Will rising transportation costs increase prices for medicines and other products?

Country road with mountains in the background

As fuel prices, VAT, and Platon tariffs increase, what's in store for the transport market in 2019 and how this will affect the cost of goods?

As fuel constitute a significant part of the overall cost of transportation, last year’s jump in fuel prices had a significant impact on Russia’s transportation market. Against this background, the price of logistics services in 2018 increased for the majority of market participants (68%). 41% of carriers indicated a slight increase in their tariffs for transporting goods while almost a third of companies increased prices by more than 10%, and 1% of companies by 20% or more.

These findings are from an annual study of the logistics market by the Transporeon Group, conducted in November 2018. A total of 2,500 carriers connected to the group’s Ticontract platform took part in this most recent survey.

Summing up the year 2018

As part of the study, companies were asked about the dynamics of the transport market in 2018. 200 carriers spoke about their expectations for 2019. Most were small (44%) and medium-sized (41%) companies with annual revenues of up to 100 million rubles and 100 million-1 billion rubles, respectively. 15% of respondents were large companies with annual revenues exceeding 1 billion rubles.

Market factors influenced prices, although all of the surveyed carriers operate mainly on long-term contracts. According to the study, one-off tariffs established for individual orders accounted for only slightly more than 10% of all transactions.

In general, market participants in 2018 remained "in the black". Over the year, more than half of the surveyed companies grew by 10% or more. Among the reported risks for 2018 were a lack of transport offers and a shortage of professional truck drivers, as well as the growth of cargo volume. In all other respects, the market and price dynamics coincided with the expectations of market players: 41% of respondents said that tariffs remained unchanged; 26% had to raise prices by more than 10%; and only 1% by 20% or more.

It is likely that the preponderance of long-term contracted tariffs – with only a small number of orders based on non-fixed tariffs – enabled carriers in Russia to balance their books. They were able to avoid the price increases and shipper shocks experienced elsewhere around the globe. In addition, in the Russian market there are popular mechanisms to compensate for fuel price dynamics when concluding transportation contracts. Agreements typically stipulate in advance a maximum fuel cost growth rate, beyond which revised tariffs are triggered.

Any rise in the price for carrier services can affect the cost of products on store shelves. Mikhail Kravtsov, head of logistics at Ruscam Steklotara Holding, notes that there are many stages in the production of goods where transportation costs affect the final cost, starting with raw materials supply and production logistics and ending with inter-warehouse movements and final delivery to the consumer.

Kravtsov notes that at the same time some market participants include in the tariff, and subsequently therefore in the price of goods, not only the real cost of transportation against the background of, for example, rising fuel prices, but also other costs or subsidies to the company's net profit. "This can be seen in the example of a number of transportation tariffs where fuel represented about 35% of the tariff total. With fuel prices increasing by 38% in 2018, the cost of transportation of goods should have increased by 13%. However, for the Moscow-Ufa route, the tariff increase was 23%, which is almost double the fuel growth element".

It should be said that any collapse in the market of finished goods due to production shortages of raw materials in certain regions will add logistics leverage and increase transportation costs for the cargo recipient while also raising the selling price.

Against the backdrop of all these factors, shippers including retail chains and goods manufacturers can include higher transportation costs in their prices, and this causes a further increase in the cost of goods on the shelves. The rise in prices for transportation services affects the prices of medicines – all medicines and not just the ones listed as vital and important, with prices regulated by the state.

Roman Evseev, head of logistics services at Sibur, notes that logistics costs represent a higher proportion of the overall cost of goods produced in one region and consumed elsewhere. These categories include non-local fruits and vegetables. Foodstuffs, fast-moving consumer goods (FMCGs), and building materials are the most sensitive to rising logistics costs, according to Evseev, while even the slightest increase in carrier tariffs affects expensive goods such as electronics and household appliances.

Roman Evseev, head of logistics services at Sibur, notes that logistics costs represent a higher proportion of the overall cost of goods produced in one region and consumed elsewhere. These categories include non-local fruits and vegetables. Foodstuffs, fast-moving consumer goods (FMCGs), and building materials are the most sensitive to rising logistics costs, according to Evseev, while even the slightest increase in carrier tariffs affects expensive goods such as electronics and household appliances.

It is worth noting that, according to the Federal State Statistics Service, the cost of food products in 2018 went up by 4.7% with a total inflation rate of 4.3%. At the same time, food inflation accelerated significantly compared with 2017; at that time, food inflation was only 1.1%. Gasoline prices went up by 9.4% over the past year.

Why prices will rise this year

The surveyed logistics companies were not expecting a significant increase in tariffs in 2019 but, at the same time, a growing percentage of respondents forecast price increases of more than 20%. In the 2017 survey, none of the carriers made such forecasts; in the 2018 survey, some 5% predicted these increases. Despite this, a large proportion of respondents said they had not yet decided on investment plans, which is again indicative of market instability.

The main factors influencing the price dynamics of carrier services in 2019, according to the most recent survey, will be the economic situation and rising fuel prices. The latter is particularly anticipated due to the January 1st excise tax increase on diesel (2.7 thousand rubles) and gasoline (3.7 thousand rubles). In addition, the freezing of retail and small wholesale fuel prices in early 2019 is provoking oil companies to earn in other ways, including from clients in the transportation industry.

The Association of Transport and Logistics, Manufacturing and Trading Companies, according to the Kommersant newspaper, has already warned Prime Minister Dmitry Medvedev about the consequences of such a move. It predicts the price of carrier services may rise by 10%, and this will directly affect the cost of products for consumers. For this reason alone, the sales price of Russian products is likely to increase by between 1% and 8% depending on the category.

Survey respondents also indicated the effect on tariffs of VAT increase from 18% to 20% in 2019. This tax is directly transferred to consumer prices. For socially important goods – in particular meat, vegetables, cereals, baby food, and medicines – the VAT rate remains stable at 10%, but of course the VAT-inclusive price of fuel affects almost every product, mainly due to higher delivery costs.

Other price growth factors are not so obvious – in particular, the expectation of changes in state regulation for the industry. For example, in early 2018 costs and consumer prices were impacted by the abolition of movable property tax preferences which had previously benefitted many carriers. An increase in the number of toll roads and rising prices for imported cars and spare parts also indirectly affected the market. In addition, from the beginning of 2019, Platon tariffs have increased — these payments typically represent up to 5% of the carrier’s overall costs. Because it now costs more to travel on the roads, these expenses will inevitably be passed on by the carrier to the cargo owner, and the latter will include all this in the cost of goods for the final buyer.

In general, rising prices for fuel and all of the above factors represent an indirect risk of increasing the cost of consumer goods. However, given the context of declining purchasing power, shippers such as retail chains and manufacturers cannot simply pass on all of their extra costs to the consumer. This is obvious in the 2018 survey. Despite increasing logistics costs, overall tariffs did not increase significantly. This is due to the presence of competition and market optimization opportunities for carriers.

It is therefore possible to restrain and minimize the growth of logistics tariffs and, accordingly, the price of consumer goods. To do this, shippers need to optimize and automate their key business processes. The use of technology allows shippers to reduce transportation costs by more effectively searching for, identifying, and securing the right carriers for their particular transportation routes, offering carriers connecting loads to help minimize empty runs. Collaborating via a cloud-based digital platform, shippers and carriers can jointly engage in resource planning and queue management – solutions which mean even extreme fuel cost fluctuation can be accommodated to minimize the impact on end-consumer pricing.

Subscribe to our Newsletter now!