The footprint of U.S. freight transportation has been contracting for nearly four decades. In the 1980s and 1990s, it was mostly due to supply concerns as producers and their partners sought to compress order cycle times by pushing goods out the door more frequently and over shorter distances. Today, it is demand-driven as digital commerce shifts control to buyers, many of whom want deliveries the next day or sooner, forcing retailers and providers to position their goods even closer to the consumer.
As the structure of American shipping evolves from long to short to even shorter lengths-of-haul, it portends profound consequences for all concerned. Railroads and intermodal service providers may find their legacy long-haul networks are out of step with today’s distribution patterns. Trucking companies will further reduce the size of their networks to support reduced vehicle miles travelled. Industrial and logistics real estate, already in the ninth year of an unprecedented bull market, may see the great times roll for another decade as businesses whose supply chains were built on one central distribution point discover that more warehouses will mean lower delivery costs because they can hit tight delivery windows without relying on expensive services like airfreight to do it. All the while, e-commerce demand rolls on; sales in the U.S. surpassed $500 billion in 2018, up 14 percent year-over-year and double in the past five years.
The next chapter in the saga of shrinkage could well play out in a segment known as the “middle mile.” For a domestic move, for example, the middle mile connects a manufacturer’s warehouse and a de-consolidation center. Internationally, it bridges the geography between where the goods leave the ports and airports and where the final delivery will take place.
Much of the focus today is on last-mile deliveries and even first-mile services that link vendors and fulfillment centers. The middle mile has received such scant attention that it is known as the ‘invisible mile.” But it is where much of the work that makes logistics run – consolidations and de-consolidations – occurs. It encompasses the phalanx of large distribution centers used to shift products around the country. It is also where much of the delivery distance is covered.
Middle-mile distances vary depending on the network. However, a report released on April 17 by Deutsche Bank makes clear that a reduction is inevitable. Heightened delivery demands of e-commerce users are forcing participants to shed models built around a “straight-forward” first, middle and last-mile supply chain in favor of “fragmented” networks supporting the positioning of inventory near the final destination, the report found. Most of these fulfillment sites are being found in densely populated East Coast demand centers, which has led to a tilting of the middle-mile board in favor of east of the Mississippi River geographies that have fewer miles connecting major commerce centers, the report said. Both factors augur for a secular reduction in the typical middle-mile length of haul, according to Deutsche Bank.
Forced by Amazon.com, Inc.’s “Prime” delivery service to clear a higher bar of customer expectations than ever before, traditional retailers on average have cut their delivery times by as much as 30 percent in the past few years, the report found.
One trucking company that appears to have embraced the change before it is truckload, logistics and intermodal giant Schneider Inc. (NASDAQ:SNDR). On April 17, Schneider announced that it was “broadening its middle-mile configuration” to include its dry van and intermodal assets. The statement did not provide details on the changes in Schneider’s physical distribution network, and a company spokeswoman did not respond to a request for comment. Michael O’Brien, a subject matter expert for FreightWaves, interpreted it to mean that Schneider will use its over-the-road drivers to handle drayage operations in the 200- to 400-mile range, considered longer-range lengths-of-haul that become a de facto regional haul.
Perhaps the most meaningful trend will be the manner in which railroads and heavy intermodal users like J.B. Hunt Transport Services, Inc. (NASDAQ:JBHT) transition to a distribution landscape where long haul is out of favor, and where they face much stiffer competition in the East from trucks than west of the Mississippi. In the report, Deutsche Bank said that, since 2010, Hunt’s intermodal length-of-haul has shrunk by 7 percent, which coincides with a significant shift in intermodal demand away from transcontinental hauls and to the East where distances are shorter. The firm slapped a “sell” recommendation on Hunt Tuesday after it posted weak first-quarter results in its intermodal business, which accounts for more than half of the company’s overall revenue and more than 60 percent of operating profits.
For the intermodal supply chain, the change in the way the middle-mile operates presents a major opportunity and a significant challenge. There will be pressure on railroads, trucking companies, intermodal third-parties and ports to develop a cost- and time-effective service that links the largest distribution centers in national networks. Such services are not available at this time, and no one can predict if, and when, that will happen. Should such a strategy be properly executed, however, intermodal would be in excellent shape to compete for parcel business in the distribution scheme of the next 25 years, reckoned Walter Kemmsies, who heads the ports, airports and infrastructure practice for real estate and logistics giant JLL Inc. (NYSE:JLL), and one of the leading minds in the U.S. freight supply chain.
“I expect more parcel deliveries on rail due to organic growth and a jump at some point in the future when the domestic intermodal system gets lined up to absorb a lot more,” said Kemmsies. “Given the growth in e-commerce, the need to build out national distribution networks to keep parcel delivery costs down increases commensurately. The impact on intermodal will depend on how railroads position themselves to serve this growing demand.”