What’s in Print

Last mile delivery landscape

Dramatic growth in e-commerce is changing the way products are being shipped, which will alter the picture for trucks, trailers

Last mile delivery is the movement of products from a transportation hub to the final delivery destination—usually a personal residence—as quickly as possible.

It is critical in today’s landscape because of the dramatic growth in e-commerce, which is expected to reach $2.4 trillion worldwide by 2018—a 25% increase from 2016.

And all of this is going to impact the truck and trailer industry in ways that can’t be accurately predicted.

“It’s not clear how this last mile component of the e-commerce world is going to develop in the US and globally,” said John G Larkin, managing director of Stifel Transportation & Logistics Equity Research. “Our friends at Amazon are literally taking the pot of spaghetti and throwing it up against the wall and seeing what strands stick. If something isn’t working, they immediately drop plans and move on to the next thing. This type of creative development is encouraged within the organization and makes it very difficult for normal businesses to do business with them. They are buying their own trailers. They just put an order in for 2000 Class 8 truck tractors. They’re buying 4000 domestic containers and running their own double-stack trains on the BNSF and perhaps other railroads.

“Uber and Google aren’t too far behind in terms of thinking about what the future of supply-chain logistics is going to look like. If I were dealing with your customers like JB Hunt or US Xpress or whoever it might be, I would suggest to them their competitor is not Schneider. It’s actually Amazon, Uber, and Google.

“It’s going to be tough to make winning bets on any particular type of product. Certainly the smaller delivery trucks could be a good bet, with economic liftgates perhaps powered with solar panels. It’s really important to stay attentive and flexible so that when your future becomes more clear, you are well-positioned to deliver the products the market is demanding.”

In his presentation, “Last Mile Delivery Outlook: What Lies Ahead for The Domestic Transportation Industry,” Larkin said that as e-commerce expands and population density builds in cities, fulfillment centers are increasingly located in the urban core.

John Larkin, Stifel Transportation

“Sam Walton (Walmart founder) popularized everything around a regional distribution center typically placed in the middle of nowhere, where he could find good non-union labor,” Larkin said. “All SKUs could come in by truckload quantities or intermodal container load or trailer load quantities and are shipped out the other side in private fleet equipment or dedicated equipment, either private companies pulling company trailers or private fleet trailers pulled by company power.

“The inbound fulfillment center was not a whole lot different than inbound to the regional DC (distribution center). But then FedEx or UPS—in some cases, the US Postal Service—would take it the rest of the way, including the last mile delivery, either to a business or the consumer. The problem with this is FedEx and UPS are pretty expensive.

“Then along came Jeff Bezos (Amazon founder), who was not burdened with the push to deliver profitability to shareholders—just burdened with the prospect of a dominant position in e-commerce, which I think he has just about achieved. He said, ‘We’ll put fulfillment centers right in the core of all urban areas to facilitate same-hour delivery, same-day delivery, or next-day delivery, and at an absolute worst-case scenario, two-day delivery. You still had truckload and intermodal quantities—in some cases LTL quantities—coming into these fulfillment centers because they’re typically smaller, given the price of real estate in an urban environment—maybe 100,000 square feet, as opposed to one million. There are a lot of different ways to make the final delivery once you’ve got that inventory-forward position close to end-user demand.

“The last model is a global model which is being used by some Asian companies and a few European companies. It involves delivery direct from the manufacturer to the end user without a lot of handling at distribution centers or fulfillment centers along the way. The global air freight carriers and some logistics companies are basically the fulfillment arm. The last mile delivery component of that is still up for grabs and very uncertain.”

“For bigger items, you have seen these smaller Class 5 and 6 trucks that have liftgates and can navigate their way through neighborhoods and deliver larger items like extra-size bikes and rototillers direct to your home,” he said.

“We have other companies that are involved in last mile delivery like Dicom, which is working for Amazon and others, and Google Express making home and business deliveries. You have building materials being delivered with trucks—either tractor and semi-trailer combinations or single-unit trucks that have forklifts attached so that they can actually facilitate the unloading.

“You have JB Hunt getting into the last mile delivery. Our most recent refrigerator was delivered by JB Hunt. There is a huge opportunity here as this business continues to grow. The tricky part is the installation. It requires a different kind of skill than the average delivery driver may have. There has to be some sort of high compensation and reward and penalty system to make sure this critical element of the process is handled.

“Amazon is patenting every idea you could ever dream up—more so to block other people out. There is a dirigible which suspends a warehouse in the air and they use drones and parachutes to deliver the product. There’s also a patent on an underground delivery system. Amazon is light years ahead of everyone else in terms of thinking through all the alternatives.”

 

Pat Thomas 
Immediate past chairman of ATA 
“Trucking Trends Today”

Pat Thomas, Immediate past chairman of ATA

He said trucking moves 70% of freight in the US, and in spite of all the things that are going to happen in the world, trucking will continue to move about 70% of the freight—and could actually gain market share.

“You hear all things about the growth of intermodal, but the numbers are so small,” he said. “They are going to grow at a faster rate than trucking but trucking will continue as most people predict to increase market share for all freight moving across this country. That’s good news for our industry.”

Other trends:

Consolidations continue.

“XPO has a number of acquisitions over the last few years and has grown from almost obscurity into now the #1 logistics provider in the Transport Topics top 50, passing UPS in the last few months. The good news is freight is going to grow. The bottom line is, over the next decade or two, it’s going to grow at a pretty good pace. That’s good for our industry.”

Driver shortage growing.

