While many are announcing the death of retail, the real narrative is changing the way goods move in the U.S.
In case you haven’t been in a mall lately – and judging by the numbers, many of us haven’t – brick-and-mortar retail is struggling. At last check, retailers have announced plans to close over 4,000 stores this year. And that is only the announcements made so far in 2017. Just 21 retailers account for over 3,500 of those stores.
Kmart has closed many of its stores; reports are that Sears is teetering on extinction; Rue21 announced 400 store closings and J.C. Penney, which has been in trouble for several years, is continuing its store closing path, announcing 180 closings so far this year.
How are all these closing affecting trucking, which moves so much of the nation’s retail freight?
Store products have traditionally been delivered via truckload carriers, so the natural conclusion would be that the truckload segment of the industry is struggling. That doesn’t appear to be the case, though.
The truth is that truckload carriers – or anyone that moves on retail freight, for that matter – are in a time of transition.
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“While brick and mortar stores may be closing, e-commerce is exploding,” David Heller, vice president of governmental affairs for the Truckload Carriers Association (TCA), told FreightWaves. “It’s causing a ripple effect. Will the truckload environment [move more freight] to distribution centers? Whether it’s made in America or not, nobody ever goes to the train station to buy things. It’s got to get to where it needs to go and it’s got to get there on a truck.”
Retailers are closing down stores at record paces, reports Bloomberg, with 14 chains in the first three months of this year announcing bankruptcy filings. The filings have run the gamut, from shoe stores to sporting goods and even electronics. Another 20% of retailers are expected to shut down brick-and-mortar stores in the next 5 to 8 years, according to eMarketer.com.
Call it the Amazon effect
While many assume the shuttering of store fronts is due to e-commerce, there is also the possibility that America has finally shopped ‘till it dropped. Retail space per capita in the U.S. is 48 sq. ft., with the next highest nations only reaching 20 sq. ft., reports Thomas Albrecht, president of Sword & Sea Transport Advisors. The implication is that maybe there were just too many stores.
The fact is, Albrecht tells FreightWaves, that people are still buying goods despite the store closings, it’s just coming via e-commerce. Online sales, he says, make up more than 15% (excluding gas and fast food) of retail sales.
“Annual retail sales have grown between 3% and 4% each of the last couple of years, but the venues they are being purchased through and the impact to freight flows is quite dramatic,” Albrecht says. “Same store sales at brick and mortar stores have declined 51 consecutive months. Retail sales for the month of March … are a microcosm of the broader trends. Retail sales rose about 5% year over year, but e-commerce sales rose 12%.”
Sporting goods sales dropped 3.8% and apparel rose a minuscule 0.3%, he adds, but much like furniture, that is being buoyed by growing online sales.
“The reality is those two categories aren’t that weak because sporting goods and apparel are increasingly being bought online,” Albrecht explains. “Dick’s Sporting Goods has respectable store trends, but especially strong online sales. And even Macy’s, the poster child for struggling department stores, is seeing strong online sales to the point that online is almost a $6 billion business for them even as same store sales fall at a mid-single digital percentage clip. Lastly, the government reported furniture grew just 2.9%, but there is this company called Wayfair consistently posting 70-plus percent sales growth and they are exclusively an online retailer.”
Is the mall really dead?
Some, though, are even questioning whether the narrative of death of the mall is an accurate one. According to retail analyst Paula Rosenblum, writing for Forbes, the retail apocalypse is a false narrative.
“The only trouble with these stories is … they’re baloney,” she writes. “They serve to frighten the industry, allow retail observers to pontificate endlessly, and give ‘everyman’ a new slow-moving train wreck to watch. And they don’t do much more than that.”
Among the reasons she cites are increasing retail sales. Retailers reported a 4.1% increase in first-quarter sales over first-quarter 2016. Also, most of the chains closing stores have not been hurt by e-commerce as much as they have been hurt by years of poor management, changing market trends, or were simply just too large.
Rosenblum also notes a statistic that is rarely published: while there have been nearly 4,000 store closings so far in 2017, there have been over 2,800 store openings.
“Category killers may be on the way out,” she says, “but retailers selling interesting items and curated assortments are doing really, really well.”
Where is the freight going?
So while it is clear that in-store sales are sliding, the growth in e-commerce is propping up freight volumes. The question then becomes, where is the freight going if not to stores and who is benefitting from this?
According to TCA’s Heller, 78% of all truck freight is truckload. In 2013, trucking moved 14.96 billion tons of cargo. By 2040, that number is expected to rise to 18.79 billion tons, reports the Bureau of Labor Statistics. Satish Jindel, president of SJ Consulting Group, says that 23% of all for-hire freight tonnage can be attributed to retail accounts.
“More shipments are moving faster and shorter distances,” he says. That has led to a rise in less-than-truckload (LTL) and parcel shipments.
From 2011 to 2016, Jindel reports, the LTL market has grown 2.7% on a compounded annual growth rate. That compares to 5.8% for parcel and just a 0.6% rise for TL.
