E-commerce, economic trends change face of trucking, logistics industries

by Jeff Della Rosa (JDellaRosa@nwabj.com) 274 views 

For big carriers of brick-and-mortar retailer Sears, it’s not too early to start looking for other core customers, said John Larkin, transportation analyst for Stifel. He said this when responding to a question about who’s the biggest loser in the growth of Amazon.

On July 12, Larkin spoke to the Truckload Carriers Association Refrigerated Division about economic trends and the outlook of trucking, especially as it relates to e-commerce.

“I think a lot of the brick and mortar stores and traditional retailers are really going to lose here,” he said. “You’ll see that JC Penney is closing all these stores, Sears is closing 35 stores, (and) some other chains are closing stores. That’s going to put a lot of pressure on the shopping center real estate world.”

Amazon’s culture differs from that of the railroad, he said.

“The culture of Amazon is such that they incentivize people to take a lot of risk and to try outlandish things. And if they don’t work that’s OK, you don’t get fired.” However, in the railroad culture, if you try something that doesn’t work, “you’re fired.”

“Amazon is adverse to that, and that’s what makes them so dangerous,” he said. “Brick and mortar economy is really on decline, and I think what you’re going to find is people in the older generation which are uncomfortable ordering things on the internet pass the future on to folks that are technologically savvy and comfortable.”

He expects the e-commerce market share to rise from 10-15% to 30%, to 40-50%.

“It’s incumbent upon everyone to kind of be aware of that and figure out what role, if any, your company can play in supporting that new supply chain which is a different configuration than your traditional brick and mortar store,” he said.

On July 21, J.B. Hunt Transport Services announced it would spend $136 million to purchase Houston-based carrier Special Logistics Dedicated, which will allow the Lowell-based carrier to expand its e-commerce delivery platform. Special Logistics Dedicated offers pool distribution, which allows a company to combine multiple less-than-truckload shipments into one shipment, resulting in a lower shipping rate. Until now, it wasn’t an area that J.B. Hunt had a lot of exposure in, said Brad Delco, trucking/transportation analyst for Little Rock-based Stephens Inc.

The retail sector accounts for about two-thirds of the economy and has been “doing pretty well,” Larkin said. But the retail growth rate has been slowing “as people have been struggling with very little increase in their wages and take-home salary, so they’ve had to tighten their belt a little bit here over the last few years.” This has impacted the economy, and might be a reason “why freight has seemed a little slow over the last couple of years.”

While freight load volumes have recovered since the recession, large truckload fleet capacity has tightened. Carriers have had the opportunity to adjust their fleet sizes as they trade in trucks every three, four or five years in a move to retain drivers because if they drivers “aren’t being fully utilized they’re not earning what they think they should earn, and they’re going to leave,” he said.

On the flipside, smaller carriers have increased the size of their fleets because of the availability of low-priced used tractors and that they believe things will get better.

“So, if I wait until things obviously get better, and I start getting trucks, then I’ll be too late. So I need to start getting trucks in advance even though rates in the spot market today are weak,” he said. “That’s the mindset of the ever-optimistic entrepreneur and that has created quite a bit of sloppiness in the market.”

In the past, when spot rates began to rise, contract rates would begin to increase within six months.

“But this time around that model kind of broke down,” Larkin said. “Here we are 12 months after spot rates inflected, and we’re not hearing a lot of shippers coming up to the bar with big time rate boosts. Hopefully those are coming, no later than bid season in the first half of next year, but we just did a fairly comprehensive survey and are seeing a lot of contractual rate increases.”

As of July, spot pricing has risen about 10%, but contract rates have been roughly flat, from the same month in 2016, according to Benjamin Hartford, transportation/logistics analyst with Baird.

“Some carriers noted some seasonal softening in demand and resulting capacity availability last week.”

Low freight rates have continued to impact profits for P.A.M. Transportation Services, and on Thursday (July 27), the Tontitown-based carrier reported second-quarter earnings fell 59% to $1.6 million or 25 cents per share. President Daniel Cushman said 50% of the company’s revenue comes from the automotive sector, and some carriers operating in the sector have accepted long-term contracts with lower rates,” which we believe are unsustainable.” The carrier has been looking to other sectors to expand into as freight demand falls.

Auto sales have rebounded from the economic downturn in 2009-2010, but sales have been slowing.

“It seems that everybody who owns a car owns a new one, or it’s new enough at least. And the cars last longer these days,” Larkin said. “There’s just less demand, especially when some people decide they don’t want a car at all.”

Vehicle production rates have been falling, “which is a little bit worrisome for the third quarter here in terms of demand because of a lot of extended plant shutdowns that are planned across the auto industry,” he said. Plant downtime can occur “without sufficient warning,” Cushman said. These volume swings are difficult to predict and can result in asset underutilization if replacement freight isn’t readily available.”

Larkin also discussed how productivity and the population impact the economy and whether GDP growth will ever reach the levels that the president would like to see. GDP growth is related to a rise in population and productivity, “which is how much work each one of us can generate,” he said. The declining fertility rate has led to a “slowing effect on the rate of economic growth and the rate of food and beverage consumption. This is a surprising piece here, and that is that the productivity change has been pretty anemic over the last couple of years, down below 1%.”

The Federal Reserve expects an average of 1.9% GDP growth through 2019.

“We should be able to do better than that, and you have to ask yourself the question what’s slowing down all of these regulations,” he said. “Is it slower birth rate, is it a tax code that punishes success? It’s probably a combination of all those things — the aging of the Baby Boomers may play a role there as well.”

When John F. Kennedy was president, average quarterly GDP growth was 5.5%, and it’s declined to 1.72% through 2016 when Barack Obama was president.

“Maybe, just maybe Donald Trump, in between tweeting, will be able to get things going,” he said. “I think the business community is certainly behind his program.”

While the unemployment rate has fallen to about 4%, Larkin said the better number is the unemployment rate that includes those who are underemployed, which pushes the unemployment rate up to nearly 9%. This rate includes those with a college degree who are working as a cashier, landscaper or barista, and those who are working part time who’d like a full-time job.

“Obamacare promoted an increase in a lot of part-time jobs, because if you work less than 29 hours you’re not required to provide health insurance to that employee,” Larkin said.

Another key aspect of the economy is the labor participation rate, which has fallen to between 62% and 63%.

“We would need 11.2 million more working men and women in the United States to get back to where we were at the peak in the late 1990s,” he said.

The rate decline has been a result of Baby Boomers getting older and starting to retire, and people who’ve chosen to live in their parent’s basement “playing Xbox all day.” He said “there’s too much of a safety net part of which is provided by forgiving parents and part of which is provided by the large government. That’s a worrisome thing.”