Thoughts on Retailers Buying XPO Logistics and What The Right Strategy Should Be

I generally do not like to comment on something so speculative however Friday ended with a huge bang in the supply chain industry with Amazon and a major retailer apparently thinking of buying XPO logistics.  I was asked by many what I thought of this so let me give you some pre-holiday thoughts:

First, this is a very normal activity as companies go upstream and downstream in the value chain to try to capture as much as they can in that chain.  Remember your business classes:  The value chain starts essentially at the extraction of raw materials and ends with the consumer (some say it goes through post consumption disposal and return of unconsumed raw materials to Mother Earth.  I agree with that however let's leave that alone for now.).  In between extraction and consumer you have activities such as transport of raw materials, conversion of raw materials to something of value, transportation to distribution, merchandising (either on line or in store) and final mile delivery (whether completed by the consumer or completed by the seller) to the point of use (the home).

Three things you will notice in that scenario:

1. Conversion is very specific to a good.  Meaning, it is not fungible and if you wanted to capture that portion of the value chain you would have to buy a lot of companies.  You may want to vertically integrate a very high margin company but not all of it.
2. Transportation is pervasive across the value chain all the way back to the raw materials movements to the final mile.
3. Delivery Final mile (v. customer pick up) is growing rapidly and it touches the consumer.  This makes Final Mile transportation part of the merchandising and consumer touch point process - and this is why retailers want to vertically integrate. The impact of final mile on the consumer experience and consumer loyalty is huge.  

There is one other dynamic happening right now and that is the current capacity crunch.  Rather than get into an "arms race" of ever increasing rates, the retailer may decide to just buy their own capacity and this is another reason to get the "Elephant Gun" out and look for carriers to buy.  

If the retailer is thinking they want to capture the final mile and protect themselves against the capacity crunch, they could do a number of things:

1. Buy technology to facilitate the final mile but not buy the assets.  Think Target's acquisition of Grand Junction.  Or their more recent acquisition of Shipt for grocery shipping.  Even Wal-Mart's acquisition of Jet.com would be part of facilitating this process.  (The biggest issue with the Wal-Mart acquisition was one of culture - Wal-Mart eliminated Jet's long standing practicing of having drinks and happy hours in the office.  That since has been reinstated).
2. Buy transportation assets and make them "in house" assets.  This is where the discussion of buying XPO comes in.
3. Build the transportation assets yourself - i.e., Amazon's acquisition of planes and doing "power only" where Amazon owns the trailers, are examples of this.  Many retailers follow this power only model.  The benefit of this is you can swap carriers pretty quickly and you can leverage small carriers since the retailer owns the trailer.  The problem with this strategy is the "crunch" is with the power not with the trailer.
4. Develop "Vested" relationships which give the specific retailer "most favored nation" status with one or more asset providers.  While this idea is championed by Kate Vitasek at University of Tennessee (read about this concept at The Vested Way) it really was "founded" in the logistics industry by the infamous J.B. Hunt agreement with the BNSF.  This gave J.B. Hunt a preferred status with BNSF which, to this day, makes it impossible for other carriers to really compete with JBH.  For the most part, the rest of the industry fights over what JBH does not want.  If JBH wants it, they win. 
5. Work within financial risk mitigation constructs. An interesting new development is to protect capacity (does not really help with final mile) by participating in the new futures exchange developed by Craig Fuller called TransRisk.  This will definitely assist with the stabilization of rates and capacity however it is at least one year away from implementation  and, while I absolutely think it will work, it is unproven.  

There are hybrids of all of these however these are the major actions a retailer could take to capture more of the value in the value chain and mitigate capacity risk.  Number 2 above, Buy Assets, has garnished all the excitement going into Christmas weekend.  My quick thoughts:

1. No one is buying XPO and if they did the Government would stop it.  XPO, as it currently is constructed, is too big and would have too big of an impact on industry assets to allow one retailer or on-line provider to buy it.
2. They could split XPO up and buy pieces of it.  While this would probably make it easier to get through government regulators, I believe this action would be value destroying not value creating.  For example, the final mile portion of XPO was created by XPO acquiring a company called 3PD.  3PD are executives who came out of retail and therefore just "putting it back" could be possible.  Combine 3PD with the final mile technology of Optima (which is a final mile technology company XPO purchased back in 2013) and you may have a platform for a good final mile service.
   
