivity.
• We are rebuilding our CI (Continuous Improvement) team now that we are out of the covid phase and we have a huge list of productivity enhancements we’re chomping at the bit to get stuck into.
• Our split DC model (CHH + AKL)  is proving a HUGE success, we’ve worked with 4 clients on this model in the last 12 months and as of today have been able to prove/deliver attractive 6 figure savings (these savings are very dependent on order, inventory and shipment profiles)  
• We’ve bought our first robot! I’m working on 4 different robotics projects atm to future-proof the business, hoping to have our first project live in 6 months – will keep updating you on this. 

So, a bit to absorb, but if you’re like me, you hate surprises and appreciate a heads-up ASAP. So, as much as I love sharing the good news and innovation, I need to share my thinking on this with you too. I think one more tough year, bear with me/us and then we’re into our “new normal” and then another 8-10 years of calm sailing.

As mentioned, Phil will be sending out a follow-up email to explain our facility negotiation strategy. Please support us with that to help us help you. Phil will lay out our strategy in that email.

If you have any concerns or want to know more about the strategies we are working on to manage our labour and facility costs for you, please reach out either to me or one of the ELT. We’re more than happy to discuss any element of this with you.

In closing, there is still a lot to look forward to. We still live in the best country in the world! but we are in a time of adapting to a 30-year record inflationary period, and Kiwis are great at adapting! 

I want to leave you with some great advice I received from a client again that I respect who lived through hyperinflation in Italy. He’s not worried about inflation. In 2021 when inflation started to bite, he told me how inflation would play out in NZ, he said everything would go up. Wages will increase, goods and services will increase, houses will get more affordable (lower prices plus higher incomes, so double benefit there and people will pay off their mortgages faster), and it’s a great time to invest in classic cars…the hardest part is the inevitable price discussions between clients and suppliers up and down throughout the supply chain through the inflation period, but it will pass and we’ll end up in a good position when it passes.

Everything he said would happen has happened so far. 

So here’s to a bright future and Happy trading!

Warmest regards

Brad

Founder/CEO 

SCS