“Right now, we’re at a level where it’s an issue for us. It makes recruiting and hiring difficult, but it hasn’t significantly impacted our ability to move freight across this country. Most people estimate the shortage is in the 50,000- to 55,000-driver range. Over the next decade, it’s going to grow to more than 200,000. As you peel the onion back on that, there are a few things that jump out: truckload, which is by far the largest sector of the trucking industry, has a turnover rate historically of 90%, and in many cases close to 100%.”

Miles per trip continue to decline.

“From 2000 to 2014, the average miles per trip have declined over 30% by building and locating these DCs in and around urban areas.”

ELD mandate implementation: productivity, expense.

“This thing is a done deal and is going to happen, and the implementation phase is this year. We will see folks scramble to do it. Large fleets are largely compliant already. Most of the bigger fleets have been on them before there was a regulation, but about 80% of companies are not compliant. The trucking industry is a big group of small companies: 90% of all companies in the trucking business have 10 trucks or less. So the vast majority of small carriers are not ELD-compliant. There will be issues as to productivity. Some people guess there will be a 3-6% loss in productivity because of ELDs. There will certainly be more equipment needed to do it, so there is an increase in purchases, particularly in trailers. There is some expense associated with buying and having it in your equipment.”

Elements of the small-package industry:

Traditional lines are blurred.

“It has been that way for a number of years, but it continues to get more and more blurred as we go on. Shortly before I started with UPS in ‘85, we had a weight limit of 50 pounds. When I started, there was a weight limit of 70 pounds. Not too many years after I was there, we went to 150. Now we can take LTL shipments within our system. So the lines are blurred between different kinds of services that we offer. That will continue to happen as we move forward. And it’s the same with other carriers. We will continue to blur those lines.”

Continued diversification by FedEx and UPS.

“Many years ago, we just delivered packages. Today, we have an airline we deliver overnight freight. We have a system where you buy space on container ships and we ship over water. We do fulfillment, we do warehousing, pharmaceutical, brokerage, intermodal. The portfolio of things we’re doing is expanding.”

e-commerce is exploding.

“But it’s been very difficult for traditional carriers to get their arms around it. It’s just happening too fast, the surges are too great, and capital investment to prepare yourself—particularly for Christmas season—is almost unwieldy. So we’ve seen UPS and FedEx have some difficulty with earnings related to e-commerce. When I started 31 years ago, we delivered predominantly from business-to-business. That thing has been turned on its head now. It’s more business-to-consumer. The cost structure on that is not nearly as good. So we’re being pinched all the time on costs. E-commerce is not going away. It’s going to grow, but managing it and trying to keep the margins in place are difficult.”

•  The three largest companies (UPS, FedEx, USPS) are being challenged by new competitors.

“Most of these you will have never heard of. Many of them I don’t know names either. But they’re popping up all over the country. They typically are regionally based and sometimes locally based. But they can come in with very low capital investment and disrupt what we’re doing.”

•  Continued pressure to reduce time-in-transit and customize deliveries.

“There’s continued pressure to do it faster, cheaper, and customize it more. We will continue to see pressure to do that. You can actually change the delivery address on a package once it’s in route. So after the shipper has shipped it, you’re able to electronically divert it to another delivery address in a different state, all the way across the country. That’s a nice feature, but it takes technology and expense.”

•  Access points.

“They’re very popular in Europe, and we’re rolling those out here in the US with both of the big carriers. You’re not at home during the day, so you can have a package delivered to an access point and pick it up when it’s convenient for you.”

•  Increased capital investment on facilities and technology.

“There has been unbelievable investment in facilities and particularly in technology in our industry in order to help drive down the cost because of e-commerce. If we can get a package in and out of the building with it only being touched twice—once on the way in and once on the way out—that’s the best of all situations, whereas years ago it may have been touched four or five times while it was in there. We have to find every single way we can to reduce the cost of operating the facility.”

 

Thom Albrecht, CFA 
President, Sword & Sea Transport Advisors LLC 
“e-commerce & Last Mile Services: Heavy, Bulky Items”

Thom Albrecht, Sword

Albrecht said consumers are increasingly comfortable ordering bulky items online. In 2012, appliances were the least likely product consumers were willing to buy online, followed by furniture and large electronics. Today, only 10% say they wouldn’t buy appliances online—compared to 38% in 2012.

Last year, Wayfair—which specializes in furniture and home goods—saw revenues grow 74% to $3.3 billion.

“They have traditional furniture companies running for cover,” Albrecht said.

He said the online heavy, bulky delivery business is almost $13 billion in freight revenues per year, with furniture accounting for $6 billion. And people are stepping up their online ordering: Average orders for every individual who’s shopping online was 10 per year in 2012, growing to 16.7 last year, and projected to reach 21.5 in 2018.

And Amazon is beginning to go after the food industry.

“Food is so critical to everything they do because it’s going to add tremendous density,” he said. “Over the next three to four years, you’re going to see online grocery shopping explode. That density is going to lead Amazon Prime to change its definition from two-day deliveries to first next-day and then same-day. It’s going to be same-day everywhere across the country, which will lead to more brick-and-mortar shutdowns, including the grocery industry. And online spending will be over 20% of retail sales. It could be closer to 25%.

“Surveys show that Americans are not going to be regular shoppers of online grocery until you have a same-day, or at worst case, a next-day option. So this is why Amazon is doing that. But in conjunction with that, they will change the definition of Amazon Prime for non-food day deliveries to next-day and same-day. It’s going to have dramatic ramifications for length of haul and equipment needs.” ♦

 

 

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