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Medium-duty trucks in an e-commerce world

Oct. 7, 2016
The growth of e-commerce and last-mile delivery is spurring an expanded role for medium-duty trucks

With more Americans ditching malls and turning to e-commerce to satisfy all their shopping needs, a logistical tidal wave is quickly taking over the transportation industry.

Kenny Vieth, president and senior analyst at ACT Research, notes that e-commerce activity has soared within the retail sector over the last 15 years. As a percentage of sales (excluding food), e-commerce comprised 24.3% of retail sales in the second quarter, which is an uptick from 23% in the first quarter. That compares to just 3% back in 2001, he explains.

Vieth also points to the findings of the 2012 Commodity Flow Survey, which found that 78% of freight travels less than 250 mi. in the U.S., with 65% of all freight traveling less than 50 mi.
“I think there’s a lot of opportunity in that under-50-mi. space,” he says. 

The rapid rise of e-commerce retailing, which is expanding to encompass bigger and bulkier items such as furniture and appliances, is creating a growing logistics bottleneck when it comes to last-mile delivery in neighborhoods.

While tractor-trailers are great at moving goods long distances, the tight spaces in neighborhoods can be a bit more challenging.

“The problem is that while there’s a lot of growth [in e-commerce shipments], taking a tractor trailer … into a neighborhood [is a problem],” notes Richard “Dick” Metzler, chief marketing officer for online shipping provider uShip Inc. “They may hit mailboxes or power lines, tear up yards, or any of the other bad things that can happen when they’re not equipped to handle this type of [environment].”

“[E-commerce transport providers] simply have to find a more effective way than what they are doing today. It’s a real problem for the industry. Nobody is doing it really well,” he adds. “We are still in the very early days as to how that’s going to work out.”

Yet this is precisely the spot where Sandeep Kar, global vice president for the automotive & transportation research practice at consulting firm Frost & Sullivan, believes medium-duty truck models could provide a better transportation fit.

“We’re talking urban trucking when we talk about the growth of e-tailing, and that’s also changing the type of freight moves needed,” he says. It is generating more next day, even next hour, deliveries in urban channels for larger and heavier loads.

Kar emphasizes that heavy-duty vehicles are not ideal for intracity and intraurban deliveries. At the same time, light-duty vehicles such as vans don’t offer enough capacity.

“At the end of the day, that’s why the medium-duty truck may have a much more important role to play in this last-mile space,” he notes.

Kar recently authored a report for Frost & Sullivan that examined trends affecting the medium-duty segment out through 2025. Here are some of his findings: 

◗ Medium- and light-duty trucks are being used more to transport goods from larger freight hubs outside larger urban centers to multiple drop points within cities; freight moves that include both distribution centers within the city and individual consumer door steps.

◗ A rise in the number of intracity drop points is occurring alongside an overall drop in package sizes, thus generating demand for greater volume versus payload in truck bodies.

◗ Cabover-type, medium-duty models are growing in demand vis-à-vis conventional trucks owing to the impact of urbanization, which drives demand for more fuel-efficient and maneuverable truck designs.

◗ Asian OEMs maintain over 40% market share in the global medium-duty segment and are expected to further augment that market share with leadership in both cabover models and low-cost and “value truck” models.

◗ The ideal specification for a typical medium-duty truck model by 2025 will feature a cabover design with a 12- to 20-ft. wheelbase and 4- to 10-ton payload capacity. It will be powered by a 4-cyl. 4L to 6.5L engine offering a 150- to 300-hp. “bandwidth” mated to a 5- or 6-speed automated manual transmission (AMT) or 6-speed automatic.

This isn’t to say that there won’t be opportunities for conventional medium-duty models. For example, starting this month, Daimler Trucks North America (DTNA) will offer its proprietary 5.1L DD5 diesel engine on its Freightliner M2 106. The engine offers a rating of 210 hp. and 575 lbs.-ft. of torque or 230 hp. and 660 lbs.-ft.

White glove or brown glove? What are they and is your fleet one of them? Keep reading to find out!

That proprietary engine offering not only allows DTNA to deploy the same vertical integration strategies in the medium-duty space as it is doing with its heavy-duty vehicles but also to take advantage of a truck market that is more stable than the heavy-duty segment, notes Brian Cota, DTNA vice president of national accounts.

“Everywhere we look in medium-duty, it is a much more stable market without big peaks and valleys of demand,” he says. “We’re projecting steady medium-duty sales in 2017 and 2018.”

Cota echoes Kar by noting that changes in the way people shop in the U.S. are changing final-mile delivery needs as well. “That change in final-mile needs should certainly lead to more demand for Class 6 and 7 vehicles,” he says.

That’s also leading to design changes on medium-duty models, not only as a way to lower cost but to make them easier to operate for novice drivers.

For example, Kevin Koester, Ford’s medium-duty and F-Series fleet marketing manager, explains that the F-650 Super Duty shares many of the same cab interior components found on the F-250.
“We’re bringing a better automotive fit and finish to work trucks; bringing the architecture of the Super Duty into the medium-duty segment,” he says. “The seating geometry is similar and the cab interiors are roughly the same, and that’s so we can bring more comfort and familiarity to the driver.”

