DEEPER DIVES: Why Your Accountant's Advice Could Be Destroying Your Business

Good Morning,

First, as always, thank you for joining.

Since it’s on everyone’s mind, we’re talking about costs today. I share with you some personal experiences from managing milk trucks to armoured cars to sedans.

Wake Up and Deliver Episode 6 got posted yesterday. My bad there - busy week and even basic editing was a big time commitment. Matt and I are back on Monday morning at 7:30AM US/CAN Eastern Time.

On Friday I am also doing a new Live Stream over LinkedIn with Jessica and Matt. Make sure to drop in and catch the returns discussion.

Returns: What strategies do we keep? What do we return?

Here’s what this issue brings:

• How you short change your future with decisions that put off investing in your vehicles. Lessons learned and recommendations on how to handle the massive OPEX physical operations bring
  

• UPS is looking to make more money. I share why regional carriers should be worried about their focus
  

• Breaking down the reality of an Amazon Flex drivers who support major promos like Prime Day

Even Billions in Revenue Won’t Save You From The Worst Way To Balance The Books

I love working with young companies and start-ups.

They have so much energy and passion for what they are doing, no problem feels unsolvable.

They live their values.

The thing is, every company once had strong values. They refused to compromise on anything that could impact the quality of their product or service.

But over time, responsibilities build. Hundreds turn into thousand, and thousands into millions. Scaling a business means that everything increases, not only your sales.

For anyone that sells physical goods, or has a consumer facing service, operating costs get wild.

I wrote about Dollar General on Friday. Almost 20, 000 stores. Their revenue is over $9.9B (for the quarter…), with a profit of just over $540M - which means an operating cost of almost $9.4B.

Dollar stores aren’t the only ones that run at this type of margin.

When I was in the food industry, it was the same story (food, up until recently, was a low margin business). Billions in sales, billions in operations, millions in profit.

This is why cost cutting is coming back with a vengeance.

No matter what your sales margin is, it’s faster to get dollars back to your bottom line by cutting costs.

Why?

Because a customer has to agree to buy. You can’t force the decision. You aren’t in complete control.

Everyone has much more control over their costs.

Trucks Move The World - So Why Are They So Undervalued?

Today I want to share some insights around fleets.

Everything that is sold these days, is on someone’s truck at some point.

It might be a carrier, or an owned asset. From a plant, at the port or to your door - nothing gets anywhere without being on the road first.

Commercial vehicles are expensive. They are a major investment. Depending on what type of work you do, a similar looking truck can cost over $100k more (when I was in the cash-in-transit business, whenever we had to build a specific model of truck our cost jumped more than $87k versus the core design).

After the spend, you also have repairs and maintenance. Each year that you have the truck, it gets more expensive too.

The average annual R&M spend often jumps over 150% in years 6-7 versus years 1-2.

Add fuel, insurance, accidents and can easily end up with ballooning yearly budgets.

Here’s the dangerous part. The type of thinking that makes the numbers and reports look great, but that put you at the bottom a hill with a boulder rolling down.

You delay.

You “evaluate” your fleet and decide that you don’t have to do some repairs right away. Park a few trucks and use others. Push an aging asset another year (or two) because those CAPEX dollars need to be spent elsewhere.

But then it happens.

The YoY comparisons.

There’s bigger problem that now exists. If you couldn’t support the $2M in additional spend in the first year you decided to delay, how are you now going to deal with it at $3M?

I can almost guarantee you didn’t hit those lofty sales budgets.

The “it will be better when” thinking of an increased sales ramp rarely works. It either never happens or, when it does, everyone would rather cash out the bonus instead of buying a new truck.

How To Avoid The Trap

Culture

If you want to drive the most stability and reliability into your business, you need to prioritize an appreciative culture.

Your assets aren’t a burden to bear. They are the critical tools that make sure that you can live up to the promises you make to your customers.

Poor treatment of vehicles or deprioritization from senior leadership can kill you.

Models & Pricing

Whether you lease or own, money from every transactions needs to go to your trucks.

When you lease, you are paying those costs to keep vehicles on the road and switching out every 5-7 years.

When you own, you are immediately building backup your CAPEX reserves. The truck you just bought, while shiny and new today, is already on the clock. It will need to be replaced. To make the math work, probably every 8-10 years.

But that means you have to factor in increasing costs, and sometimes, significantly increased maintenance costs for the last few years to keep it safely on the road.

Maintenance

These days, you need to be using a tech-centric approach to R&M. Properly understanding everything that’s going on with your fleet is a data heavy task. You should either be using a fleet management platform that consolidates repair information, or be connected directly with the brand portals to review your spend through their system.

In my last role, we developed detailed dashboards to track every dollar we spent on the trucks.

Imagine, millions in spend and we could see immediately when a branch bought tires from the wrong dealer and off the corporate program.

Outside of the spend management, most repair platforms track line item level details from your invoices.

Have these tagged with industry standard ATA codes and you’ll be pleasantly surprised how much you can find about what’s happening out in the field.

We were able to tell the different in spend by category, type of truck, dealer, region, etc.

I had it set up to calculate the average labour rates we were paying across the country, see the percentage split between the parts and labour spend and track vendors that exceeded tiered thresholds on repairs vs authorization.

I’m not sharing any of that to boast.

I want you to understand what is out there for you to take advantage of. Leveraging those types of tools, and transforming your business with data will make you better.

For yourself, for your future and for your customers.

In the first year we implemented that program, we took over complete control of the R&M spend and saved more than $700k. Without sacrificing quality.

