Most people are aware that the cost of moving product to get it from where it is produced ultimately to their front doors is a sizable part of the cost of any product. Most people though probably do not quite comprehend quite how big the cost of logistics is. Transport planning consultants are acutely aware of the impact of logistics and distribution costs on the price of everyday goods, as our clients are asking us all the time what can they do to cut the cost of getting their products to market.
Approximately 1/3 of the world’s economy is engaged in moving product. From farm or mine to factory; from factory to distribution centre; from distribution centre perhaps on a ship to another distribution centre then onto a retail store, and then finally for home delivery. The numbers of touch points and cost impacts on any product are enormous.
So it goes without saying that logistics cost is having a significant impact in the cost of living crisis we are all seeing. So what is driving the increase in logistics costs that is driving UK (and world) inflation?
Fuel
We can all point to the global fuel crisis primarily driven by the actions of Russia and the war in Ukraine. Clearly the global macroeconomic challenges driven by the impact of this are huge. Whilst supply of oil globally has stabilised due to changes in supply routes, the cost of that fuel has reduced, but not by enough. It is still higher than at any point than it was since 2015. The fact that global wholesale oil prices are dropping does not necessarily mean that logistics operators are seeing equally significant reductions in the cost of diesel. There are many local UK economic factors such as government policy that are keeping fuel pump prices paid by logistics operators higher than we would like to see.
Red diesel
Rarely talked about, particularly in relation to food price inflation is the impact of the UK government’s decision to withdraw the duty benefit previously assigned to red diesel. It is red diesel that is typically used to power refrigeration units in the UK food and grocery trailer fleets. The cost of keeping our fresh product cold has therefore increased significantly, and these costs have been passed on to consumers. As this is a net zero policy, it is not likely to see subsequent reform, and these costs will be here to stay.
Driver Shortages
It is well known that there is a shortage of LGV drivers creating significant wage inflation in the UK transport sector. Like all other costs, retailers, wholesalers and logistics operators are having to pass these costs on to the consumer to offset the cost increases they are seeing themselves. We have commented elsewhere that this situation is if anything continuing to get worse, so we do not anticipate there being any significant UK driver cost deflation any point soon.
Shipping costs
international shipping costs have come down from peak of costs seen in 2021, when costs escalated by a factor of five-six times the previous cost. 40 foot container costs were at that point being quoted in excess of £12,000 for a shipment from China to the UK. They have now dropped massively, but frustratingly still not back down to pre pandemic levels. A typical cost of a container is now in the region of £2,000, still up from the average £1,500 per container prior to the pandemic. Just like any other cost for our retailers and producers, these are passed on to the consumer ultimately driving further price inflation.
Warehouse Labour
Shortages of labour are not only present in the driver population. UK warehouse labour is also incredibly stretched, with many operators struggling to fill permanent vacancies as well as seasonal peak recruitment. Longer term solutions include the increase in use of warehouse automation in an attempt to limit the impact of labour shortages, but such changes are both costly and long term. Only the biggest businesses typically have deep enough pockets to pay the cost of major automation investment.
UK Warehouse Space Prices
Over the past few years there has been significant price inflation in the UK warehouse space market. New build sites have been snapped up off plan in most cases with demand significantly outstripping supply. This is in large part driven by the shift in the UK economy away from retail space, with inventory being pushed up the supply chain to central distribution units. As this demand has not abated, developers have taken the opportunity to push up the cost per ft2 for new-build buildings as well as second user facilities. In a recent exercise for a warehouse design client, it was established that a site developer would require a cost per ft2 in the region of £11-12 to develop a build to suit warehouse. This is more than double what would have been expected for similar space three to four years ago.
Other Factors
There are many other nuances in the logistics world that have a direct knock-on effect to the cost of living crisis, and most of these are not impacted by UK government / Bank of England interest rate policies trying to take the heat out of the economy. These are all supply side challenges that will continue to drive inflationary pressure into the UK market regardless of government policy in this regard.
The role of Brexit
The UK’s position outside of the European Union also has an impact on inflationary logistics pressures. Whilst not strictly down to the cost of logistics, the cost of administering imports to the UK has increased considerably, and these costs are passed on to the UK consumer, often via the logistics charge for moving the product. Additional time taken by LGV fleet at ports awaiting customs clearance is baked into the inflated transport costs seen in the UK. However, it is not only the UK suffering increased transport costs and labour shortages. There are widespread shortages across the EU as well, the difference being that wages and supply tends to balance itself out across the EU whereas there is no freedom of movement of that labour to the UK to keep our markets on an even keel.
In summary
Overall, logistics has a huge impact in the cost of living crisis. Whilst efforts may be made to train and recruit people into the industry, there will continue to be shortages on the supply side for years to come that will make bringing back inflation to the 2% UK target a real challenge for UK PLC.