Koester believes one of the biggest takeaways from medium-duty trucks like the F-650 is that they are capable work trucks that don’t feel like work trucks. “We’re trying to open up who can drive such trucks—to make them less scary or intimidating to drive,” he emphasizes. “We also want it to feel more familiar to a wider spectrum of drivers, so they can get in and quickly be a success.”

Lowering the cost of medium-duty models is another key strategy, he points out. Indeed, he says equipping the 2016 F-650 with a 6.8L V10 gasoline engine can shave $8,000 to $10,000 off its sticker price when compared to a similarly equipped diesel truck.

All of this doesn’t mean sales of medium-duty trucks in the U.S. are poised to explode anytime soon.

Jonathan Starks, COO at research firm FTR, says medium-duty sales were up 8% in 2015 and should rise another 4% this year. Beyond that, he does not see a major acceleration of sales taking shape in this segment.

“Over the last three years, we’ve seen some pretty solid growth in the Class 6 and 7 segment—a little stronger than the overall medium-duty market but not by an awful lot,” Starks notes. “We do think some of this is due to the retail e-commerce shift but not a whole lot.”

ACT’s Vieth offers a similar assessment. “Right now, this helps medium-duty sales but only at the margins,” he says.     

White glove vs. brown glove

When it comes to discussing last-mile delivery service, the terms “white glove” and “brown glove” often get bandied about. But what do they mean?  Richard Metzler, chief marketing officer for online shipping provider uShip Inc., explains that white glove is a high-end style of delivery—often meaning that goods are not just offloaded from the truck but taken into the customer’s home as well.

“I think white glove will continue to enjoy the very nice niche that it plays today, but it’s super-expensive and it is not the largest in the e-commerce delivery segment,” he says. “The fastest growing segment of larger format e-commerce [i.e., bulkier goods such as furniture] is brown glove service. In other words, it is still in the brown packaging and is taken to the door and then you’re on your own from there. But it costs a lot less [for delivery] and you don’t need specialized carriers to haul it.”

Metzler says such large format goods sold online is an e-commerce segment that is beginning to grow at a runaway rate. 

“Think about gun safes or large pieces of furniture or even appliances,” he emphasizes. “This is really starting to take off, and the logistics challenges with that is home delivery. They have unique challenges that need more cost-effective solutions.

“Oftentimes e-commerce merchants will send a truckload of orders into Atlanta, and then a white-glove carrier will do the final-mile delivery, installation, setup, etc.,” he adds. “Or the same thing is done brown glove with a local or regional carrier, where it’s in the packaging, it’s on your doorstep, it’s out of the rain, but it’s not in the room of choice. The packaging isn’t taken away, and there’s no installation or assembly.”

While white-glove service will, in his words, definitely remain part of the last-mile delivery picture, it’s a service that probably will only experience single-digit to low double-digit demand. 

Metzler adds that with these larger format items, regional and local carriers could see more business. “Their document delivery business has gone away, so they’ve gone from cars to Sprinter vans and 24-ft. to 28-ft. box trucks. They could be a source for last-mile delivery.

Slow and steady

Sales of medium-duty trucks are expected to stick to a slow yet steady growth pattern for the next several years, dipping slightly next year but swinging back upward in 2018 and 2019.

Jonathan Starks, COO at research firm FTR, noted at his company’s annual conference back in mid-September that overall North American production of medium-duty trucks is expected reach 210,500 units this year, up from 188,100 units in 2015. It will then fall to 201,800 units in 2017 before climbing back to 206,000 units in 2018 and 209,900 units in 2019.

Within that group, Starks said production of Class 4-5 trucks is expected to reach 70,600 units this year, up from 55,800 units in 2015. A dip to 67,200 units in 2017 should occur before consecutive years of growth to 68,300 units in 2018 and 70,400 in 2019.

Production of Class 6-7 trucks, which represents the bulk of the medium-duty market, is expected to follow the same path, Starks noted. It will rise to 139,900 units this year, up from 132,300 units last year, then down to 134,600 units in 2017 before climbing back to 137,700 units in 2018 and 139,300 units in 2019.

“The medium-duty outlook is for continued slow and steady growth,” added Steve Latin-Kasper, market data and research director for the National Truck Equipment Assn.

“No one is predicting a recession for 2017 or 2018,” he said. “We should also maintain 2% GDP (gross domestic product) growth this year and into next year, but that really comes down to whether millennials open their wallets.”

If they do, Latin-Kasper said GDP could accelerate to 3% in 2017, which could spur demand for more trucks. “If they don’t, it will be more of the same slow growth we’ve experienced so far in this economy,” he pointed out.

In terms of medium-duty truck trends, Latin-Kasper noted that the fleet buying cycle as a whole has been shifting from Class 4 and 6 trucks to more Class 3 and 5 units, with a lot of growth in the commercial van segment occurring, especially for high-roof vans.

He also noted that state and local governments—grouped under municipal fleets—make up about 10-15% of medium-duty truck sales. Equipment buying for that segment is muted for now, and this is largely due to the presidential election, which tends to tamp down government activity; however, sales in the government sector should pick up next year after the election.

About the Author

Sean Kilcarr | Editor in Chief

Sean previously reported and commented on trends affecting the many different strata of the trucking industry. Also be sure to visit Sean's blog Trucks at Work where he offers analysis on a variety of different topics inside the trucking industry.

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