The Impact of Ecommerce on the Trucking Industry

In February 2019, the American Trucking Research Institute completed an excellent study entitled, E-Commerce Impacts on the Trucking Industry. This blog contains a summary of the highlights of this report. For more information on this topic, download the full report which contains an array of sources that are footnoted throughout the document.

E-commerce has been defined as retail and business transactions involving the use of online platforms. Closely aligned with E-commerce is omni-channel retailing, which represents a real-time, channel-agnostic synchronized visibility of inventory across the supply chain using a central stock pool, that allows consumers to fulfil demand anytime, anywhere. These developments have disrupted current business models in the retail industry. Technological innovations associated with these developments have significantly changed the consumer experience; manufacturers, distributors, retailers and transportation companies have adapted their supply chains and business models to support the new retail environment.

This blog is comprised of two components.

The first segment examines changes that pertain to retail supply chains. This is followed by a look the direct impacts of these changes on freight transportation.

The Changing Retail Landscape

The ATRI study highlights that an overwhelming majority (85.9%) of e-commerce sales are generated by non-store retailers, which are businesses that have a primary presence outside traditional brick-and-mortar stores. Digital spending has been concentrated in consumer products like apparel, furniture and furnishings, and electronics.

As a result of these consumer spending shifts, many traditional brick-and-mortar retailers are struggling to maintains their financial viability. Department stores have been dramatically impacted by these trends, with employment at such US-based stores falling by more than 385,000 jobs since 2011. There were over 16,000 new non-store retail establishments in 2017 compared to 2001, a majority (52.3%) of which have opened in the last five years. As a result, employment at non-store retailers has increased by 140,721 jobs since 2011.

Retailers such as Amazon, Home Depot, Target, and Walmart have made significant capital expenditures to create internal networks of fulfillment options and delivery capabilities. Amazon, the leading e-tailer, has built or plans to build over 150 million square-feet of warehousing space in a ten-year period to support the huge volume of online orders flowing through its network.

While brick-and-mortar stores remain an essential component of current retail operations, retailers are becoming more flexible in how they reach and transact with consumers by decentralizing their distribution/fulfillment networks to bring inventory closer to consumers. According to research conducted by CBRE, a commercial real estate brokerage firm, “last mile” routes have indeed been shrinking in distance. In analyzing the 15 largest metropolitan areas in the U.S., CBRE researchers found that the “last mile” of order fulfillment averages between six and nine miles, and these distances are expected to shrink further as distribution/fulfillment networks continue to expand near large urban populations.

In addition to boosting demand for general warehouse space, the omni-channel needs of the retail industry have changed how warehouse space is being utilized. Smaller facilities in urban industrial zones are being repurposed to facilitate the growing volume of “last mile” deliveries. A new breed of “big box” warehouse space has also emerged as retailers and their supply chain partners create their regional distribution hubs. Specifically, the largest class of distribution centers have doubled in size over the past ten years, as buildings with 32-foot ceilings are now being supplanted by 40-foot-tall facilities as developers work around land constraints.

Transit Times and Freight Costs

Free shipping continues to grow in importance; results from a separate survey indicated that 64 percent of consumers would not pay extra for two-day shipping options, while roughly one-third of respondents would not pay extra for same-day shipping.

This rapid change in consumer demand for faster and less expensive shipping can be attributed in part to the Amazon Prime annual (fee) membership program, which offers free two-day shipping on millions of eligible products. Amazon also offers free shipping to non-Prime members on orders exceeding $25. Amazon has leveraged this approach to establish a dominant foothold in the e-commerce market, accounting for more than 43 percent of U.S. e-commerce sales and four percent of all retail sales in the country.

In order to increase flexibility and convenience for consumers, retailers and 3PL providers have expanded the types of locations where consumers can receive deliveries. Although deliveries to personal residences or businesses are the most common option, roughly 30 percent of online orders are delivered to alternate locations.

