2016 commercial

transportation
trends
Strategies freight
carriers can use to
defeat disruptors
Contacts

Beirut DC Tokyo

Fadi Majdalani Frederick Duiven Mizuki Kato

Partner, PwC Middle East Director, PwC US Partner, PwC Japan
+961-1-985-655 +1-703-682-5597 +81-3-6250-1200
fadi.majdalani frederick.duiven mizuki.kato
@strategyand.ae.pwc.com @strategyand.us.pwc.com @strategyand.jp.pwc.com

Chicago London Vienna

Andrew Schmahl Mark Couttie Klaus Hoelbling

Principal, PwC US Partner, PwC UK Partner, PwC Austria
+1-312-578-4895 +44-20-7212-5032 +43-1-518-22-907
andrew.schmahl mark.couttie klaus.hoelbing
@strategyand.us.pwc.com @strategyand.uk.pwc.com @strategyand.at.pwc.com

Andrew Tipping
Principal, PwC US
+1-312-578-4633
andrew.tipping
@strategyand.us.pwc.com

2 Strategy&
About the authors

Andrew Tipping is a specialist in organization and change leadership

for Strategy&, PwC’s strategy consulting business. He is a principal with
PwC US, based in Chicago. He leads Strategy&’s U.S. transportation
business, and his client base includes airports, airlines, postal, and
logistics companies.

Andrew Schmahl is an advisor to executives in the transportation,

industrial and private equity sectors for Strategy&, PwC’s strategy
consulting business. He is a principal with PwC US, based in Chicago.
He helps clients respond to disruptions in their markets through
designing operating model improvements and exploring new growth
strategies.

Frederick Duiven is a specialist in sustainable growth strategies for the

transportation sector for Strategy&, PwC’s strategy consulting business.
He is a director with PwC US, based in Washington, DC.

Strategy& 3
Introduction

On the surface, the commercial freight transportation and logistics

industry looked calm in 2015. The sector moved sideways financially;
average earnings were flat. The U.S. Department of Transportation’s
Transportation Services Index, which measures industry output, rose
only a couple of points. The biggest headline for the sector came early
in the year with the resolution of the painful, but not disastrous, U.S.
West Coast port labor dispute in February.

However, beneath the relative tranquility, roiling forces were (and are)
at work. These dynamics are rooted primarily in the changing needs of
commercial transportation and logistics customers. Shippers’ supply
chains are becoming ever more complex, even in market segments
where their needs have been relatively straightforward in the past.
These changes are best encapsulated by five trends:

• The fracturing of supply chains, which increasingly feature a mix

of offshore, nearshore, and onshore locations, and the expanding
number of nodes in shipper distribution networks aimed at reducing
delivery time to customers from days to hours.

• The rising recognition among shippers that transportation and

logistics can yield a considerable competitive advantage for them;
shipping is no longer a tactical decision influenced solely by cost, but
rather a strategic consideration based on such factors as customer
expectations, sales volume, and product mix.

• The expanded presence of high-margin shippers selling valuable

and sensitive products, such as specialty pharmaceuticals and fragile
electronic equipment, that require exceptional handling, security,
reliability, and tracking procedures from their transportation
companies.

• The frequency and magnitude of disruptive events — higher peaks in

demand, “100-year” storms and other natural disasters, labor strikes,
and geopolitical uncertainties — that are causing shippers to reevaluate
their procurement tactics and the efficacy of their logistics networks.

4 Strategy&
• The double-digit growth of e-commerce and the inroads that
it is making in the business-to-business arena, where shipment
complexity is higher and transparency and tracking requirements
are greater.

These trends are creating new demand patterns for the commercial
freight transportation and logistics industry. Shippers want logistics
partners that can operate across their diverse supply chains and
distribution networks and that are strategically inclined — as
comfortable in the C-suite as in a buyer’s office. Shippers particularly
seek carriers that can accommodate spikes in volume and maintain a
high level of performance during disruptions. And they are looking for
business-enhancing opportunities, such as 3D printing and digitally
enabled solutions that provide visibility into multiple vendors, greater
price transparency, and a consumer-like user experience.