   However, don't forget, neither XPO, 3PD or Optima own the transportation assets. They merely find, qualify and route.  The "work" is still outsourced to smaller delivery companies and therefore this would be more of an example of buy technology  (along with getting very good people) versus buying transportation assets.
   
   The big question this would leave is what happens to the rest of XPO?  Is it just a carcass laying out there to be pecked at by private equity investors? Does Brad Jacobs still run it?  Are the pieces as valuable as the whole?  I think not.  I think the value of each piece of XPO diminishes significantly as other pieces get sold off. This is why I believe splitting XPO up would be value destroying not value creating (unless, of course, the buyer of a piece is willing to either pay a huge premium for the portion they buy or be willing to immediately divest of certain portions of the "carcass")

I think the logical action for retailers is to concentrate heavily on #1 (Buy Technology) along with #4

 (Develop Vested Relationships).  I would also heavily participate in #5 (Work within financial risk mitigation constructs) once it becomes available. 

Interestingly, and somewhat off the radar, this is what Target appears to be doing (after hiring Preston Mosier and Arthur Valdez from Amazon).  Perhaps everyone, including Amazon, should be focused more on what is happening in Minnesota.

Have a very happy holiday season!

Amazon Final Mile - It is All About The Brand

I keep being asked why in the world would Amazon start their own home delivery / final mile service (See Amazon Logistics)?  Everyone questions this as a stretch and even Fed-Ex could not help themselves when they stated Amazon (they did not specifically say Amazon but we all knew who they meant)  does not understand what it takes to have a dense delivery network like Fed-Ex or UPS. 

UPS chose to be in denial by having the CEO say:

"We don't believe that Amazon's strategy is to do it themselves and the reason we believe that is we have this huge infrastructure, we're investing in technology, we have a great mutual relationship with them," 

I think most of the analysis, and the response from Fed-Ex and UPS miss three critical points:

1. Branding
2. Capacity
3. Drop Ship
   

Branding:  When a final mile company delivers to the consumer's home the consumer sees it as an extension of the company the item is purchased from, the product and the purchase experience.   The consumer does not see "Fed-Ex", "UPS", "JB Hunt Final Mile" or "XPO" and certainly they do not separate the delivery from the entire purchase experience.  If the product is late, damaged, delivered in a truck that looks like a get away vehicle from a crime, is handed to you by a person who is a felon, etc. etc. the consumer will be very disappointed and will always relate this experience to the store (whether on line or physical).  If Amazon is to protect their brand they need to own more and more of the fulfillment chain  This allows them to do that. 

Capacity:  UPS and Fed-Ex have disappointed at the crunch seasons more than once and I believe Amazon is just sick of it.  At some point you have to take destiny into your own hands and take control of it.  Part of this is what stage the companies are at in their development.  UPS and Fed-Ex are in the "protection of business" stage and Amazon is still in the "Grow.. grow.. grow " phase.  What does this mean?  It means UPS and Fed-Ex are big companies who only invest when they know 100% it is a "sure thing". 

Amazon, on the other hand, is investing like mad.  Therefore, UPS and Fed-Ex cannot keep up with the explosive growth and maintain all their other businesses.  This shows itself in a lack of capacity at crunch times and so Amazon, as they always do, have taken their destiny into their own hands. 

Drop Ship: In Amazon's statements what is also clear is they want to control the drop ship experience from vendor's warehouses.  In this case the consumer orders from Amazon, the order is passed to a vendor, the vendor maintains the inventory and warehouses it but a Amazon truck picks it up and delivers to the customer.  Think about this as the touch points the customer is directly involved in are:

• Order experience
• Delivery experience
• Payment experience

In the case I outlined above, Amazon owns all three and the burden of back room logistics (versus front room logistics - I feel like I should trademark those two terms) is kept by the vendor.  This is brilliant and well outlined in this short article in Industrial Distribution Magazine.  

As logisticians and supply chain people we always look to the operational aspects of a strategic move.  In this case, it goes far beyond logistics operations.  

Read all my postings about Amazon as I have tracked this development for years:  Amazon Coverage on 10xLogistics

Amazon and Kenmore - A Match Made in Heaven

It is incredible it took this long for the marriage made in heaven to happen. Kenmore is the crown jewel of Sears and Amazon has always wanted to capture appliance sales.  But how?  The logistics are daunting.

