The present business climate for refrigerated trucking may not be deadly, but it still hurts. It is a migraine headache that has continued for the past three years. But the coming election year followed by incremental tax cuts could provide refrigerated carriers with a prescription for pain relief, Thomas Albrecht told the annual meeting of the Truckload Carriers Association Refrigerated Division.
Albrecht is managing director of BB&T Capital Markets in Richmond, Virginia. BB&T is an investment-banking house that places special emphasis on trucking interests. The Refrigerated Division meeting was held in Incline Village, Nevada, July 9 to 11, 2003.
Typically, refrigerated carriers report working harder and smarter to generate more revenue resulting in thinner profit margins, Albrecht said. Many carriers would like to return to their results in 1993 and 1994, two of the better years for financial results in the refrigerated freight sector. Analysts believe that refrigerated transportation represents an $8 billion market in a larger universe of $460 billion in sales by food manufacturers.
This is a huge market, both for food manufacturers and for motor carriers. However, this market has undergone substantial consolidation, Albrecht said. Not only have motor carriers been consolidating, but food manufacturers have consolidated as well.
Buying frenzy among shippers
For instance, Kraft Foods acquired Nabisco in 2000. That same year, Unilever acquired Bestfoods, and ConAgra bought International Home Products. In 2001, PepsiCo acquired Quaker Oats; General Mills bought Pillsbury; and Kellogg Company bought Keebler Foods Company. On the motor carrier side of the equation, the original incarnation of Freymiller trucking, AmeriTruck, Aashce Transport, Alterman Transport, and the TLC division of Landstar have all gone through liquidation. Simon Transportation and Rocor International both went through Chapter 11 bankruptcy with Simon emerging as Central Refrigerated and with selected assets of Rocor being purchased by Prime. In addition, KLLM Inc went through a leveraged buyout in 2000, and Frozen Food Express has struggled with its financial position.
One puzzling part of the turmoil among refrigerated carriers is that when it struck, five of the carriers involved were in or near the top 10 in the business, Albrecht said. “Shippers probably know about this problem at a subconscious level, but refrigerated carriers should probably make a formal announcement of it to their customers,” he said. “In contrast to the financial difficulty faced by refrigerated carriers, there has not been a single dry van carrier in the top 10 of that sector that has gone out of business in the past three years. In fact, only two dry van carriers on the top 25 list have failed, and that includes Builder's Transport, which failed a number of years ago.”
This consolidation has increased the buying power of the shipping community substantially, Albrecht said. At the same time, troubles within refrigerated trucking have contributed to the stronger position of their customers. “Every time a carrier goes out of business, its competitors may privately rejoice,” he said, “but the reality is that fewer competitors within the carrier community gives shippers even more buying power.”
Good indications surface
With all the bad news, it may be hard to see, but some good things are beginning to percolate to the surface for refrigerated carriers, Albrecht said. For instance, the unloading situation at grocery warehouses is beginning to improve with a decrease in the necessity to hire lumpers. While the lumper situation still exists, it is nowhere as serious as it was just a few years ago. The lumper problem has improved and continues to head in the right direction, he said. The same thing goes for pallets; although, some unreasonable exchange programs and some uncooperative shippers still exist.
Turmoil among refrigerated carriers may be slowing allowing carriers to catch up with the effects of consolidation among shippers, Albrecht said. For instance, many carriers complain about their narrow tractor-trailer ratio, sometimes as low as 1.3 or 1.4 trailer to each tractor. Although small, that ratio can actually help the larger carriers, because many small fleets can barely afford to operate one refrigerated trailer for every tractor in their fleets, he said. “As shippers get bigger, the carriers that have more trailers available will be more attractive to shippers,” Albrecht said. “The key is figuring out a way to get paid for maintaining a larger trailer fleet.”
Length of haul remains both a positive and negative factor for refrigerated carriers, Albrecht said. Longer hauls produce more revenue; however, they also inhibit a carrier's ability to develop shorter regional lanes. Environmental concerns are a factor behind longer hauls. Many of the production areas forfood, especially fresh beef and pork, are required to be located well away from major population centers.
Food shipments remain flat
Not all news for refrigerated motor carriers is good. For instance, food shipments are growing slowly — just barely 1.5% to 2% a year. That is roughly the same as the population growth, Albrecht said. “The food transportation industry was a $7 billion market nine years ago and is only an $8 billion market today,” he said.
Two factors combine as bad news for refrigerated carriers. The business does not offer many opportunities for drop-and-hook operations, Albrecht said. As a result, the pay scale and the working conditions at dry van carriers are often more attractive to drivers than pay and conditions at refrigerated carriers. Coupled with slow growth for food shipments, all these factors conspire to result in lower rates, inadequate profit margins, and unacceptable financial returns, he said.
Some of the bad news in the total transportation industry may be good news for refrigerated carriers. For instance, 2001 and 2002 stand out as two of the weakest years for trailers sales in recent history, Albrecht said. Trailer manufacturers may not like it, but low trailer sales are an indicator that carrier capacity is heading in the right direction, he said. Sales are up slightly in 2003, but the year will still be considered weak by the manufacturers. “The backlog of orders for new trailers is barely half what it was in the years of peak trailer production, which may bode well for refrigerated carriers as they seek to match their capacity to the demand for freight services,” Albrecht said.
Shippers can afford rates
A curious part of the market is that shippers have been raising prices for their products while refrigerated carriers have not been raising freight rates. Since 1994, food costs have risen 23% while freight rates for refrigerated goods have remained flat, Albrecht said. “Don't let shippers claim that they don't have the ability to raise rates, because they can't raise their own prices,” he said.
