Clearing up Some Distorted Ideas on Rate-cutting
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Hauliers Should be Allowed to Charge Rates Based on Their Own Experience of Costs, Phis Their Views as to What is a Reasonable Profit: There is no Real Danger in This Course MY last week's article terminated in the middle of a discussion which I have had with a haulier friend of mine, relative to certain suggestions I made in an article entitled "The Wise Men from the East," which appeared in "The Commercial Motor " dated March 24.
When I broke oft last week, I had got to that part of our conversation in which I had gone through my friend's costs and rates, showing that, with an 8-tonner on the Liverpool-London route, he was able, at 32s. 6d. average rate per ton, to make a revenue of 248 15s. per week, as compared with the total cost of 241, so that his net profit was 27 I5s. per week per vehicle. It is, perhaps, of importance to emphasize that the figures which we were discussing were, as to most of them, pre-war.
That part of the conversation was really preliminary to demonstrating to him that it was quite possible for another operator, in the same district, to charge less for the same kind of traffic and yet make a fair and reasonable profit. It is my view that, if an_ operator finds it possible So to do he is justified, and cannot fairly be charged with rate-cutting.
My point, to this operator was that, in making such a charge (of rate-cutting), he was wrong in principle, because, what he really meant was that this competitor was cutting his rate and that he had no justification for assuming that his rate was a standard one and, therefore, sacrosanct. I should add that my friend had 14 vehicles of a 'total pay-load tonnage of 140.
" Now," I said, " we will try to get out some figures for your competitor.
" We know quite well that he has only two lorries—both .8-tonners. The first thing that we must inquire into is the amount of his establishment charges, as compared with yours. Incidentally, before we go any farther, just bring out your own sheet of establishment costs to date, so that we can have before us the details as a basis of comparison of what are likely to be his figures."
" Do you happen to know his costs, then? " Ile asked.
" I don't," I said, "and if I did I should not be discussing them with you. You and I both know the style in which he carries on his business and, from that, it will not be difficult to get a good approximation as to what his figures really are."
Differences in Establishment Costs He then produced his own schedule of establishment costs, drawn up in the manner I have often recommended and which he has followed for some years. It is here reproduced as Table I. The total, it will be observed, is 25,809 15s. 9th per annum, which differs from the figure of £5,500 per annum as mentioned in the previous article.
" I see your costs are up a bit," I remarked. " Is there any particular reason for that? "
" They might have been more than that," he replied, " for there are two items there—fire watching at £200 a year and war-damage • insurance at 2500—that Were not included the last time you saw, them. Had I not been able to make some reductions in one or two items, principally staff wages and travelling expenses, the total would have been higher than it now is."
" Right," I answered, " we will let it go at that. Nov, let us estimate your competitor's establishment costs.
" In the ,first plate, there is nothing to go down under the first two items, office rent and office' rates. I happen to know, as you do, that his office is merely a partitioned
off corner of his garage, and that he pays less than £1 a week garage rent in all and that is the amount allowed in operating costs for garaging two vehicles: It might almost be said that we could put down a 'minus quantity against those two items, but we'll make it nil, "He doesn't spend much on lighting, probably 22 per 'quarter in the winter and 10s. in the summer, making a total of 25 per annum. For heating, all that he has is an old coke stove, and I don't suppose he spends as much as 23 per year for fuel on that, but we will call it 23. His water will cost him about 30s. per year.
" For his telephone bill I think 215 per annum will suffice, and I should imagine that if he pays his auditor a couple of guineas for his annual audit he thinks he is being extravagant. Anyhow, we will make it that.
" Law costs—I don't suppose he has any. He is not the sort of man who spends money on lawyers. On sundries, for which you have 2330, I don't suppose he would spend more than £5. We can put down £2a year for fines, and as for travelling expenses they will comprise no more than bus and tram fares if I know the man. Now £10 will cover them.
No Director's Fee " Clerical wages is the next item, and there is nothing to go down for those because he does all the work himself. For the same reason the next item, National Insurance stamps (clerical) will also be nil. I don't suppose, as a matter of fact, that he pays himself any director's fee at all. It is more than likely that he regards his net profit as being his remuneration and lets it go at that. However, we will put down £50 per annum against that item.
" There -will he very little on account of depreciation on garage fixtures. I don't suppose he has anything but his fuel pump and a small compressor for tyre inflation and £1 per annum should be sufficient,
" For income tax and N.D.C. we will take £40. He is not a member of any association so there is nothing to go under that heading. The bank charges will take £5. For expendittire on ferries, weighbridges, parking and so on, £6 per annum.
" He always buys his vehicles for cash so that there is no interest on hire-purchase to be dealt with. Printing and stationery ,will cost him, at the very outside, £10 per annum. His ordinary fire insurance won't cost him £1, but we will put it down at that.
" He doesn't spend anything at all on maintenance of buildings because he makes the landlord do what little is done, which is precious little.
