- Logistics companies are expecting another big year as e-commerce takes share of consumer spending.
- Freight markets are forecasted to stay tight through the end of 2021, bringing some inflation.
- Retailers that hadn’t mastered e-commerce logistics before the pandemic continue to fall behind.
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As consumer dollars continue to shift online, logistics players know there’s money to be made.
The National Retail Federation expects more than $1 trillion to be spent online in 2021 — roughly 20% more than the record $969 billion in 2020. It’s an unprecedented opportunity for freight and logistics players that can meet internet retailers’ exacting standards.
“It’s hard and messy, and not everybody wants to go figure that labor model out because it’s difficult,” said Craig Callahan, chief commercial officer for Werner Enterprises, a trucking company specializing in top-flight retailers including Walmart, Dollar General, and the Home Depot. These retailers have strict standards, requiring precise schedules and few mistakes. Staying out of e-commerce and sticking to moving goods for industrial businesses can be less demanding for shipping companies, but the reward often isn’t as great.
The two biggest players in the space, FedEx and UPS, have been hustling to keep packages moving for more than a year now. But there’s a lot more to e-commerce than a package on the doorstep.
The surge in e-commerce package volume has created unprecedented scenarios for the entire retail supply chain. Retailers are having difficulty restocking virtual shelves due to congestion at West Coast ports and tight trucking and ocean freight markets.
With capacity so tight across the logistics spectrum, companies who can work around the maxed-out capacity of other carriers are going to win big.
Winners: Gig economy delivery platforms
Major Players: GoFor, Instacart, Lyft, Postmates, Roadie, Shipt, Uber
With foot traffic radically down for many retail stores last year, online sales via same-day delivery and curbside pickup became a lifeline for retailers.
For those not set up to ship packages out of stores, same-day delivery was a more accessible way to keep orders flowing and the gig economy delivery companies swooped in. Gig services are relatively easy for retailers to partner with compared with shipping from stores, and the surcharges UPS and FedEx put in place (and still charge) made the higher cost of gig delivery much easier to stomach.
Companies like Instacart, Shipt, and Roadie have been working with retailers for years, but the new fees and the unreliable service from traditional carriers like the USPS allowed newer carriers a way into retailers’ operations.
Uber and Lyft jumped into delivery too when the ride business slowed. After acquiring Postmates, Uber is wading into non-food delivery with its Uber Direct service. And Lyft is following the trend slowly too with a business-to-business service.
Target’s April announcment that it will use Shipt drivers to deliver packages to shoppers from warehouses and not just stores is evidence that gig platforms are evolving into a true challenge to traditional parcel carriers.
Winners: Regional parcel carriers
Major Players: Courier Express, Hackbarth, IntelliQuick Delivery, LaserShip, LSO, Ontrac, Spee-dee Delivery, United Delivery Service
When FedEx and UPS started enforcing volume caps and levying surcharges, retailers looked to regional players to redirect their packages. Regional parcel carriers don’t have the same name-recognition since they don’t cover the entire country, but their importance in keeping e-commerce flowing is growing quarter over quarter.
Regional carriers have gained market share of e-commerce packages in the pandemic, according to e-commerce software company Convey, peaking in November when national carriers were most strapped.
To meet the increasing demand for last-mile delivery, some regional carriers are ramping up capacity. LaserShip announced in December it had expanded two New York City-metro area warehouses by a total of 200,000 square feet and upped the automation inside to increase throughput. And Ontrac opened its first automated sortation center last month in Reno, Nevada.
FedEx and UPS have maintained their surcharges beyond the holiday season. And retailers who found themselves without a carrier to pick up parcels in November and December learned a hard lesson, so regional carriers are likely to be a permanent hedge against disruption.
Winner: Big and bulky last mile
Major Players: FedEx Freight, GlobalTranz, JB Hunt, XPO Logistics
When an e-commerce package is over 70 pounds it is kicked into a whole other universe of delivery players: the “big and bulky” specialists. As large-scale purchases like furniture and appliances grew, carriers put resources in place to seize on that business, but it’s not an easy space to play.
Deliveries like these require more service than most. Plus, larger items mean fewer deliveries per truck route which cuts down on efficiency. Mistakes and returns for large items can easily cut into profits. It’s easy to see why some carriers stay away.
But during the pandemic, the opportunity became too enticing to pass up for some.
“The big and bulky final-mile business is taking off also as people have gotten much more comfortable in ordering everything online — not just the stuff that is handled by parcel companies, but furniture, appliances,” said Ryder CEO Robert Sanchez said on an earnings call last month, according to Sentieo.
One wildcard in this area is retailers who can complete these big deliveries themselves. Peloton has built its own delivery fleet to mixed success while still using other carriers, Wayfair has a vast network of last-mile delivery facilities, Costco made a “big and bulky” last mile acquisition last year, and naturally, Amazon also plays in this space.
Gig-economy startups are also taking greater share of large-format retail deliveries since they can offer an on-demand service faster than Amazon.