Strategy& 5
For commercial transportation companies, freight traffic has stalled…

Transportation Services
Index — Freight
120
100
80
60
40
20
0
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Source: U.S. Department of

Transportation (http://www
.rita.dot.gov/bts/transportation​
_services_index/chart/946702​
800/1446350400/1/1/1)

And industry profits have stagnated, despite declining fuel costs…

EBITDA Margin

25% Railroads

20%
Trucking
15% Aggregate T&L
Airlines
Marine
10%
Air Freight
5% and Logistics

0%
2010 2011 2012 2013 2014 2015 (YTD/Q3)

Note: Based on screen of

transportation and logistics
(T&L) companies with annual
revenue greater than US$50
million and where last five
years of data is available.

Source: Capital IQ,

Strategy& analysis

6 Strategy&
And many companies have used M&A for growth,
although a strategic approach is usually a better option

Number of trucking and logistics deals Value of trucking and logistics deals (US$M)

14,637
23

18 18
16 15
14
11
10
4,652
3,798
3,282
5 2,298
3 4 1,962 2,165
141 646 299
85
’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15
(thru Q3) (thru Q3)

Note: North America,

2005–2015, disclosed
transactions only

Source: Dealogic,
Strategy& analysis

Strategy& 7
Enter the disruptors

Established commercial freight and logistics companies are generally

not suited to satisfying their customers’ full range of new preferences.
Their network configurations, physical assets, skills, and service
offerings are the product of an earlier set of market conditions and
customer expectations. As a result, a raft of new competitors are
slicing off bits and pieces of the logistics sector, offering targeted
services that some shippers perceive as providing more value and
innovation than the more traditional, wider but less specialized,
menus of the larger companies.

One category of disruptor — let’s call it “local network builders” —

bucks the conventional model of centralized warehousing and expansive
transportation networks for a distributed, localized structure that
exploits the benefits of speed and dynamic flexibility at a competitive The success of
cost. Currently, leading e-commerce retailers like Amazon.com are “crowdsourcing
building such networks for themselves. But it doesn’t take much
imagination to see the emergence of third-party logistics consolidators —
fillers” suggests
perhaps the aforementioned retailers themselves — that can build out flexible models
local networks providing better service than established carriers. that address
Another kind of disruptor could be termed “crowdsourcing fillers.”
workforce
Such companies leverage the fundamentals of social networks to offer challenges will
shippers the supply chain flexibility and agility that they need to better succeed.
manage surge capacity and network disruptions. This category includes
firms like Cargomatic, which connects shippers and carriers through
Web and mobile apps, and Roadie, which connects customers to people
who will transport their stuff. The success of these businesses is not a
foregone conclusion, but their very existence suggests that a creative
and flexible model that addresses today’s workforce challenges — such
as driver availability and unionization — eventually will succeed.

A third sort of disruptor is something we might call “startup simplifiers.”

These companies target new and small shippers that don’t offer enough
volume to warrant the attention of larger carriers. Their elevator pitch is
that they view such shippers as more than just high-margin customers
to be harvested by a specialized sales force. Rather, they see small

8 Strategy&
shippers as a distinct customer segment that requires specific and
differentiated products and services. Their offerings often go beyond
shipments to a broader set of logistics activities, such as website design
and online channel management. ShipStation and uShip are two
companies in this niche.

A fourth disruptor could be labeled “big data manipulators.” They use

a strategy that harnesses digital capabilities and the power of analytics
to satisfy shippers that require more consumer-like buying experiences
and greater control over their shipments. When managed well, these
services can also yield substantial cost savings for the carriers and
logistics companies that provide them. These savings can be reinvested
in extending their digital competence. Companies such as Echo Global
Logistics and Keychain Logistics are good examples of players pursuing
this strategy.