" Of his liability to bad debts we really haven't any knowledge at all. From your acquaintance with him, what would you say; is he likely to have any? "
" I should say not.. He is the sort of chap who looks after number one, and he isn't likely to let anyone go very far, that is certain," " Very good then, we will say £5.
" As regards claims. What do you think? "
" There is not much liability to damage with the traffic he carries any more than there is with mine so that, in all probability, I should think if you put £4 a year down you won't be far out."
" All right then, we will say. £4. Interest on capital invested in the business. What of that? "
" Well, there is only the money in the lorries because there is nothing else worth bothering about." " Well, as you know, interest on capital invested in the business is part of operating costs so that the answer to that is nil. " As forpostage, I suppose £5 a year will cover it. We will put down £5 Ss. as that will make our total an even amount.
" A and B licences will take £3. He does no advertising at all so there is nothing there. His goods-in-transit insurance costs him £10 and—what does he do about fire watching: do you know " " Yes, I know all right. He does a couple of nights a week himself, his wife does a night and the drivers take it in turns to do the rest. At the outside, I should say that £60 a year would cover it."
" Very well, then, we will put down £60. Then there is war-damage insurance. I should say that is probably about £20. What is the total?
‘Ve added it up and it came to £264.
" Now you see," I said, "it costs him £264 per annum for establishment costs for two vehicles.. ;That, as near as makes no matter, is 42 10s, per week per vehicle, which is, approximately, 65. 3d. per week per ton of pay-load, considerably less than half your total of 15s.
" And that isn't all the advantage he has over you," I continued. "He is a good business man, and I say that with no disrespect to yourself. Indeed, perhaps I could put it another way: I might point out that he has only the traffic of two vehicles to care for, be has been in business for some years and, by running a good service, has
made some useful connections at both ends of his route. In consequence, he is able to make three journeys per week, regularly, with both lorries, and his percentage of back loading is higher than yours."
" He gets more back loads because he does them at cut rates," he persisted. " We are coming to the cut rates question in a minute, if you don't mind waiting, I said.
'You are not going to tell me that he doesn't cut rates now," he came back sharply.
" Wait and see," I said. " I was going to point out to you that, besides being at an advantage as compared with you in connection with his establishment costs, his vehicle-cost per mile is less."
"How can that be," he asked, "as we have already agreed that I am able to buy petrol, oil, tyres and vehicles on better terms than he can? "
" It can very easily be," I said, "as I shall soon show you. In the first place, even supposing that he could
make no cuts in his running costs, his cost per mile is bound to be less than yonrs because he is averaging 1,200 miles per week with each vehicle, instead of 1,000 miles per
week, which is your figure. . •
"Actually, because, as you know quite well, he works on Sundays in his garage doing running maintenance on his vehicles and keeping them up to .scratch, he can make a fairly considerable cut in his maintenance costs: I should estimate this at not less than id. per mile. His running costs then, instead of being 6.03d. per mile, -which is the figure in the current issue of ' The Commercial Motor I
Tables of :Operating Costs, total only 5.53-d. per mile.
"Taking a round figure for his standing charges of £8 per,week; instead of £8 Is. 6d, the figure in the Tables, the amount of his standing charges per mile is only 1.6d., so that his total vehicle-operating costs per mile are only 7.I3d. instead of, as in your case, 7.71d.
" Then," I continued, " his total vehicle-operatin,, costs per week, for running 1,200 miles, are £35 13s. You see that is more than yours, which amouut to only £32 2s. 6d.. That is because you are dieing 1,000 miles and he 1,200 miles evew week.
" Now, we took his overheads to be £2 10s. and we will alio* the same for drivers' expenses as we did in your case—£2 17s. per week. That brings his total cost to £41 per, week which, curiously enough, is exactly the saine, as yours. We have to bear in mind, of course, that he is doing three journeys per week as against your average of two-and-a-half. '
" Now then, his average loadings per week, instead of being as in your case 30 tons, is from 36 tons to 38 tons and, if we take 37 tons as an average, he can get the same revenue as you 'get—£48 15s. per week—showing a profit of £7 15s. per week if he-charges no more than 26s. 4d. per ton as compared with your 32s. 6d."
"My goodness," he said. "That is a difference." ' " A considerable difference," I said. " Actually, it
doesn't follow that he charges so little as that. He may know your rates and think it worth while te get quite close to them without equalling them,. Suppose he decides that it would be reasonable to operate for 2s. 6d. per ton less than you do, so that he gets 30s. 'per ton instead of 32s. 6d. In that case his revenue is round about £55 10s,, showing him. £14 10s. per week profit."
" But it -can't be done," he protested. "No single operator running two vehicles can-make all that profit.' .
I know very well that he can," I replied. His week's' profit of £14 -10s. per week is a little better.tha.n £700 per annum, per vehicle.
" Do you still think that he is rate-cutting? " S.T.R.