Based on the growth patterns, it’s easy to see a shift to more LTL and parcel growth. But is that really hurting truckload carriers?
“Length of haul has declined, with public truckload carriers reporting average decline in length of haul of 4% between 2011 and 2016,” Jindel says. “Parcel carriers and courier companies have both benefitted from the growth in e-commerce at the expense of brick-and-mortar retail.”
Albrecht notes that length of haul has consistently shrunk over the years as more distribution centers have opened.
“Length of haul (LOH) in truckload experienced consistent shrinkage from the late 1980s into the mid-2000s and then largely stalled except for the effects of the ‘Great Recession,” he says. “Many TL carriers saw LOH shrink from 2006-2010 only to modestly rise again the next few years.”
Albrecht also cites the just-in-time inventory shift and driver hours-of-service rule changes as other factors. “The next few years, a combination of ELDs and e-commerce will cut 50 to 100 miles off most TL carriers average annual length of hauls,” he adds.
Since 2011, LTL shipments have grown faster than TL dry van shipments each year. In the prior 30 years, that happened just three times. “E-commerce and faster replenishment cycles are behind this,” Albrecht explains.
Clearly, LTL and parcel carriers are benefitting, but Heller doesn’t think the truckload carriers are suffering much. In fact, he believes that the freight is still moving via truckload, but more of it is heading to distribution centers that are cropping up all around the country in response to e-commerce, rather than to stores.
“There is a change in the way retailers are using their stores,” Jessica Dankert, senior director-retail operations for the Retail Industry Leaders Association, told FreightWaves. “There are fewer large truckload moves and more less than truckload to urban fulfillment centers.”
The way retailers are handling e-commerce is driving the move to more LTL shipments as well. Albrecht notes two retailers that have had success with online orders being picked up in stores.
“Two successes are Home Depot and Toys R Us, each seeing about 45% of their online sales picked up in stores,” he says. “Walmart is being very aggressive in giving customers all sorts of options, including drive-through lanes at stores. Other companies are trying to use stores as the replenishment center for home deliveries.”
Target is undergoing a reset of its store designs over the next few years. As part of the redesign, special sections will be available for in-store pickup of online orders and fast-moving goods. It’s doubtful, though, that Target is moving a 53-foot trailer of blenders to each store to fulfill online orders.
The result is more LTL freight being shipped directly to stores, although most retailers are either not trying this approach or limiting what can be picked up in stores to only those items already stocked in stores.
“While there are some success stories here, the reality is most stores are ill-equipped for that,” Albrecht notes. “They are not built to have a large amount of inventories to fulfill all the online orders. Keep in mind that most brick and mortar stores feature between four and ten times more SKUs online than in their stores, so stores as [fulfillment centers] can only go so far given the limited physical storage in back.”
That has led to a revolution of sorts within distribution centers.
“New types of distribution centers [are being developed] that are more flexible to handle both e-commerce and store replenishment,” Dankert says. “For some, it’s smaller and more distribution centers. For others, it’s a remodeling. It’s a continual reevaluation of their distribution centers.”
How are carriers responding
While carriers that have dedicated operations catering to retail operations may be harder hit by the trends, it doesn’t mean they are not profiting from those same trends.
“You are seeing some traditional trucking partners diversifying their delivery options to take advantage of last mile,” Dankert notes. “You see a lot of focus on last mile and as a result, there are lot of startups [in that space].”
Legacy carriers are also trying to take advantage of the trend. Schneider National, for instance, is expanding its operations with last-mile delivery services. In June 2016, the company acquire Watkins & Shepard and Lodeso. Both companies are now part of Schneider’s growing Final Mile + service, which offers customized home, commercial and retail delivery with white-glove service.
Based in Missoula, MT, Watkins & Shepard provides LTL, truckload and logistics services for difficult-to-handle goods such as furniture and floor coverings, Schneider says. The company has more than 1,300 employees, including nearly 800 drivers based out of 20 terminals across the U.S.
Lodeso uses proprietary technology to handle supply chain complexities within the home delivery industry. In addition to continuous delivery tracking throughout the supply chain, this unique technology platform allows delivery agents, customers and all appropriate parties to handle any issues in a proactive manner.
“We are facing a large increase in demand for our services, and that requires investment in people, equipment and facilities,” said Ray Kuntz, Watkins & Shepard CEO, at the time of the sale. “Schneider not only brings financial strength, they also understand transportation and the power of technology, and appreciate what we have built as a team. Schneider is the trusted choice to integrate and support our employees, as well as current and future customers.”
XPO Logistics has expanded an e-commerce service that provides LTL and last-mile delivery options to shippers and other major carriers such as Swift Transportation and ArcBest are among those quickly adding last-mile delivery services.
ArcBest believes last-mile delivery is a $3 billion market. Others, according to Logistics Management, believe it may be a $13 billion market.
“We believe that in many ways e-commerce is still in its infancy and will continue to experience explosive, double-digit growth for the foreseeable future,” Mark Davis, vice president of pricing and traffic for less-than-truckload carrier Averitt Express, said in a recent interview.