The first quarter 2003 suggests that better times are coming, Albrecht said. An analysis of dry van rates compared to rates for refrigerated freight shows that van rates have risen 5% since the end of 1994 compared to an absolutely flat market for refrigerated carriers. “However, in the first quarter of 2003, refrigerated rates are up 6.3% compared to only 2.5% for dry van rates when compared to the first quarter 2002,” he said. “However, the first quarter 2002 was awful, dropping more than 3% compared to the fist quarter 2001.”
Rates need to rise, because the average operating ratio for refrigerated carriers is dreadful, Albrecht said. A five-year average that includes two pretty good years shows an average operating ratio of 96.7 for refrigerated carriers. Amargin that narrow doesn't even generate enough profit to reinvest in the fleet, he said. “This information should be public,” Albrecht said. “Share this data with shippers. They need to know about data from the industry at large as well as the financials from individual carriers.”
The productivity for tractors in refrigerated fleets has increased about 1.6% in terms of revenue per tractor since 1994 to about $154,000 per tractor per year at the end of 2002, Albrecht said. Trailer productivity has risen even faster at about a 3.7% increase since 1994, ending 2002 at about $126,000 per trailer per year.
Strategies of successful carriers
An analysis of successful carriers shows a number of strategies held in common. For instance, nearly all successful carriers find that interplant traffic is the best, Albrecht said. Lanes between customer plants tend to be more profitable, and drivers seem to like them better. Moves from a plant to a distribution center tend to be second best, while routing from a distribution center to individual customers are the least desirable. An exception to this rule exists for the dedicated fleets set up specifically for multi-stop routes from warehouses to stores.
Another trend for successful carriers is a focus on the suppliers to companies such as Wal-Mart rather than trying to serve Wal-Mart or its competitors directly. Evidence suggests that vendors to Wal-Mart are prepared to pay a little better than Wal-Mart itself, Albrecht said.
The main source for growth among refrigerated carriers seems to come from dedicated fleet contracts. “Every refrigerated carrier we know that is adding capacity is putting that growth into dedicated fleets about 90% of the time,” Albrecht said.
Growth also is coming from non-traditional freight sources. Instead of general food shippers, successful carriers are pursuing freight from manufacturers of cosmetics, health and beauty aids, and pharmaceuticals, Albrecht said. Lowering capital costs also helps carriers succeed. A good example of that shows among the most profitable refrigerated carriers who try to recruit as many independent contractors for their fleets as possible, he said.
Manage lane yields
Successful carriers put an intense effort into yield management to maximize the profit per truck per lane, Albrecht said. Lane management is a never-ending process to ensure that every load across a given lane is profitable. In addition, profitable carriers have a strong commitment to servicing their business, which sometimes requires more effort than went into winning the business in the first place. Keeping customers is nearly always less expensive than finding new ones, he said.
The most profitable carriers have a tendency to love difficult freight, Albrecht said. Difficult loads can be the most profitable loads, because shippers have trouble finding carriers to serve those lanes and customers. Easy freight pays poorly specifically because it is so easy to handle that any carrier can haul it, he said. By the same token, profitable carriers avoid random lanes. Instead lane development is deliberate and nearly always triangular so that growth is built around other business that is already strong. The secret to lane development is constantly increasing density between profitable points, Albrecht said.
The best carriers spend the majority of their time every week examining the worst loads from the previous week, Albrecht said. That is a requirement to determine which lanes are meeting expectations and which are not. Knowledge about lanes allows everyone in the company to concentrate on the most profitable parts of the business. Pursuing rate hikes is a constant job — especially for under-performing lanes, but in reality for every mile a carrier runs, he said. “Successful carriers never stop asking for increased rates,” Albrecht said. “Creating an expectation among customers of paying higher rates, of being asked for higher rates constantly, makes it much more difficult for shippers to refuse higher rates.”
Many carriers operate on the premise that eliminating deadhead mileage is the most important thing they can do, Albrecht said. In reality, empty mileage probably is the third most important factor in trucking. Revenue per truck and paid mileage per truck easily outweigh deadhead mileage as a metric for judging efficiency, he said.
History suggests that the next two years hold the potential for substantial growth. This is based on an analysis of the past 14 election years going back to the Truman election of 1948. In only three of those 14 election years have the gross domestic product grown by less than 3%, Albrecht said. Presidents have an incentive to boost the economy going into election years. Only Jimmy Carter in 1980 stands as an exception to this principle, he said.
Tax cuts will help push the economy forward. Starting with the Kennedy tax cut, which Lyndon Johnson pushed through, the economy averaged 6.5% growth from 1964 to 1966, Albrecht said. Ronald Regan pushed a tax cut through Congress in 1983, and the GDP grew more than 7% in 1984. With the Bush tax cuts spread across several years, it is impossible to predict growth as high as in the past, but the economy still will grow in response to the tax cut, he said.
The election can be expected to have an impact on the stock market as well, Albrecht said. He used data from midyear and presidential elections going all the way back to 1918 and projected results through the 2004 election cycle. For all years, including the Great Depression, the stock market has gained an aggregate of 57% in election years. Discounting the down years of the 1930s, the market has increased 62%, he said. “That's what has been happening to the market for the past three months,” he said. “The market does not rise simply to repeat history, but it does go up in anticipation of the incentives the political process builds into the economy in election years. Using data from past election years to project 2004, we could see a Dow Jones average approaching 11,600. I don't know how long the increase will last, but I feel fairly confident in the market for the next 12 months.”
