Warehousing woes—and wins: Are cost concerns holding back Canadian warehousing firms?

March 24, 2015

Canada's warehousing and distribution companies find themselves in a challenging spot these days. Their customers are demanding better service and lower prices, yet only committing to short-term contracts in return. With revenues increasingly uncertain, many companies are working hard to keep a tight rein on costs. Yet could this focus on cost control prevent companies from making investments that might improve their businesses and open up new opportunities?

These and other challenges were explored in a recent BDO report, Warehousing woes—and wins. In this report, BDO looked at results from the MM&D magazine industry survey, as well as insights gained through roundtable discussions with industry leaders.

Companies wrestle with costs

Cost issues topped the list of survey participants' business concerns. More than one in four companies overall—rising to more than one in three of those involved in retail, health and pharmaceuticals—said that costs was their main business challenge. In the roundtable session that followed, company leaders were quick to explain why.

“Warehousing and distribution companies are under tremendous pressure from customers,” says Kerri Plexman, BDO's Toronto-based Transportation, Warehousing and Distribution leader. “Customer expectations in terms of quality, speed and flexibility are rising. They want better, faster service, and they want warehousers to do more than simply store stock.”

Yet at the same time, these customers are pressuring warehousing and distribution companies to lower their prices. In some cases, customers' sheer size and financial clout enable them to dictate prices to warehousers that are left with little choice but to accept the terms.

Predictable revenues a thing of the past?

Warehousing and distribution companies would certainly like to invest in order to meet their customers' increasing demands. However, they're deeply concerned about the costs involved—because they're not sure whether the revenues will be there down the road.

Warehousing customers' purchasing behaviours have changed in recent years. Customers are no longer interested in committing to an annual or multi-year contract for the use of space. Now, they're only willing to sign short-term deals measured in months, maybe even weeks.

This shift to short-term contracts is already having a significant impact on warehousing and distribution businesses. Customers can now switch suppliers more easily, giving retailers and others even more leverage in negotiations over price and service. More problematic is the impact on distributors' ability to plan for the long term.

“Suddenly, these business owners are caught in this ‘yo-yo' situation,” says Bob McMahon, BDO Canada's National Retail and Consumer Business Leader. “They don't know what the next six months will look like. The sector has become much more volatile.”

Lacking the predictability they need to properly manage their business and plan for the future, warehousers find themselves making investment decisions in hopes that they'll recoup their costs in the future.

Cost worries a stumbling block to investment

This “leap of faith” approach to business investment isn't to everyone's liking, and some aren't prepared to take on the risk. Many firms are postponing spending on additional space, process improvements, technology and new services because they're loath to incur any more costs than they need to.

Yet avoiding spending and keeping a lid on costs carries its own risks. Companies that forego spending on service improvements could find themselves quickly losing ground to competitors.

Investing today to secure tomorrow

While revenue and cost worries are causing many warehousing and distribution companies to think twice before making new investments, other firms are moving forward despite the uncertainties.

These firms are starting to offer “pick and pack” and direct shipping on their customers' behalf. Some of them are moving into third-party logistics, transforming themselves into one-stop shops for warehousing, packaging and delivery, and delivering a complete solution to their customers. Companies serving the food and beverage industry are even expanding into refrigerated storage and transportation.

These investments are being made with an eye on the long term. By delivering better services—and a wider range of services—warehousing and distribution firms can position themselves as essential business partners and inspire customer loyalty. This, in turn, can help firms deflect pricing pressures and potentially secure longer customer contracts.

“Customers will increasingly prefer those firms that can offer better-quality service and a wider offering,” says Plexman. “Those that avoid upgrading what they deliver may soon find themselves struggling to compete.”

In the end, warehousing and distribution firms will need to embrace new ways of doing business, despite the uncertainties they face. However, that doesn't mean they need to “bet the farm” with new spending. Yet companies that take time to understand their customers' evolving needs and then move forward with prudent investments will be well positioned to secure business in the years to come.

Learn more:

To learn more about how BDO can help your transportation, warehousing or distribution company with these and other challenges, contact your local BDO office or:

Bob McMahon
National Retail and Consumer Business Leader
905 272 7818 bmcmahon@bdo.ca

Kerri Plexman
Partner, Transportation, Warehousing and Distribution Practice
416 369 3104 kplexman@bdo.ca

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