An appropriate name for the final disruptor type is “hybrid carriers,”

because they seek to balance the traditional divide between asset-light
and asset-heavy models, creating a combined ground network that
offers the best of both — a base load of fully controlled, owned
equipment plus a portfolio of instantly available non-owned equipment
that can be contracted to manage demand fluctuations. Companies
such as XPO Logistics, which recently acquired Con-way Trucking for
US$3 billion to enhance its small freight portfolio in North America,
are adopting this approach and rapidly expanding their transportation
and logistics services.

It’s highly unlikely that any one of these new niche value offerings will
come to dominate the commercial freight transportation and logistics
industry (or that these are the only new strategies we will see), but they
are already reshaping the sector. Many additional competitors will arise
in the near future, including but not limited to Amazon, which most of
the industry views as the most threatening disruptor.

Strategy& 9
Disrupt yourself

What should executives of established commercial transportation and

logistics companies do to defend against these disruptive business
models? How can you strengthen your market position in the current
environment? We believe the answer lies in developing a set of
capabilities that address changing customer needs, that are sufficiently
flexible to shift direction to match those changing customer preferences,
and, importantly, that take advantage of the deep specialization that
your firm excels in while greatly improving operating efficiencies to
drive optimum performance.

That’s a tall order — and one that most logistics firms are not prepared To defend
to take on. To help in this transformation, here are some pathways for
success, focusing especially on required priorities and skills: against
disruptors,
• Create a better balance between customer needs and develop flexible
operational efficiencies. Empower and encourage frontline
employees to address shippers’ challenges within the framework of capabilities
their daily duties. They should be able to provide shippers with that address
greater visibility and maneuverability with respect to the timing and changing
mode of shipments, and they should automatically aid shippers with
global, cross-modal solutions — perhaps by mixing and matching customer
owned and third-party services. needs and use
your firm’s
• Enable supply-side vigilance and strategic M&A deal making
and integration. Foster the habit, throughout your company, of specialization.
continually scanning for new competitors, seeking to understand
how customer needs are being addressed by those competitors.
When you identify product and capability gaps, consider acquiring
companies that fill in those holes in your business model. For
example, UPS’s $1.8 billion purchase of Coyote Logistics gave it
access to proven freight e-brokerage technology. And C.H. Robinson,
a Minneapolis-based logistics company, has made M&A a central
component of its strategic initiatives, spending nearly $1 billion on
acquisitions since 2010 on outfits that offer expansion opportunities
in geographic regions or customer bases.

10 Strategy&
 Don’t view M&A in itself as a sufficient strategic response to
the shifting demands of shippers. M&A can be an excellent tool
for obtaining capabilities and fleshing out product and service
portfolios, but only if you have an effective tactical plan for
meeting customers’ needs.

• Fully deploy data analytics and digital management. Deploying

data analytics includes tools needed to capture and store data
effectively, the analysts who unlock insights from data, and the
pathways needed to transform those insights into operational
realities. Integrate this data with your customers’ systems, and
with the systems of other third-party firms they work with. Design
and implement advanced customer-facing digital tools.

• Enhance network agility and support capacity management.

Develop your own local shipping networks or use third-party
networks, bypassing traditional hub-and-spoke operations and
taking advantage of more dynamic approaches to pickup and
delivery of goods. These local networks can be more flexible than
national systems because their packages travel only a short distance.
They can promise overnight delivery even for pickups as late as
10 p.m., which gladdens many shippers because most Internet orders
are placed after dinnertime. Moreover, local networks can support
the effective management of supply chain disruptions and of large
variations in demand on a daily, monthly, and annual basis.

Together, adopting these capabilities — or the right combination of

them for your company’s business model and customer base — can
help carriers and logistics companies respond to the shifts in shipper
demand that have opened the door to disruptors emerging within
their markets. That’s a much more palatable option than sitting back
and watching as your position in the marketplace erodes.

Strategy& 11
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