There has also been a growing trend of carriers adding dedicated services. J.B. Hunt, for one, has seen its dedicated operation grow significantly in recent years to the point that it now makes up 23% of its operation and produces 30% of the revenue – second only to intermodal.
Whatever the cause, the result is that movement of goods is quickly becoming more of a logistics puzzle that requires companies to have flexibility and partnerships in the various segments of the industry – TL, LTL parcel and even intermodal.
The Journal of Commerce recently looked at this trend and found that of the five largest companies in its Top 50 U.S. Trucking Companies, only two – J.B. Hunt Transportation Services and YRC Worldwide – are truly trucking companies.
The other three are UPS, FedEx and XPO Logistics – all of which other various service levels.
“The latest rankings illustrate how trucking, at the top, at least, is evolving into a more logistics-oriented business, with third-party logistics companies owning some of the largest U.S. trucking operators,” wrote JOC.
In an interview with JOC, Bradley Jacobs, CEO of XPO, said that larger shippers “really appreciate the option of having one single, seamless solution for movement of goods from the warehouse to the [distribution center] to home delivery.”
Because of that, collaboration is quickly growing between carriers and their retail partners.
“There is a lot more focus on collaboration,” Dankert says. “Historically, there was more a customer-service provider relationship. We see a lot of retailers and trucking providers working together and exchanging data to solve these problems.”
To help meet some of these needs, J.B. Hunt launched Marketplace for J.B. Hunt 360. The e-commerce solution matches shippers and carriers and offers real-time data and artificial intelligence to match freight with capacity. As carriers make instant offers on available loads, shippers will be provided true market pricing of shipments, the company says. The system will automate carrier selection based on preference, ratings and reviews, and other factors.
“Technology is a huge force propelling us into the future,” says John Roberts, president and CEO of J.B. Hunt. “Customers are demanding greater visibility and information into their supply chain in real time. J.B. Hunt 360 is our comprehensive solution to meet that demand, combining J.B. Hunt’s 55 years of operational excellence with the latest technology available in the industry.”
A new frontier
While dry van carriers have been living these trends disrupting their operations for the last few years, refrigerated carriers have been mostly immune. That is about to change, though, again thanks to that great disrupter Amazon.
“In the next 5 years as Amazon conquers food delivery (or online grocery), this will lead to more freight density for their entire network, both food and non-food,” Albrecht says. “To conquer online grocery requires more same-day and next-day deliveries, itself a shortening of length of haul, which will shorten length of haul for all carriers.
“Ten years from now, every large and medium-sized metro area will be surrounded by fulfillment centers,” Albrecht predicts. “Each area will have its own fulfillment centers, rather than a city like Atlanta serving cities throughout the southeast.”
That is a view that was expressed by David Jackson, CEO of Knight Transportation in the company’s last earnings call.
“If you think about the growth that we’ve seen in e-commerce, it’s created a significant concentration of products moving into major markets which allows truckload to be in the game,” he said. “Whereas initially, when it wasn’t so concentrated or there wasn’t the volume, you had no choice but to rely on parcel or even LTL. So there’s a lot of opportunity, a lot of truckloads that come with e-commerce.”
The upside is that it will increase the number of local driving jobs. It also may mean that even more freight will move to distribution centers via truckload operations only to be loaded for last-mile delivery. The question is who will be handling that last-mile? Will it be the truckload provider’s regional service or a last-mile specialist?
Even retailers are not sure of the model sometimes. Grocer Meijer launched a curbside pickup service and while it has met with some success, it has not been the booming success predicted. The company also launched a home delivery service. Rick Keyes, president & CEO, told the audience at the recent TPA Supply Chain Show that even retailers are sometimes behind the times.
“The biggest challenge is the speed of change,” he said. “There has always been change, but now we have multiple disruptions happening at once. Just when you solve the problem right in front of you, you realize you should have solved the problem two or three steps away.”
According to data from eMarketer.com, 31% of shoppers will try online grocery shopping this year – up from just 4% in 2014. The average online food bill is expected to top $125, says an SSTA Analysis.
Online food kit companies such as Blue Apron and Plated – where consumers buy complete meals and have them delivered to their door – are becoming more popular in a society that increasingly has little time to spend hours making meals each night. In fact, companies such as these have raised over $5 billion since 2014, Albrecht estimates.
Also, starting this summer, Amazon will be able to accept food stamps for online groceries. The food stamp program is a $66 billion entity, according to the USDA, presenting a large opportunity for the e-commerce giant.
It is clear to anyone involved in moving goods that the freight industry is changing. But unlike the narrative that retail is dead, it is anything but. Savvy trucking companies are already positioning themselves to take advantage, but it is requiring a rethinking of their operations.
Whether they run truckload, LTL or parcel, carriers are being forced to adjust along with the retail industry. Freight is still being moved, and by all accounts, there is more freight than ever. That’s the good news for carriers. The bad news? If you are not positioned properly, you may be on the losing end of the new freight environment.