To better compete, brick-and-mortar retailers are leveraging existing store space to provide one of the more popular alternate delivery locations available to consumers. Some retailers have converted vacant mall space into locations where customers can pick up or return products bought online.

The Impacts on the Freight Transportation Industry

In terms of delivery vehicles, Amazon is building its own cargo hauling and delivery capacity to supplement the existing capacity provided by the U.S. Postal Service (USPS), UPS, and FedEx. The e-tailer announced it was spending $1.5 billion to build its first air cargo hub to support its growing fleet of cargo planes. Target, a major retailer, is looking to expand its internal home delivery capabilities, and has relied on acquisitions to accomplish this goal.

Outsourcing is another strategy retailers are using to expand their e-commerce delivery networks. In this model, retailers contract with 3PL providers capable of handling a retailer’s warehousing, distribution, and transportation needs. The growing decentralization needed for e-commerce has created a considerable decrease in the average length-of-haul. Longer inter-regional or national long hauls are now being replaced by shorter intra-regional and local hauls. These dramatic decreases in trip lengths and odometer readings are being experienced by truckload, LTL, and courier services; the average length-of-haul for dry van truckloads has declined almost continuously since 2000, falling by 296 miles, or 37 percent. 

The pressures associated with shorter delivery windows, and the requisite growth in JIT inventory management systems, have placed even greater emphasis on the reliability and timeliness of truck transportation. While this has been an ongoing challenge for motor carriers, delivery windows continue to compress as retailers establish their omni-channel retailing capabilities. Walmart recently raised the minimum threshold of on-time deliveries imposed on its suppliers and will fine suppliers who fail to consistently deliver orders within a specified one- or two-day window.

This trend is consistent with ATRI research findings from informal polling of motor carriers, in which many of the responding motor carriers indicated that their volume of shipments requiring a two-day or three-to-four-day delivery window had increased over the past five years. Carriers reported that these faster shorter-haul deliveries have offset deliveries with a five-to-seven-day window. As more motor carriers enter the “last mile” arena, many are providing value-added “white glove” deliveries of large and bulky items like furniture and home appliances.

Impacts on Trucking Equipment

Carrier fleet equipment purchases have changed to support the new delivery requirements. This is particularly true in the “last mile. Registrations for single-unit trucks, a proxy for straight trucks used for local deliveries, are growing at a faster rate than registrations of more traditional tractor-trailer units. Expanded use of electric vehicles seems to be a natural extension of alternative energy-based e-commerce deliveries.

Driver Recruitment and Driver Retention

These two issues rank at the top of trucking company concerns. The growing demand for truck transportation from e-commerce is further exacerbating the industry’s issues with vehicle capacity and truck driver demand. The ATRI study suggests that the changing supply chain and distribution/fulfillment models of e-commerce and omni-channels may present a solution for attracting more qualified truck drivers. Local P&D operations provide the type of jobs that will keep drivers closer to home, thus eliminating a frequently cited quality of life concern for current truck drivers and potential new entrants. The benefits of shorter truck trips also extend to drivers in the TL and over-the-road LTL segments of the industry, as the shorter intra- and inter-regional hauls may offer a more stable and predictable work schedule and provide drivers more home time.

Driver turnover is predominantly an issue in the TL sector. While driver turnover in this sector remains elevated around 90 percent, turnover rates for over-the- road LTL carriers is approximately 10 percent, while the rate for local LTL is not much higher. As such, the e-commerce and omni-channel transportation preference for the shorter haul LTL sector is beneficial in that it grows demand for the type of jobs that many truck drivers prefer.

For more information on this topic, download the full report from ATRI.  To speak with Alan Hooper, one of the authors of the report, come to the 2019 Surface Transportation Summit (www.surfacetransportationsummit.com/speaker/alan-hooper/) on October 16 and attend his group discussion.

To stay up to date on Best Practices in Freight Management, follow me on Twitter @DanGoodwill, join the Freight Management Best Practices group on LinkedIn and subscribe to Dan’s Transportation Newspaper (http://paper.li/DanGoodwill/1342211466).