AUSTIN. Truckload carriers have something to look forward to in the near term but, in looking a little further down the road, a leading industry analyst tosses around terms like “decimate,” “destroy,” “profound impact,” “seismic changes,” and, the kicker, “the whole world is going to turn upside down."
First some good news from Thom Albrecht, a long-time Wall Street analyst who is now president of Sword & Sea Transport Advisors, a transportation consulting firm. Speaking at the Transplace Shipper Symposium here this week, Albrecht forecast the excess truckload capacity that started building in 2015 should have run its course by early fall.
But “equilibrium” does not mean a quick rebound to 2014 conditions. “The intense rate pressure should begin to reflect a more stable market supply environment,” Albrecht said.
He also anticipates that 2018 and 2019 “will feel good” to truckers. But carriers shouldn’t get too used to the good times, because a lot of truckload demand is going away and never coming back, he explained, thanks largely to Amazon and the e-commerce revolution in retail.
Albrecht used "the flywheel effect" to characterize the growth of e-commerce: "It's something that’s big and slow to get going, but once it gets going it becomes self-sustaining."
To illustrate, he pointed to Amazon's 47% growth in the sale of cosmetics last year—compared to 2% growth for the industry overall. "They're going to decimate traditional cosmetics sales venues," he noted. Similarly, Amazon sold $7 billion in housewares last year, 33% growth compared to 9% for the industry. Amazon's health and personal care business likewise grew five times faster than the industry as a whole.
And just this month Amazon will host a "mega" consumer products and food summit in Seattle, at which the company is expected to tell major suppliers, "we want you to bet your distribution capabilities on us," Albrecht explained to the audience—one that featured many such manufacturers.
“'You don't need Kroger, you don't need Walmart, you don't need Target, or Costco,' whatever," he said of Amazon's pitch, then clarified, "of course, they're not going to do that—but they're going to explore how they can sell more products through Amazon."
Friend or foe?
The "carrot and stick" message will be to offer suppliers access to the leading e-commerce retail platform as the lure—or else the products will not receive full promotional exposure as Amazon instead pushes its own branded, competing products.
For those consumer products companies, Amazon and its rapid growth prompt both dread and optimism. "You want to attach yourself to a winner, but there's also the fear that if we don't do something with Amazon, we don't even know what our future looks like,” Albrecht said. “And then there's the fear that some of the traditional venues they've bet on are going to be under financial distress. They're seeing it already, and it's expected to spread."
And as the flywheel picks up speed, Amazon drives even more density to its own network—more stops and more products per stop. As a result, over the next three to four years standard nationwide delivery times will shrink from two days to next day to same day, and that leads to "another round of brick and mortar shutdowns."
"Amazon is in the process of completely destroying the traditional brand values that we're used to," Albrecht continued. The bottom line: 20% more brick and mortar stores will close in next 5-8 years, on top of an already threatened traditional retail environment.
Online spending, as a result, will grow from 9% to 20% of retail—and "it's going to have a profound impact on freight distribution and patterns." For starters, the heavy-duty commercial fleet will be 8-10% smaller in next 10 years.
On-line grocery shopping will likewise generate "seismic changes" in the marketplace, growing from a $9 billion slice of a $700 billion pie to $70 billion by 2021, led by Amazon, Albrecht explained. Amazon has also qualified to be a vendor for the federal food stamp program, coinciding with the recent offer of Prime memberships at a monthly—rather than an annual—rate. This comes on top of the rising popularity (and investor interest) in home-delivered "food kits" from companies like Blue Apron and HelloFresh.
"All of a sudden, the large truckload shipments to some of these places are going to go away," Albrecht said. "There's a lot going on here in distribution. The whole world is going to turn upside down."
What is a carrier to do?
As Amazon standardizes same-day delivery, truckload length-of-haul will shrink "dramatically" in the transition to a delivery model.
"I think that's why excess capacity has remained [in the current market], because the industry is already losing so many traditional truckload shipments,” Albrecht said. “And you're looking at a different driver profile, too: The person who's driven over-the-road, even if it's been in a dedicated operation, do they want to do five stops and only cover 120 miles? There's a lot of interesting questions.”
One of which, apparently, is can the company be a trusted partner?
Just last month Central Freight Lines sued Amazon Fulfillment Services in California federal court. The carrier claims Amazon owes more than $2.9 million in outstanding shipping fees, and has bullied Central Freight and other trucking companies into unfair contract terms.
"This is what Amazon does: They look like the pretty girl at the dance,” Albrecht said. “Trucking companies talk about the first year they partner with them and it's fantastic, but after that it's just a series of frustrations."
Albrecht suggested that many truckload carriers are like "deer in the headlights," waiting for an upturn in the cycle "to bail them out"—but loads lost to e-commerce aren't coming back.
"They're going to miss market if they don't wake up," he said.
And just what is what's left of the long-haul market going to look like?
Transplace CEO Tom Sanderson suggested that the "in-bound" link in the supply chain—from the manufacturer to distribution centers—would remain. The result, added Albrecht, will be to free some dedicated capacity. For fleets willing to risk "the volatility" of the one-way OTR market, "it's probably not a bad place to be," he said. "But most fleets don't want to do that because they're looking for steady freight to satisfy their drivers—and that's a different challenge—but it's an opportunity for fleets that can stomach it."
On the LTL side, however, Albrecht has recently surveyed the largest carriers and reported that 7 of the 20 largest were already "embracing" e-commerce: They've ordered specialized equipment, including pup trailers that are only 12 feet tall to better serve neighborhoods with low power lines or over-hanging limbs, along with adding Sprinter-style delivery vans.
There is also a growing number of final-mile independent contractors that specialize in over-sized items that are "not friendly" to FedEx or UPS, he noted.
In the nearer term, commercial fleets will begin to add "a lot more" medium-duty equipment, with fewer traditional tractor-trailer combinations. Both Utitlity Trailer and Wabash recently decided to enter in the truck-body market, he noted.
It gets worse, or at least different
But the Amazon jungle is just one unexplored territory for carriers.
Throw in autonomous trucks (Albrecht thinks they're coming sooner rather than later, as Silicon Valley entrepreneurs will "ask for forgiveness rather than permission" from federal regulators as they work with more easily swayed state DOTs) and digitally driven pricing and capacity transparency, the trucking industry could look completely different in a generation.
"If we get a vehicle with no driver, the power play 20 years from now might be brokers and 3PLs will decide to own some trucks, with massive trailer pools," Albrecht speculated. "Why would you need a US Xpress? That's a Jetsons scenario, I realize, but I say that because California DOT recently said that their vision of autonomous trucks does not include drivers—and if California gets behind it, it's certainly becomes possible."