Winner: Less-than-truckload carriers
Major players: ArcBest, FedEx Freight, Yellow (formerly YRC), XPO Logistics, Old Dominion Freight Line, Saia
The growth in e-commerce and the logistics strategies of Amazon and its imitators feed directly into the less-than-truckload (LTL) market, which consolidates the cargo of multiple shippers on a single truck. It’s more complicated — and more expensive — than booking an entire truckload from the same shipper.
The speed of Amazon-dominated e-commerce requires retailers to put smaller amounts of inventory in more warehouses so that they can be closer to the consumer. That means the trucks they hire to move it all around are making more stops and dropping smaller loads as Amazon’s competitors adopt the behemoth’s hallmark strategy.
“Due to the rise of e-commerce and changes in distribution models, more less-than-truckload (LTL) and short-distance freight will be moved in 2021,” wrote Gartner analysts in a February report.
The wildcard here is profitability. LTL is a high-touch business since cargo often has to be unloaded and reloaded several times before it reaches its destination, so efficiency can make or erase profit margins. UPS recently sold off its LTL contingent UPS Freight to Canadian LTL carrier TFI International due to its low profit margins. FedEx Freight, however, the largest LTL carrier in the US in 2020, posted its highest second-quarter profit margin in 15 years in December at 13%.
In the first quarter of 2021, Saia, ArcBest, and Yellow all posted improved revenue and profitability from LTL shipments.
Big Losers: BNSF, Union Pacific, Norfolk Southern
Railroads have been giving themselves a makeover for the last few years in the hopes of winning more consumer-related freight as stalwarts like coal decline in shipments. Even though rail service is often days slower than a truck, retailers of all kinds choose it for less time-sensitive goods because it’s cheaper.
To keep costs low when business tanked, railroads furloughed staff and put locomotives in storage. When demand roared back, some railroads struggled to bring staff and equipment back into service. At the same time, retailers were under pressure to restock.
“I certainly think there’s some unhappiness,” said Mark Yeager, CEO of Redwood Logistics, of rail customers. “Customers will be looking very closely at rail performance and see how it’s doing, and they’ll be more likely to, if they have an option, to convert to an over-the-road option even if it costs more.” That goes double for retailers, he said.
Union Pacific and BNSF still haven’t returned to their pre-pandemic number of railcars on the tracks despite booming imports. Norfolk Southern on the East Coast had a much longer lull than its major competitor CSX. But volumes are now ramping up. Industry-wide, “April set an all-time record” for the category of freight that includes retail products, according to the Association of American Railroads.
With better service, the railroads might have kept more e-commerce volume in 2020 and gained the same jump forward the rest of the e-commerce ecosystem saw. Instead, several railroads are still in recovery mode. But going forward, shippers simply may not have the option to write-off rail even if they want to.
“The reality of it is that it just can’t all move on a truck,” said Callahan.
Losers: Retailers without contingency plans for shipping
Big Losers: Foot Locker, Kohl’s, Macy’s, Urban Outfitters, The Container Store, and more
E-commerce businesses may be booming but the logistics companies that make them possible did a better job of protecting profit margins in 2020 than retailers. Surcharges from UPS and FedEx, along with a tight trucking market, didn’t help.
Retailers set up new delivery and pickup services in a matter of weeks last year once they understood how the coronavirus would impact retail.
Some retailers saw the trouble coming and set up contracts with regional carriers along with other mitigation tactics. The ones that didn’t were forced to ship more packages as carrier prices and surcharges eroded margins.
The evidence is on the balance sheet. Kohl’s reported that most of the profit margin lost in Q4 compared to the year prior was due to freight surcharges. Freight costs took a substantial bite out of profit margins from Ross, Macy’s, Urban Outfitters, and the Container Store.
Foot Locker’s work to minimize markdowns was essentially canceled out by freight costs and executives said in February that it’s likely to stay that way until stores are running at full strength again to offset the extra costs that come with online sales.
No retailers have yet figured out how to make e-commerce sales as profitable as in-store sales, but the pandemic proved some are much better at it than others. And several are now saying these costs are here to stay at least through the end of the year.
Losers: Passenger airlines
Major examples: American Airlines, Delta, Southwest Airlines, United Airlines
Air cargo is an increasingly essential part of e-commerce since short shipping times sometimes require putting a package on a plane. But for the major airlines, cargo flies in the belly of passenger planes. So when passenger flights cratered, airlines lost most of their opportunity to carry packages.
Airlines have certainly tried to keep their cargo business aloft during the pandemic. Regulators adjusted rules to allow passenger planes to be filled with cargo. American Airlines flew cargo-only flights for the first time in 35 years. Due to the global evaporation of capacity, airfreight rates have been elevated for much of the last year so cargo flights were lucrative, but US airlines still lost an estimated $35 billion in 2020.
Without ample capacity, the passenger airlines largely missed out on their opportunity to cash in on the e-commerce boom. A Wall Street Journal analysis found that the additional planes being added to the airfreight market may prove to be too much after the pandemic subsides and the demand cools.