Price Compression is a financial term where the future prospect of an asset is priced higher than its expected value; the price is ‘compressed’ and includes more ‘value’ than would ordinarily be projected for the time period. In short, it’s a linear equation and this is a math free zone so don’t stop reading.
Market Compression is different from Price Compression. Markets behave in a nonlinear manner in comparison prices. Market Compression is what happens to Jello when exposed to children. When a small child interacts with Jello, they give it a good squeeze, upon which Jello escapes the child’s grasp. It’s nonlinear and unpredictable, just like Jello, and we remain math-free, mission accomplished.
We’ve all seen extreme examples of price compression in our own neighborhoods in the recent housing market where housing prices have exceeded expectations, growing more rapidly than could have been anticipated. We have also seen price compression in historically significant cycles of rapid change such as the mortgage bubble or the ‘dotcom’ era.
In 2023, the transportation industry saw several bankruptcies among carriers, indicating financial instability and possibly overcapacity issues, the result of which is a leading cause of market compression. These developments suggest a landscape filled with capacity issues, financial challenges, even integrity issues within the transportation industry as 2023 came to a close, likely influencing all manner of business strategies moving forward.
While all markets grow and shrink, service markets like transportation react differently under compression. What makes market compression unsettling is an increase in rate of entrants and dropouts within a relatively short period creating yet more unpredictability and that’s where we find ourselves today in an unsettling period that began with Yellow on August 6, 2023.
Thoughts on Yellow Corporation Story
Yellow Corporation and certain of its affiliates and partners filed voluntary petitions under Chapter 11 and it wasn’t that no one saw it coming. Yellow Freight’s issues were widely reported for months, the company has had increasing challenges for years, even restructuring twice in the past two decades. Yellow Freight faced challenges and controversies over the years from labor disputes to financial struggles to operational and performance issues. What few saw was Yellow Freight’s complete exit once it had become clear the bailouts were not going to help the then #3 LTL Carrier in North America.
While Yellow Freight’s filing included several subsidiaries, Yellow Freight, USF Holland, and despite Roadway Express ceasing operations in 2009 Roadway was still listed as one of the affiliates in the filing. What does all this mean? It means that not only will clients continue to realign their freight relationships, but freight service providers will similarly continue to realign freight relationships for the foreseeable future. Companies like General Motors, Ford and Stellantis alongside companies like Walmart and Home Depot will all be scrambling for capacity among the top 100 LTL Carriers all of whom just moved closer to #1.
Scrambling for Capacity
Scrambling for Capacity in 2024 will extend well beyond Q1 and into Q2 for shippers and markets where once again we expect to find ourselves face-to-face with yet another round of supply chain disruption. What’s unique about Market Compression is at the same time there are shippers shopping capacity the market appears to have excess capacity evidenced by dropping rates.
Unlike some market dynamics like cost and demand that tend to have a linear relationship, market compression is non-linear. Reactions to these market circumstances encourage a three-dimensional compression such that the outward expression of the market is often unpredictable and where we would expect new leaders to emerge, and some to exit. This all takes time, and it’s beginning to take place.
Food for Thought
"What makes market compression so interesting is the simultaneous impact on shippers and markets. Reaction by shippers and markets to market compression is not universal by any means, in fact rampant unpredictability seems to be the norm."
What makes market compression so interesting is the simultaneous impact on shippers and markets. Reaction by shippers and markets to market compression is not universal by any means, in fact rampant unpredictability seems to be the norm. Some of reactions expressed by both shipper and carrier companies have been wildly unpredictable over the past 6-month period, again beginning August 6th.
Quiet Logistics, for example, has gotten very quiet indeed. A third-party logistics company headquartered in Massachusetts, Quiet Logistics specializes in order fulfillment and returns for e-commerce retailers that was acquired by American Eagle. A consolidation that sounded like a really good idea, American Eagle combined the classic ‘shipper’ with a ‘third party’ operation.
One could tender an expectation was built on cost savings for American Eagle and operating costs for Quiet. The company expanded rather quickly through several ‘quiet’ acquisitions, then “pulled back” quietly after missing financial targets. They replaced their CEO and were last reported to be “ramping down investment.” Quiet Logistics has gotten very quiet indeed.
Visiting their website, this time with a bit more scrutiny, I noticed that their web presence is based on the small screen which seems to point to an incomplete technology investment and could just as easily be a purposeful foray and specifically intended to target a younger entrepreneurial audience. Whether the small screen approach is the result of ‘built-on’ legacy technologies from several mergers and acquisitions or entirely new technology designed from the ground up is not known to outsiders and we’ll know more soon enough as the full impact of market compression comes to bear.
Moves by UPS and Ryder
Moving from the very small to the very large, has anyone else noticed the frequency and number of UPS store ads lately? Is this a predictable reaction of the behemoth UPS to the market compression; a targeted campaign aiming at small-scale shippers just to gauge the market or how smaller shippers are reacting to market compressions of their own, only time will tell.
Ryder in the meantime has continued a path of acquisitions, though not as quiet as Massachusetts’s Quiet Logistics. The Ryder acquisition of Cardinal is expected to result in a complete integration of Cardinal operations including facilities into Ryder; according to Ryder, “strengthening Ryder’s position as a leading customized dedicated contract carrier in North America” Only time will tell if Ryder management has the technology where-with-all in their Silicon Valley-Based Technology Lab which opened less than a year after Ryder acquired the logistics technology start-up Baton. Technology start-ups are risky at best, having a technology start-up in transportation tech perhaps, more so.
What to look for
I suspect larger entities will begin to double down on their previous gambles in the small-scale sector by defining and completing deeper acquisitions to complete a folio that the leaders of these acquisition-based growth companies expect will propel them into the next century. I expect that many more combined companies to struggle with integration challenges as they find their current stable of products and services challenged beyond their capacity which will be unable to keep up or grow through acquisitions of their own.
I suspect that we’ll see more from shippers like UPS and Ryder for that matter by the time the Super Bowl and post-Super Bowl advertising has eclipsed in April. Ironic isn’t it, that post-Super Bowl advertising is expected to eclipse at about the same time shippers and markets both scrambling for capacity today are expected to be exiting the darkness of the period and entering the light, shine on shippers, shine on carriers, more to come.
Maybe next time we’ll talk about how PartnerLinQ expects to help shippers and carriers overcome issues in this market where Market Compression is expected to reign large for at least the next several months if not years. e.g., how to ensure business relationships are sustained and remain connected during cycles of market compression through technology – just a few thoughts. If you have some thoughts of your own let us know, we’d love to talk about it.
Thomas Smith, Director Supply Chain Consulting, PartnerLinQ Inc.
Thomas A. (Tom) Smith is a seasoned leader in the EDI Industry and the Director of Supply Chain Consulting at PartnerLinQ. A professional services traceability, integration, & engineering manager, Tom’s real-world experience extends beyond the world’s most recognized brands and into supply chains everywhere. Working directly with industry leaders and organizations, Tom’s experience developing and delivering business processes and transaction standards across more than 26 industries has impacted brands, businesses, clients, customers, and our team member across the globe.
