Trucking Markets: The Future Structure

 In Supply Chain Design

An Important Question From a Reader

The following question comes from Pawel Trebicki of Raben Transport, a Polish Company. Thanks for your interest, Pawel.

The question:
Will big shippers come to dominate trucking – and where: first mile, middle mile, last mile? [1]

The answer:
History tells us that large companies like to do their own thing. Where they have sufficient scale (lane density) to obtain the same efficiency as for-hire carriers, they tend to bring the work in-house. The driving issue is the desire for complete control. However, they also think they can pocket the for-hire carriers’ margins.

There are two degrees of such operations. The first, “private” operations, bring all, or almost all, the aspects of the work in-house, and the second, “dedicated” operations, keep dispatching in-house but subcontract the provision of capacity to a for-hire operator. Such operations have grown steadily since the mid-1990s, and together the two modes of operation make up about 45% of truckload trucking today.

We can say, therefore, that in 45% of the market shippers dominate – and they are usually big shippers.

[1] This jargon, I believe, comes from Amazon. First mile refers to pickup operations that bring freight to a facility for consolidation into truckload lots. Middle mile is the full-truckload over-the-road portion of the move. Final mile is the distribution of less-than-truckload freight to its receivers.

Where do shippers dominate trucking now – first mile, middle mile, final mile?
Achieving critical mass in lane density is easier where the supply-chain work takes place in a limited geography, and when back hauls are generally empty. Providing adequate service over a large geography with good backhauls generally takes more density than most shippers have. As a result, shipper-dominated operations are overwhelmingly biased toward local, short-haul operations (first mile, final mile) and away from line-haul services (middle mile). Of the 45% that the “private” and “dedicated” operations control, more than 40 percentage points are local/sub-regional operations.

Although the most visible of those operations carry the brands of big retailers like Walmart, the limited geography of many first- and final-mile operations means very small companies can achieve critical mass – with only a few trucks. My house is heated with propane. Our small, local supplier just filled the tank from one of their handful of private trucks. It was a Kenworth, no rinky-dink operation for that company.

What about the middle-mile trucking, and the over-the-road stuff?
Two things keep shippers from taking control of the middle-mile portions of their supply chains. The first is, again, the need to establish density. For-hire fleets with access to many customers can easily fill their trucks more than private fleets, with access only to their own freight. To date, in North America, despite the existence of very large retailers and manufacturers, middle-mile, over-the-road trucking is limited to a small fraction of private fleets, usually requiring very specialized equipment. Hill-Rom’s movement of caskets comes to mind. [2]

The other reason for the scarcity of middle-mile shipper-controlled operations is their inability to attract drivers who are willing to sleep in the truck. That task is a distinctive competency of for-hire trucking fleets that few shippers care to challenge. Walmart just announced its plans to pay its private-fleet drivers $90,000 per year for some operations. That may make recruiting for its local-delivery fleets easier, but it would make its middle-mile costs well above those of typical for-hire fleets who now often pay $60,000 or less.

 [2] Casket vans have extra volume and are equipped with special racks to secure the caskets.

What about Amazon?
Given the rise of Amazon, another of those large companies with a driving need for control, we need to determine if it has enough scale to achieve competitive density. Here are the facts: Amazon’s share of online sales in 2019 is about 50%, and online sales make up just over 13% of all retail activity. So, Amazon’s share of all retail activity is 7.5%, and retail makes up about 60% of all dry van trucking. That gives Amazon control over 4.5% of dry van trucking; let’s round that up to 5%. When converted to middle-mile tractors, that equals about 40 thousand trucks. Knight-Swift, the largest for-hire truckload carrier, fields just under that number. It is no wonder that Amazon is planning to bring much of that work in-house, as it has the scale of a very large truckload carrier.

But . . . there is always a “but.”
It turns out that Amazon directly provides only 15% of the online market, not the 50% of the market that uses the Amazon website. The balance of Amazon’s share is those goods that the supplier sends to the customer. Therefore, the direct, fully-controlled freight flows of Amazon need but 12 thousand trucks. That is still enough volume to have good density in many lanes, but it is not enough to establish a dominant position in the national market.

