“If you got it, a truck brought it”
While it lives in the background of industry, trucking is the heartbeat by which manufacturers deliver goods to businesses and consumers throughout the United States. As the dominant method of goods transportation, trucking accounted for more than 70% of the total domestic tonnage (10.5bn tons) in 2015, and trucking firms generated $726bn in revenues in the same year1. While the U.S. has seen consolidation across an array of industries, trucking remains extremely fragmented, with more than 90% of carriers (firms that provide trucking services) operating with 6 or fewer trucks1. This lack of consolidation points to the industry’s low competitive advantages as well as minimal historical advantages to scale, as purchasing power and other size benefits have been offset by increased administrative costs of larger scale operations.
Generally defined as a slow-moving industry, trucking is experiencing a seismic shift driven by the rise of the digital age. Customer requirements have increased dramatically, and carriers are being forced to ship more customized loads at faster speeds for a lower cost. This change has been led by e-commerce giants such as Amazon, who promise 2-day free shipping to customers, increasing delivery expectations and sending shockwaves up the supply chain2. Carriers must also integrate with customers who are increasingly turning to digital and/or automated software to manage their supply chains to decrease costs and improve efficiency3. Finally, the comparatively low barriers to enter the industry have allowed new, nimble, technologically savvy players to emerge, which in turn has increased competition and forced existing players to evolve (or face risk of elimination)4.
Schneider, one of the largest players in the Full Truckload carrier market5, has recognized these industry shifts and has made substantial technological investments to improve existing operations and gain a competitive advantage in the space. In its S-1 filing for its 2017 IPO, Schneider management provided detail on Quest, its $250mm “comprehensive business process and technology transformation program”6. Per its S-1 filing:
“Our state-of-the-art Quest platform allows us to make informed decisions at every level of our business, providing real-time data analytics to optimize network density and equipment utilization across our entire network, which drives better customer service, operational efficiency and load optimization. […] Our Quest platform allows us to assess our entire network every 90 seconds, resulting in real-time, round-the-clock visibility into every shipment and delivery, route schedules, truck and driver capacity and the profitability of each load/order. Our Quest platform enables us to minimize unbilled miles, optimize driver efficiency and improve safety, resulting in increased service levels and profitability.”
As shown below, this investment in technology has paid off for Schneider, as net income margin doubled from 2012 to 2016, and allowed Schneider to achieve a 23% compound annual growth rate (CAGR) on net income on only a 4% revenue CAGR over the same period.
Schneider financial performance ($000s):
Source: SEC filings data, November 2017
Additionally, through increased asset utilization, Schneider was able to maintain trucking operating margins throughout 2016, while competition saw material margin decreases in a year categorized by general overcapacity resulting in depressed prices across the industry.
Source: SEC filings data, November 2017
Going forward, Schneider’s response to increased digitization is twofold. First, the company plans to build upon its existing technology investments to (i) increase interaction with its customer base, driving “enhanced user experiences”, (ii) leverage data analytics to anticipate customers’ and drivers’ needs, and (iii) leverage the platform to incorporate innovative technologies and maintain their competitive edge. The company is also focused on capitalizing on the growth of e-commerce. In June 2016, Schneider acquired Watkins & Shephard and Lodeso, both of which focused on the “final mile” of delivery services, as the company focuses on becoming the leading “first, final, and every mile” carrier in the industry6.
While Schneider has made effective technology investments, they should also look to aggressively scale the business via acquisition going forward. Scale benefits have increased in the new industry landscape as (i) smaller players cannot easily make the large technology investments necessary to remain competitive, (ii) network density increases in importance as carriers look to improve efficiency, and (iii) larger players are more equipped to negotiate with a consolidating consumer base. Schneider could also likely benefit from decreased purchase prices, as smaller players deal with temporary capacity overhangs and increasing regulatory demands. This industry consolidation has already begun, with the announcement of the $6bn Swift (#1 player) and Knight (#11) merger, the largest of its kind in industry history7.
Given this context, important questions remain:
- Should Schneider look to partner with Amazon going forward? This could drive strong growth, but may also lead to significant customer concentration, lower negotiating power, and ultimately thinner margins.
- How should Schneider stay ahead of technology advancements going forward? Timing of significant advancements, such as autonomous trucking, are hard to predict, but could have a significant impact on existing operations.
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- “Reports, Trends & Statistics”, American Trucking Association, 2017 http://www.trucking.org/News_and_Information_Reports_Industry_Data.aspx, accessed November 2017
- Deborah Lockridge, “How E-Commerce is Changing Trucking”, February 2017, http://www.truckinginfo.com/channel/fleet-management/article/story/2017/02/how-e-commerce-is-changing-trucking.aspx, accessed November 2017
- Gerhard Nowak, “The era of digitized trucking: Transforming the logistics value chain”, September 2016, https://www.strategyand.pwc.com/reports/era-of-digitized-trucking, accessed November 2017
- Andrew Tipping and Jonathan Kletzel, “2017 Commercial Transportation Trends”, https://www.strategyand.pwc.com/trend/2017-commercial-transport-trends, accessed November 2017
- William B. Cassidy, “JOC Top 50 Truckload Carriers: Larger fleets outperform market”, August 2017, https://www.joc.com/trucking-logistics/truckload-freight/joc-top-50-truckload-carriers-larger-fleets-outperform-market_20170815.html?destination=node/3338846, accessed November 2017
- Schneider National, Inc., IPO Filing, April 2017 https://www.sec.gov/Archives/edgar/data/1692063/000119312517113914/d238359d424b1.htm, accessed November 2017
- Samuel Barradas, “Knight And Swift To Merge For Largest Acquisition In Trucking History”, https://www.thetruckersreport.com/knight-swift-merge-largest-acquisition-trucking-history/, accessed November 2017