After decades operating a major international freight and warehousing business in the U.S., the logistics division of German rail operator Deutsche Bahn is ready to flex its muscle in the crowded trucking market.
DB Schenker is the fourth-largest logistics services provider in the world, with $19.4 billion in gross revenue in 2019, and operates the largest trucking network in Europe. In the U.S., the trucking division has a support role, doing pickup and delivery for customers’ air and ocean shipments and warehouse moves.
The new strategy is to develop a stand-alone product that can penetrate the pure domestic truckload and less-than-truckload markets, as well as cross-border transport with Mexico and Canada, without any connection to international freight forwarding or contract logistics.
“This is kind of a refocus on land transportation to concentrate on penetrating this market more and an accelerated effort to grow the product, especially in the U.S. and North America,” said Joe Jaska, executive vice president for land transport in the Americas region, said in an interview.
DB Schenker, he said, will add some outsourced assets this year to help grow sales on its own, but intends to begin serious expansion efforts in 2022 that likely will include acquisitions.
The logistics giant recently enhanced its sales force in the U.S. and Canada to focus on selling truck transportation. “It’s dedicated salespeople actually going and selling the product as opposed to salespeople trying to sell the whole portfolio of services,” Jaska told FreightWaves.
Once COVID-19 cases calm down, a special gold-painted truck will cross the country, serving as a traveling billboard as it visits customers to showcase DB Schenker’s capabilities. The Golden Truck tour will include virtual media depicting where the truck goes, its activities and the people it interacts with.
The expansion into domestic over-the-road trucking comes as shippers search for alternatives to alleviate a supply squeeze. Since May, most trucks have been reserved in advance and rates for immediate delivery very high. Analysts expect demand to remain strong for many months as the economy reopens, more government stimulus is issued and retailers replenish inventory.
DB Schenker is pursuing a similar strategy in South America. After several years operating a trucking network in Brazil, it is expanding its land divisions in Argentina and Chile that previously supported ocean transport and contract logistics businesses to offer full domestic trucking.
Pure play truck product
DB Schenker ranks in the top 25 third-party logistics providers in the U.S., by various estimates. Its primary services are import/export, customs brokerage, order fulfillment and warehousing and distribution. It has 7,300 employees in 47 branches and 60 distribution centers with more than 17 million square feet of space under management. Road transportation follows an asset-light model, with subcontractors providing most of the power.
The new truck product will also rely on third-party operators to provide capacity for company-owned trailers operating in dedicated loops. In some cases, the integrated logistics provider will purchase equipment for the fleet as insurance against market fluctuations in rates or availability, Jaska said.
“You can’t control your costs as much, unless you do have some assets that you can control. So we see there is a fit for that. We have customers that would like an asset solution,” he said. “That is going to be another door opener for us to get in that arena more. We control enough business to where we can manage a fleet and, quite frankly, the market won’t affect us as much because of the amount of business that we have versus the size of the fleet we’re going to put on.”
Jaska said DB Schenker has a natural advantage with its forwarding and customs brokerage to handle cross-border trucking, which is a lucrative market opportunity.
“We can provide pickup and delivery on both sides of the border, as well as the customs piece, and be an end-to-end solution,” he said.
The North American model will be different than in Europe, where DB Schenker operates a huge less-than-truckload network with several hundred facilities and hires out a large portion of the transportation. Initially at least, that means an emphasis on truckload with some LTL as well as final-mile distribution.
“Our end game, our vision, is to have a large network in North America similar to what we have in Europe. There’s no definite timetables with that. Right now we’re in organic growth mode and down the road there is very likely to be some merger-and-acquisition activity,” Jaska said.
“Everything is on the table as to what this looks like,” he added, but acknowledged that building an LTL network will take time considering the company initially plans to rely on outsourced assets.
A partial truckload business with local pickup and delivery trucks making multiple stops and multiple customers sharing a trailer has a high barrier to entry versus a full truckload operation. It requires a large amount of capital to build an interconnected network of transshipment terminals and is much more labor intensive to sort and load individual shipments. Driving to a designated destination for a single customer and emptying the entire contents is relatively simple by comparison. That’s why the top 10 LTL motor carriers control about 70% to 75% of the market, according to industry analysts.
“A lot of third-party logistics providers do quite a bit of LTL work,” said Evan Armstrong, president of Armstrong & Associates, a logistics research and consulting firm in Wisconsin. “We don’t really call it that. We call it cross-docking or assembly and distribution. But you can build a non-asset LTL network.”
Logistics companies with those arrangements will have contractual relationships with owner-operators to perform pickup, delivery agents to do delivery and truckload carriers to perform the linehaul.
“You’re not going to have a 300-terminal network. And it’s not something you’re going to do overnight,” Armstrong said.
DB Schenker has several potential models it can follow.
On Monday, Canadian motor carrier TFI International announced an $800 million purchase agreement for LTL carrier UPS Freight (NYSE: UPS). It likely will use its dedicated U.S. truckload business, which it acquired from XPO Logistics (NYSE: XPO) in 2016, to run some long-haul trunk lines between LTL terminals and reduce redundancy.
Forward Air owns terminals, but only as a fleet of about 1,000 trucks. It mostly relies on independent contractors to run expedited LTL and truckload, as well as final-mile services. Roadrunner Transportation Systems (OTC US: RRTS) has a similar LTL setup.
With its size and majority ownership by the German state, DB Schenker has deep pockets to invest in the endeavor.
“The easiest thing for them to do is buy somebody,” said Armstrong, who once headed the pricing department at Roadrunner’s predecessor.
DB Schenker’s approach likely will depend on if it wants to do last-mile delivery, a segment that is growing at about a 17% compound annual growth rate, according to Armstrong & Associates’ data.
A natural target would be the final-mile division of XPO Logistics, which last year conducted a strategic review that included the possible sale of one or more XPO business units but put its North American LTL unit off-limits. In December, XPO said it would spin off its contract logistics business to shareholders. There are no indications XPO officials are interested in selling the last-mile unit, which would have a high price tag, but CEO Brad Jacobs has a track record of doing transactions if they maximize shareholder value.
“That’s a lot different than traditional LTL, which is business to business, dock door to dock door. Do they want to be in the slower-growth LTL piece or are they trying to get into last-mile delivery?” Armstrong asked.
In that case, buying a traditional LTL doesn’t make sense.
“But if they bought a truckload carrier who could also perform linehaul and had some origin warehousing, cross-dock facilities, you can do a lot through delivery agents,” said Armstrong. “You could build a pretty nice $500 million business in a few years that way.”
Logistics providers in Europe typically blend groupage, as LTL is called, and warehousing, while operators in the U.S. are more specialized, he explained.
“They’re used to combining LTL and truckload operations there. And that’s one thing I always warn European companies about if they’re trying to do something here. It’s really pretty separate. The way customers perceive those relationships is very separate” and shippers have different people procuring LTL and truckload carriers, Armstrong said.
“I’m not saying you couldn’t have some overlap. But for them it’s about getting the right solution with that one mode. If one provider can do it, that’s fine. But it’s not like Europe where shippers are used to going to one provider for both LTL and truckload.”