Of course, Amazon is already thinking up ways to convince its online partners to put their shipments into Amazon’s process. That would add fuel to Amazon’s thrust for control. We know from what Amazon has said publicly that they intend to bring most, if not all, of their freight, in-house, which puts them in direct battle with the three big parcel companies. FedEx and UPS operate 59,000 tractors between them, presumably many of which are currently moving Amazon packages. Clearly, that pairs’ 167 thousand smaller first- and final-mile trucks will pose a major challenge to Amazon.

Is Amazon smart to bring in-house what others have contracted out?
We have evidence in the behavior of Walmart, the big supply-chain company that has stores. I describe them that way because of their emphasis on supply-chain design. No one has done it more successfully over the last fifty years, and Walmart remains roughly 50% bigger than Amazon in sales with direct control of more than 61 thousand tractors-worth of freight. While it is true that they have a top-five private fleet, with more than 7 thousand tractors, the other 54 thousand tractors-worth of freight they farm out. Some other big fleets do bring in-house a much larger percentage of their freight, but those companies, like PepsiCo and Sysco, are centered on final-mile operations that favor private operation. This tells us that the overwhelming majority of U.S. retail firms, small or large, find for-hire trucking the most effective option. Again, having access to multiple sources of freight lowers productivity. Specializing in trucking not only delivers lower costs and provides more dependable capacity, it also frees the shipper from worrying about those problematic drivers.

If others are not doing it, why is Amazon?
We have, then, a situation that suggests strongly that Amazon’s appetite for control is more a function of the understandably human desire for control than some truth in transport economics. However, that the Seattle crowd has enough volume to fundamentally expand the boundaries of private fleet management says that a determined management team with ample money and patience can reasonably attempt such a thing – whether it is smart or not. To the extent they learn to do it well, and can sustain the process, their investment is a negative to the large truckload fleets that serve the big retailers today. Amazon is slowly driving a portion of those companies out of business, including the dominant player from only 20 years ago. In addition, Amazon has a clear preference to deal with small fleets when they subcontract portions of their truckload work to for-hire carriers (tractor-only is apparently their preference).

What could change the economics?
Two factors could shift them up the performance curve to make them a sure winner. First is their lavish investment in analytical work, both data management and systems design. They employ more than 120 economists, all doing practical applied science. Perhaps they will be the first to master the analytical potential of the digital revolution. Second, should they maintain their astounding growth performance and gain effective control of their partners’ freight, the 40 thousand tractor-equivalents of work could double or triple. What if their 50% share of online sales becomes 50% of all retailing? Buy your car from Amazon? Why not? That would jump them over UPS and FedEx to a new realm of critical mass. Amazon would achieve density their for-hire competitors couldn’t match.

Am I going out on a limb here?
Such speculation has little meaning in 2019, as the potential dominance of Amazon is certainly ten or more years out. Mingled with a host of other dramatic retail and supply chain changes, the 2035 truckload environment will be unrecognizable to today’s observers. The value of such speculation today is to make the industry aware of the high stakes as the industry moves through the Twenties and Thirties. Moreover, it reminds us that the faster grower in the fastest growing segment of the economy is adopting a different model for its freight to include its middle-mile volume. The current competitors in that space need to be aware of that challenge, just as UPS, FedEx, and USPS are threatened in the first and final miles. This analysis suggests that the outcome remains much in doubt, except for the certainty of a nasty fight.

Who are the winners?
Since the center of this challenge is in the control of the freight, and its capacity (the freight matching and dispatching function), the blood will be spilled among the big players who aim to control networks of freight via their technology, process and/or assets. I say it that way to add the technology suppliers to the usual list of carriers, brokers, and competing retailers. The clear winners in the short run are the small carriers who make their living selling capacity to the big organizers of the networks, brokers, and carriers. They will prosper because Amazon, at least so far, is not planning on buying middle-mile tractors and hiring drivers. In the long run, there are far too many variables at play here to identify the ultimate winners. We know who is competent now: UPS, FedEx, Amazon, Knight-Swift. We can watch them slug it out for a while, and maybe steal a few ideas while the radical technology slowly appears to change the rules in ways we can’t understand.

So, thanks, Pawel, for your question.
I hope I have answered some of what you are wondering about. I will address additional parts of your inquiry in subsequent blog entries.

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