Taking care of your assets is like your own health.

Trying to fix something only when it has become a problem is always harder and more serious. It’s easier to make better decisions along the way, to have the discipline to not trade the results of tomorrow for a small bump today.

UPS Hires A New CFO To Dramatically Increase Revenue & Free Cash Flow

Brian Newman is out, and Brian Dykes is in as the new CFO for UPS.

BD has two main strategic goals:

1. Achieve $108-$114 billion in consolidated revenue by 2026
   

2. Focus on boosting shipping volumes while controlling costs.

For reference, UPS’s revenue was $91B in 2023.

While this might not sound like it’s a big deal, it is.

The US parcel market is dominated by 4 players

• Amazon

• FedEx

• USPS

• and UPS

UPS ranks third in volume, but is leading in revenue.

If you are a regional carrier who built through COVID, or a new start-up that exploded thanks to VC funding, you should be worried.

None of the new entrants to the market have done anything interesting or novel when it comes to parcel shipping.

Go to ANY of their sites and look at their offer.

All they try to talk about is being to do things cheaper than the national carriers.

But the reality is, there is no innovation as to why they are cheaper. They have weaker infrastructure, less coverage and have leaned on the gig economy to make those claims.

Don’t me wrong, I’m a fan of regional carriers.

I just think they need to do more, because you aren’t going to be faster than UPS, FedEx or Amazon.

For all the new technology some of these carriers employ, they (pretty much) all still do highly manual sorted work to load trucks, use basic market last mile routing algorithms and don’t have the brand awareness to quickly get sizable volume considerations from major retailers.

You now have a market that is not only in a price war between the regional carriers, but with two of the big national ones gunning for major volume increases.

UPS has called their shot, we know that they are focused on. More mid-sized businesses and organizations tied to healthcare.

To drive more parcel volume, they have the flexibility in their current revenue model to apply considerable pressure to contract negotiations.

What I think we will start seeing is reverse rebates.

Instead of your price going down as your volume increases, what I’m expecting to start seeing is national carriers giving ridiculous rates to onboard and draw in customers. These rates at entry will be ultra aggressive and positioned in such a way that UPS will earn back profitability over the course of the contract.

With the short term financial focus of most general retailers and eCommerce brands, this type of program would but unexpected and novel for the space.

Regional carriers would get stuck not knowing how to handle it.

Amazon has also made it clear that they aren’t going to sit back and allow massive amounts of volume to build other networks.

Its new plan to do direct importing through the Amazon websites and do the logistics is a way to make sure that volume within their network keeps climbing.

How committed is UPS to these strategic goals?

Enough to spend millions in severance and new compensation to get the right type of leader to the table.

What they are paying Dykes

• Annual base salary of $725,000

• Management Incentive Program award with a target of 115% of his base salary

• Long-term incentive performance award targeted at 450% of his base salary

• Stock option grant equal to 50% of his base salary.

What they paid Newman 

• $7.3 million in total compensation for 2023.

• Eligible for a $1.8 million cash payment and additional severance up to $5.9 million

Underestimating their resolve would be a huge mistake for anyone in the last mile space.

People Love Prime Days But It Pays People Poorly

Prime Day is about to hit.

The promise is a new deal every 5 minutes.

But have you wondered what it actually takes to get it done?

One way that Amazon handles the additional capacity of events like Prime Day is with the Amazon Flex program.

If you don’t know exactly what Prime Day is, try this:

An exclusive annual mega-sale event offering incredible deals across categories for Prime members, driving massive sales and attracting new subscribers.

Amazon Flex is different than “traditional” deliveries. Flex drivers are gigwork / independent contractors.

Traditional deliveries are done by Amazon DSPs (Delivery Service Partners). Those DSPs run their own delivery companies and are responsible for their employee base.

Flex drivers will use their own vehicle and get paid by hour.

DSPs get into more intricate vehicle lease agreements with Amazon and receive a completely different compensation model.

Here’s a couple of typical examples of an Amazon Flex route offer. These deliveries are offered to drivers in “blocks” at pre-determined amounts for the work available.

(If you do some quick math, you’ll notice pretty quickly that this isn’t exactly the best offer in town).

A major challenge for Amazon Flex workers is the consistency of work. Since the program is primarily used to manage overflow capacity, drivers go from not getting any work for a week, to then seeing massive surges (like Prime Day) . Given the nature of the volume always moving through the Amazon system, and early deals offered to get people excited, a surge for the Flex program starts about a week before the actual promo date (if you know anyone driving for the program - ask them how last week was)

With scare hours and too many drivers looking to work, new tools have hit the market.

Completely unsupported by Amazon, drivers on Amazon Flex (and other gigwork platforms) are now using bots to immediately grab and confirm blocks of work based on their pre-determined settings.

This as created a new challenged in the drivers pool.

Join the thousands of drivers getting all of the best shifts and possibly get banned (see how Amazon interacts when suspected bot use is present), or keep trying to manually capture and confirm when you are willing to work and risk losing out to armies of bots always watching the data stream.

Once a block is selected, drivers are expected to deliver 30-35 stops per hour (this gets over 40 when you get events like Prime Day).

Pause for a second and let that sit.

They are expected to average 2 minutes or less, per stop (admin, driving, delivery, POD, etc).

That’s extremely hectic.

And can only be accomplished with the type of volume Amazon (and the others from the big 4) handle on a daily basis.

So while Amazon is pulling in billions in sales from the promotion, drivers getting the product to people’s door is basically minimum wage (with penalties or exile for poor performance).

That’s it for this week. Thanks for being here.