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Why LTL is perfectly positioned to take e-commerce market share

(Image: Jim Allen/FreightWaves)

This is an excerpt from Monday’s (3/22) Point of Sale retail supply chain newsletter sponsored by ArcBest.

The consumer spending boon, driven by government stimulus, is driving elevated demand for every mode of freight from ocean to air. Less-than-truckload is no exception. Not only are LTL providers seeing a surge in demand from Americans now ordering anything and everything online, but because of the imbalance between truckload supply and demand, nontraditional TL freight is spilling over into LTL as well. 

Freight analysts have been bullish on LTL e-commerce for some time. At a 2018 conference, John Larkin, who at the time was the managing director of investor banking, transportation and logistics at Stifel, explained that LTL was set to benefit the most from e-commerce growth. 

LTL is uniquely positioned to take advantage of multiple trends emerging from e-commerce acceleration. The first is simply the wider range of goods we have become comfortable buying online. Books and T-shirts are one thing, but when COVID locked most of the country down and kept Americans at home, overnight we began ordering desks, tables, sofas and other home improvements to make our stay a bit more bearable. 

It’s important not to conflate final mile and LTL, because they are two separate services with different purposes. However, as Americans buy more and more heavy/bulky stuff online, LTL providers have leveraged their equipment for final-mile deliveries. In certain situations, when the correct equipment (typically either straight truck or pup trailers with lift gates) is positioned, and the freight can be easily offloaded, LTL providers can handle final-mile deliveries. 

But this isn’t the biggest opportunity for LTL providers in e-commerce. As the behaviors at the end of the supply chain have changed, every level of the supply chain has been adjusted to meet changing consumer needs. In an effort to speed up fulfillment, retailers have increasingly positioned product closer to consumers, either by leveraging their physical stores as fulfillment centers or building localized fulfillment centers outside of population centers. 

Through the use of BOPIS/curbside or ship from store, many retailers are moving more freight through their stores despite online sales comprising the vast majority of sales growth. For the biggest retailers with hundreds of thousands of SKUs, this means more full truckloads than anything else. But for the majority of retailers, the increased throughput at stores leads to smaller, more frequent shipments to replenish inventories. “Most store endpoints in a normal flow of product aren’t receiving full truckloads of specific items every day. So [the dispersion of endpoints] does create a valuable position for LTL,” Dennis Anderson, chief customer officer at ArcBest, told me in an interview last week.

Retailers aren’t only using established store footprints to get closer to the end consumer, but also smaller, localized warehouses outside of metro areas. LTL carriers are well positioned to handle this e-commerce effect as well. “Smaller footprint urban fulfillment centers require smaller shipments to accommodate a broad range of [stock-keeping units],” Larkin said. “LTL shipments are now more often the optimal shipment size.”

Whether it’s to the end consumer or to stores, the number of endpoints is dispersing rapidly. 

By definition, e-commerce is moving the endpoint closer to the consumer, whether it be BOPIS, ship from store or home delivery. “When the endpoints are being dispersed like that, it naturally creates smaller shipment quantities. And LTL is uniquely positioned to fulfill the need”, Anderson said. 

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Since the beginning of the pandemic, data on warehouse pricing and availability has moved against retailers’ favor. The Logistics Managers Indices (LMI) for warehouse pricing and capacity have deteriorated over the past year, enticing retailers to maximize utilization and increase shipment velocity. With smaller equipment, LTL providers are positioned to gain from elevated warehouse demand. 

So what is LTL’s place in e-commerce? It is clear that e-commerce acceleration is causing big changes in the way retail supply chains are built. Retailers and brands are looking to place products closer to the end user, but inventory ages like milk. So they don’t want to carry more inventory, they want to carry inventory more efficiently and in the right places. 

And as the number of places where product flows increases, naturally, smaller, more frequent inventory replenishment runs are created. Whether it’s middle-mile solutions from DC to store or DC to DC or it’s home delivery, the location of endpoints is dispersing and the size of shipments is decreasing. 

Curtis Garrett, Recon Logistics’ VP of pricing and carrier relations, spoke with FreightWaves last week to detail the noise behind seemingly strong LTL data. 

“For every 50 shipments that are coming in on the 12,000-to-15,000-pound per shipment weight, you probably have 1,000 small, e-commerce-type shipments at 50 to 300 pounds that are counteracting that,” Garrett said. “LTL has become the catchall. The average parcel shipment is going up in weight and size as people are buying everything online. And then you have the truckload capacity issues. So everything is just kind of being thrown into the LTL bucket.”

New truck orders have been at multi-decade highs and well above the replacement rate for months now, so it is a matter of when, not if, truckload capacity is added to the market. And on the demand side, the industrial recovery is well under way. The semiconductor shortage is hampering the auto industry, but LTL demand is set to grow from autos and manufacturing this year. So it will be fascinating to watch how LTL carriers adjust their freight selection throughout the year. Consumer demand and e-commerce sales are expected to post another strong year of growth, so LTL carriers will have options. If it hasn’t been made clear yet, LTL has a major and growing role in e-commerce due to its agility and network flexibility.

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