In the first of a two-part series of articles, renowned industry analyst, Andrew Penfold, considers the creative approaches open to container terminal operators to consolidate and expand terminal revenues in a challenging marketplace.
The uncertainties associated with volumes and revenues for container terminal operators has been at the front of industry attention this year. There are many techniques that can be applied in this situation. This is the first of a two-part series of articles that examines various strategies to preserve and enhance revenues in these difficult market conditions.
During economic contractions, some ports and terminals have been confronted with above-average volume declines, while others have done significantly better. Specific factors determine market position, but a port or terminal must work with the advantages and disadvantages associated with its location and other key factors. How do you build revenue robustness? The answer is always case-specific, but the following approaches can be taken:
- Low cost strategy
- High service strategy
- Competitive network strategy
- Collaborative initiatives
- Marketing techniques
- Pricing
- Service delivery
- Intensive selling
- Contractual means
LOW COST STRATEGY
In a given terminal, with various local competitors, a low-cost strategy and therefore a low tariff strategy may attract a certain segment of customers. However, there are dangers with buying market share as investment may slip and impact quickly on service levels.
A low-cost strategy should always be appraised in the light of the Total Cost of Ownership in the overall transport chain) for a customer (line or alliance). It is the total of vessel, port, terminal and hinterland costs that determines cost competitiveness.
Having the lowest costs for one of these items will have little effect, if the total picture still results in a disadvantage. In general, there is a limited elasticity between stevedoring pricing and volumes – although lines will always seek to chisel savings here.
COMPETING ON SERVICE
The regular announcements made by terminal operators of new records on vessel handling productivity suggest that competing on speed is a valuable strategy.
Higher berth productivities reduce the in-port time of vessels and increase earning times for the vessel allowing improved network options. However, a Total Cost of Ownership analysis should be used to confirm such a strategy. This also requires continuous innovation – including direct copying of best practices.
Competition on speed will be especially worthwhile in carrier haulage markets and transshipment markets, where the shipping line is the sole decision maker.
Where trucking is shipper-controlled, reliability and predictability are key, in order to enable parties to secure the reliable supply of distribution centres or factories. Understanding the customer’s real needs is key in driving this approach.
COMPETITIVE NETWORK STRATEGY
The creation of an extensive network of hinterland and feeder connections will be very rewarding in the long term. Once in place, it is not easy to copy and it may continuously reinforce itself through scale economies.
The density, frequency, reliability and cost-effectiveness of the available networks will be a key determinant of terminal choice for a line. This strategy will also boost customer loyalty. This strategy has seen vertical investment in complementary services – e.g. feeders or barge services – from some of the major players.
COLLABORATIVE INITIATIVES
Joint ventures between terminal operators and shipping lines and dedicated concepts offered by a terminal operator to a shipping line (or alliance) are, of course, alternative ways to develop revenue robustness. Under such deals the line will receive dedicated terminal capacity, more control over operations and lower rates or higher benefits from utilisation profits (‘gain-sharing’). Typically, lines would hold a financial interest in the terminal, either as shareholder or by way of fixed cost components for the stevedoring services. Even with volume contractions the line will have an interest in favouring these terminals. In downturns these JV arrangements may support volumes and eliminate over-reliance on particular lines or consortia for a port. However, the role of dedicated line-owned terminals is not straightforward. Terminals as cost centres are usually intrinsically less efficient than independent operators where marketing is usually much more comprehensive.
MARKETING TECHNIQUES - PRICING
Various marketing tools can promote revenue robustness and minimise the risk of switching volumes in times of crisis. The pricing techniques are:
- General volume incentives
- String incentives
- Feeder incentives
- Hinterland incentives
- Gain sharing and cost cutting
- Opportunity cost driven pricing
To attract additional volumes and increase customer share, or to discourage volume switching to competitors, both general and specific volume incentives can be offered to customers. This can be either on a fixed per container basis or on a sliding scale based on volumes. Typically, a volume guarantee would form part of this deal. This could be linked to previous years volumes and agreed escalators.
In highly competitive markets a ‘string incentive’ can be applied, when a line or alliance introduces a new string or considers moving a string from one port or terminal to another. In these cases, the terminal operator would discount on the specific string and would not impact on existing rate structures.
When stimulating feeder traffic, and where the deepsea line carries the feeder handling-costs, similar incentives can be applied. There is scope here to tie the pricing offers to feeder volume bands or to feeder markets targeted as growth regions.
Similar approaches can be applied to specific hinterland connections. For example, start-up incentives can be applied for a limited period of time for a new rail, feeder or barge connection. Once again, a Total Cost of Ownership analysis should be developed to estimate the required discount.
‘Gain-sharing’ refers to joint measures that increase the benefits or lower the costs of either the shipping line or the terminal operator. The gains obtained from this approach are shared between the terminal operator and the line. These arrangements are likely to be further intensified in the future.
A gain-sharing programme consists of a documented and agreed project plan to reduce costs for the terminal and/or of the shipping line with the help or assistance of both parties. There are numerous case-specific possibilities here.
Pricing strategies are often based on cost-plus models. In these situations, an approach based on opportunity costs may be worthwhile. Here, some tariffs are based on the lost margin or the foregone profits if a customer occupies a part of the terminal capacity from which income can be generated and this is not utilised. This would be based, for example, on an agreed berth share or proportion of terminal storage.
In practice, opportunity costs are complex to calculate and cost-based tariffs are not readily accepted by shipping lines. However, consideration of lost opportunities in cases of reserved, but unused, capacity is a worthwhile approach and common in other industry sectors.
Part 2 of this review – next month - will focus on improving service and productivity levels in order to promote market share and maintain customer loyalty. In addition, active intensive selling and contractual innovations will be considered.
What is clear is that creative approaches are essential. These established approaches will become increasingly critical in the next few years and beyond as simple reliance on increased volumes looks more uncertain.
It is always the case that a definition of the customer, and their needs, is central to successful position of a terminal. This means a full analysis of the overall costs involved in the transport chain of a specific terminal versus the competition. This defines the real room for price negotiation (in both directions).
In the current market, with volumes lower and lines under pressure there will be increased demand for lower pricing. These pressures can only be resisted with a comprehensive understanding of the costs involved – with stevedoring being just one component.
Part 2 of this review – next month - will focus on improving service and productivity levels in order to promote market share and maintain customer loyalty.
