July 8, 2016

LTL carriers look to last-mile service to stimulate sagging revenue growth

Big opportunity in an unfamiliar space for carriers.

By Mark B. Solomon

Less-than-truckload (LTL) carriers, struggling with weak demand for industrial traffic and perhaps facing another round of price wars, have turned to the so-called final mile of delivery services, a competitive and specialized discipline, in an effort to build a sustainable revenue channel.

It will likely take LTL carriers out of their comfort zone. Working the "final mile," defined in today's marketplace as deliveries to a consumer's residence from a manufacturer, distributor, or retailer, means serving a segment largely unfamiliar to LTL carriers. It means dealing with more hyper-connected and demanding end customers than LTL carriers, in their relatively limited forays into residential deliveries, are accustomed to encounter.

It means entering a crowded and fragmented field of providers. About 7,000 carriers nationwide—many of them undercapitalized, mom-and-pop type businesses—provide some form of last-mile delivery service, according to FM2 Logistics Solutions, an Austin, Texas-based firm that connects shippers and LTL carriers with a national network of final and "first"-mile carriers through its IT platform. These small firms have specific skill sets in residential deliveries, and could complement LTL carriers either as partners or as bolt-on acquisitions, Kirk Godby, a partner at FM2, said late last month at a conference held by transportation data provider SMC3 in Chicago.

It also means entering the collective wheelhouses of companies like Seattle-based Amazon.com, the world's largest e-tailer, which is building a last-mile delivery system to be manned by hundreds of local delivery companies, and San Francisco-based vehicle-hire service Uber Technologies Inc., which boasts that its model and network could be leveraged for last-mile deliveries of stuff. Amazon and Uber are the companies resetting customer expectations about service, which LTL carriers that seek to carve out a niche in the final-mile business will need to adhere to.

Meeting the constant pressure to grow means leaving no stone unturned, however, and the message coming from a session devoted to the subject at the SMC3 event was that LTL carriers avoid this segment at their peril. The last-mile delivery segment, which touches all business-to-consumer e-commerce shipments, is big and getting bigger. E-commerce today comprises only about 12 to 13 percent of all retail sales, according to various estimates. This indicates there is much more share up for grabs, especially as the traditional retailers that now control most of the market move more of their selling to the digital world.

With few entry barriers, LTL carriers are free, like so many others, to pursue the last-mile business. To succeed is likely to require changes in fleet composition and utilization; a better means of communicating digitally; and an emphasis on hitting tight and precise delivery-time targets, according to comments made at the session.

For those carriers that want to provide "white glove" service, industry parlance for a full-blown customer experience that includes product setup and installation, it will require finding drivers who not only can operate a truck but are skilled in assembling large, complex items—and in interacting with customers within very personal areas of their residences, such as a kitchen or bedroom. Last-mile carrier executives said they will weigh a driver applicant's interpersonal skills above all other qualities; prospective employees, they reckon, can be trained to drive a truck and assemble an appliance, but can't be taught how to properly interact with folks in their homes.

Unsurprisingly, capacity is tight because there aren't many drivers experienced in residential interaction and product installation. The shortage is particularly acute around holiday periods, such as the Fourth of July weekend, when a nationwide surge in sales from retailers drives up buyer interest. Will O'Shea, chief marketing and sales officer for XPO Last Mile, the last-mile delivery unit of Greenwich, Conn.-based transport and logistics firm XPO Logistics Inc., said at the SMC conference that his unit has trouble recruiting drivers in some markets because they lack the "soft skills" needed to execute its full-service proposition. XPO Last Mile makes about 12 million deliveries a year and operates out of 50 dedicated facilities in the U.S.


One carrier that plays the last mile on its own terms is Pitt Ohio Express LLC, a Pittsburgh-based firm involved in truckload, regional LTL with its own network (it has a national U.S. and Canadian link-up with the "Reliance Network" of six U.S. and Canadian LTL carriers), and parcel deliveries. Pitt Ohio integrates U.S. last-mile deliveries with its LTL network and its solo drivers, according to Geoffrey Messing, the company's chief marketing officer and executive vice president. It eschews team drivers, and declines any requests to deliver goods that require two drivers to handle, Messing said. Pitt Ohio does not offer setup and installation services, and its drivers will not go further than the "first threshold" of a residence, or the first covered area such as a foyer. Typically, the goods will be dropped off at curbside or on a driveway, Messing said.

Pitt Ohio chose to leverage its own network for final-mile services after discovering that more than half of the shipments moved 50 miles or more from one of its terminals, according to Messing. The relatively long stage lengths gave Pitt Ohio the flexibility to piggyback last-mile shipments onto its traditional business-to-business delivery infrastructure, Messing said.

Using its own equipment turned out to be more cost effective for Pitt Ohio than relying on local delivery agents, Messing said. He noted in a separate phone interview that the "incremental cost" of adding last-mile deliveries to a route was more than offset by the generous fees the carrier charged its retailer customers. While its bread-and-butter LTL business is showing little, if any, growth, its residential business is up about 20 percent so far this year, Messing told the SMC3 gathering.

LTL carriers will take growth anywhere they can find it these days. The nation's industrial economy, the backbone of the LTL business, has been in a recession since last fall, and has taken carrier volumes with it. Weight per shipment is down, reducing carrier revenue and margins. Carriers are reporting better operating ratios—defined as a company's operating expenses as a percentage of its revenue—an indication they continue to run efficiently. They have also maintained the pricing discipline that was instituted following disastrous rate wars that took place from 2007 to 2010, as carriers sought to defend shrinking market shares and several tried unsuccessfully to drive YRC Worldwide Inc., then the industry leader, out of business.

However, there are indications that the rate resolve may be cracking. David S. Congdon, vice chairman and CEO of Thomasville, N.C.-based Old Dominion Freight Line Inc., arguably the best-run LTL carrier, said in late April that rate battles had become more commonplace as carriers struggled with a difficult operating environment. On Tuesday, FedEx Freight, the LTL unit of Memphis-based FedEx Corp., reported that some price discounts "are reaching very high levels."

About the Author

Mark B. Solomon
Executive Editor - News
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.

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