There is a predator in our industry preying on the uninformed but well-meaning service provider that could evolve into a controlling force and in the meantime is taking advantage of haulers with promises of financial success but leading them into financial ruin. Some of these predators even have plans to dominate markets outside of governmental control.
Who are these predators – the publicly-traded waste companies, the large regional independents, a coalition of cities, counties or waste authorities, SWANA? No, none of these entities. All of the heretofore named groups are subject to the python-like squeeze, as is “One-Truck Tommy.” The predator is not an outsider. In fact many of our service-side industry participants are involved as enablers or codependents of this profiteer. Who is this vile sort that wants to control our business and our industry and take advantage of the weak? It is “Brokers,” the waste industry’s equivalent to Payday Lenders.
Before I delve into the parasitic activities of this pandemic, there are brokers in our industry that do a good job for their clients and the haulers that manage their waste. They help to aggregate customers and leverage that quantum of customers for better rates and allow the hauler to make a fair profit on the work that they perform. To that group I say, thank you. However, there are others that sell their story of lower rates to prospective customers, pocket most of the profit and then offer up the customers to some hauler who does not fully understand their cost structure with the predator’s pitch of economies of scale of more customers will increase density and they will make a lot of money. At the end of the day the customer has a reduction in their rate, the broker gorges on their take and the hauler is confounded with the increase in business and lower profitability.
I recently received a call from a friend who wanted me to help him evaluate a bid request from a broker that recently took over one of his accounts. My friend had serviced this account for many years with no customer service issues and at a competitive market rate. Now a broker took over the account and wants my friend to service the account at a much reduced rate. The service was one 8 yd container serviced once per week for MSW and one 8 yd container serviced once per week for OCC. The broker was kind enough to include their “Target Rate” (what the broker expects the rate to be or less) for each, $145.00 and $32.00, respectively.
My friend has a good grasp of his cost structure so it was easy to populate my pricing model with his actual expense values. For the MSW service, the operational expense (truck, disposal and container expense- his disposal rate is approximately $100.00 per ton, would be $177.00 per month and the OCC service would be $48.00 per month (including the rebate as an offset to the hauler). Remember this is operational cost only. There is no markup for overhead and no profit. If my friend accepted the “Target Rate”, he would be showing an annual loss on his income statement of $576.00 by accepting the broker’s offer. He said “no thank you.”
A client of mine called me with a similar dilemma. A broker wanted him to service a national fast food restaurant with an 8 yd twice a week. The broker was kind enough to also advise him that he needed to be around $2.00 per yard in his pricing. This would put the target rate around $139.00 per month. When we inputted his cost metrics into the pricing model, the operational expense (truck and disposal at $35.00 per ton) would be $225.00 per month or $3.25 per yard without and coverage for overhead and absolutely no profit. These are not fabricated stories; they are true. I am guessing that there are 10,000 similar stories out there just like them. Why are we doing this?
Some brokers are only too helpful to explain that their target pricing will help the hauler make more money by taking on the accounts that the broker is trying to off-load. Usually they tell you that if you will look at this from an incremental pricing standpoint (what additional expense you will incur by servicing this account) you will see how profitable these accounts will be to your business. What this means is that the hauler should only consider a portion of their truck cost and actual disposal cost. The broker will probably tell you that you already own the container so there is no need to account for that expense and that your overhead expense will not increase at all because of the new account. Further to the truck expense, they might tell you that there is no need to consider the fixed cost of the truck like depreciation, interest, insurance, tag and taxes. Additionally, they will probably point out the large cost savings that you will realize by “increasing your route density.
All of these arguments are valid in certain circumstances. However, you should consider two acid tests before offering this type of pricing. First, before you accept this work under the incremental pricing concept, you should ask yourself if you are currently at a truly acceptable level of profitability. If your income statement indicates that you are not, the incremental pricing will erode your profitability. Remember the old saying, “I am not making any money at these rates, so I am going to add another truck and haul more.” Secondly, by shifting some of your expenses away from the broker accounts, you will be adding an unfair cost burden to your current customer base. If you do this to your existing customer base, you might inadvertently be marketing for the broker nation. If you are currently at a truly acceptable pretax profit and can add broker accounts within an existing route (meaning basically within current mapped route), the offer would need a second look based on analysis rather than dismissing it immediately. The density increase proposition that the brokers sometimes offer appears to be a major selling point. To the density deception, we have examined both the 2 examples from above. The Target Rates would require a density increase to an unrealistic level. Good luck. 1, 2, 3, 20 or 100 broker accounts will not get the hauler there.
I keep hearing that some brokers are proudly promoting themselves as having a “disruptive industry business model” or a “disruptive business plan.” What does this mean? To me, it means that they are trying to disrupt the decade’s-long relationship between the hauler and their customer. It also means that they will be the point of contact for your former customers, you will have no interaction with the customer other than picking up their trash and when another hauler of less intelligence offers the broker a $1.00 per month lower rate, you will be gone. The customer will not appreciate the goodwill that you have established along with the extra services that you have provided to help them out of a bind throughout the years.
The broker’s digital or “new school” promotion appears to be garbage. Customers stage their waste, a truck collects the waste and transports it to a disposal point or a recycling facility, many times with the same trucks and the same disposal/recycling site, but with a broker in the middle. What is green or an improvement about this process? Compare the broker hubris to a real digital industry transformation: Amazon’s retail shift from bricks and mortar to digital while improving the customer experience. What the broker’s value proposition consists of is the customer gets a small discount in their monthly rate, the broker makes their profit and the hauler gets, well, trashed while doing their best rendition of Clara Peller. Brokers’ business model are based on an arbitrage and is dependent on the hauler taking a financial haircut. When independent haulers stop bottom feeding on the chum that brokers are tossing, the broker’s business model will collapse and the haulers will reclaim their customers.
I had the opportunity to attend a meeting where a broker organization was explaining their business model. The company representatives were very sharp business people with no industry background (watch the film “Wall Street” where there is a meeting of business interests discussing how they were going to break up BlueStar Airline). This meeting was very disturbing. First, the brokers talked about they plan to leverage their hauler network for purchasing power with major vendors: trucks, bodies, tires, uniforms, insurance, etc. If you submit to their rate demands, you can participate. Secondly, as their customer count continues to increase, they will start allocating entire geographic market areas to one hauler in that area or, in large metro areas, to 2 or more haulers, in effect creating a franchise outside of governmental control. I have also heard that they plan to explore being a broker on municipal bids.
If the brokers continue to proliferate, this could have the impact of eliminating many independent haulers from the industry. That could be many of you! This could also impact the national and large regional companies. Scary! This is a dynamic that is unchecked and gaining momentum each day. It does not appear that anyone is doing anything to stop the demise of independent haulers. Additionally, many of the independents are aiding and abetting this dark force of independent annihilation. The grand plan could reduce the remaining haulers to be just a contract hauler under the direction of a low-paying broker, not the former appreciative customer.
I recently read an article from ‘Bloomberg Technology’ featured in ‘Waste Dive’ about a large broker. The article was not very flattering to the particular broker. It appears their lofty goals have been stymied by industry realities and economics. Could this be an indicator of where the broker business is headed? Let’s hope so.
This sordid phenomenon reminds me of when I was a college freshman and took a survey course in political science. During that course we studied different “ologies” and “isms.” One of the things I remember was that Karl Marx, the father of Marxism, was reported to have said “the capitalist will sell you the rope to hang him with.”
What can we do to stop this? Stop working with them. Stop quoting them. Put your sales force out on customer retention calls to all of your commercial accounts to tell the story. Let “Stupid Sammy’s Sanitation Service” have all of the broker business and watch him go to the federal courthouse one day and file Chapter 7 or 11. We can lobby the National Waste & Recycling Association to help us, if they will. We need a concerted effort to keep our customers. Unfortunately, some of the haulers that do a majority of their business with brokers might not be an industry participant in the future. We need a Paul Revere on a modern-day horseback to sound the alarm to take action.
People who are addicted to cocaine are called “Coke Heads”, people addicted to methamphetamine are called “Meth Heads”. Are you a Broker Head? If so, I suggest that you go cold turkey.
I hope this is helpful to you. If you would like to explore how to analytically understand your cost structure and its relationship to pricing for real profit, please give us a call. We would enjoy helping you and your company.