Enter Kenmore and enter Sears Logistics (SLS). I have always said, the best logistics company in the country is "buried" inside Sears. This has been my contention for over 10 years. SLS had perfected final mile, especially final mile for big box items, long before "final mile" was fashionable or an industry. 

Ask your parents if you don't believe me. A SLS person delivering to your home has been a staple for years.

Now, combine this with the Amazon order platform and the comfort and reliability of Kenmore and you have a powerhouse.

More to come on this but if Amazon uses SLS they have picked up an incredible scoop. And, soon, they will just buy the Kenmore brand, bring SLS with it and use the few Sears stores left as showrooms.

Schneider Enters The Final Mile Battle - A Very Late Arrival

An interesting development over the last few weeks which I needed to digest was the entrance of Schneider National into the Final Mile foray.  My readers know I have followed the growth of final mile for many years (See where I showed XPO's acquisition in 2013 was "game over").  I was an "early adopter" of how important this segment was to the overall logistics network moving products to customers.  One thing we know is Schneider cannot be seen as an "early adopter" of anything - they are very disciplined and careful in investment.  So, this is why their entrance is so important.

The service is called Final Mile+ (JB Hunt has had Final Mile Services for many years - confusing branding by Schneider) and it appears to be a direct competitor to the XPO story of owning the supply chain from raw materials through manufacturing to retail then to the customer's home.  They acquired both an operating company, Watkins and Shepard, and a technology company, Lodeso.   The key will be whether Schneider is successful at stitching this together to give the customer a seamless view from the beginning to the end.  To this point, few companies have been able to do that and it has been tough for 3PLs to make the case that "one stop shopping" really adds value.

I personally believe the model is getting a bit crowded at the integrator level and very sparse at the operating level.  Remember, all these companies (XPO, Schneider etc.) are really just brokers to a final mile courier service.  It is at the bottom level where the problem exists.  We need more people actually doing the hard work of pick up, delivery and installation.  I don't believe we need more integrators.

JB Hunt Final Mile differentiates itself because, for the vast majority of what they do, they use their own trucks and drivers.  I think that ultimately will be the competitive advantage.  While today it may be cheaper to integrate many couriers, I think in the long run service will be the key element and the way to get that service is to own the assets.

XPO Finds "The Missing Link" in Big Box Home Delivery - Game Over?

Last week XPO Logistics (See other entries about XPO here) made what I consider a ground breaking announcement and acquisition: They acquired Optima Service Solutions.  If you remember, a few months ago XPO purchased 3PD which catapulted the company into the a leading position in big box (Think appliances, home exercise equipment, massive TVs etc.) home delivery.  It was a big and bold move to complete the supply chain (They already had services for inbound, redistribution and this gave it "final mile" capability) for XPO.

However, those of us who have been working home delivery (This was a major focus of mine at a major appliance manufacturer) have known for years that the big struggle in this space is in installation and service along with returns.  The biggest reason people shy away from internet purchasing of big items (for this example lets say a refrigerator) is because it is so hard to coordinate installation and, if something goes wrong, who do you call?  The acquisition of Optima by XPO solves that problem for home deliveries made by XPO / 3PD.

XPO will now have the capability to provide a seamless solution.  Before this acquisition the purchase of the refrigerator went something like this:

1. You buy from an internet retailer who may or may not coordinate the delivery (some just give you a phone number to a LTL carrier and basically you are on your own). 
2. The refrigerator is delivered to your curb (many will only do curbside deliveries).
3. The driver may or may not help you unload (many LTL carriers will tell you that you have to unload the refrigerator yourself). 
4. The driver leaves and now you and your wife stare at this new beautiful refrigerator sitting in your garage and your wife says to you, "What the hell are we going to do with that"?

Now think of the "new world" of big box deliveries (again, our fictional refrigerator) with the  integrated and seamless solution XPO will offer: 

1. You choose an internet retailer specifically because they have the XPO / 3PD / Optima team as their delivery agent (Same refrigerator but this retailer is preferred due to the delivery mechanism).
2. When you coordinate the delivery you tell them you want it fully installed and the installation is seamlessly scheduled for you.
3. When the driver shows up to deliver the refrigerator the installation technicians arrive at the same time and they take over. 
4. Your refrigerator is installed, icemaker tested, etc. etc. 
5. You and your wife look at the beautiful new refrigerator where it belongs - installed and ready to be used. 

This is why this acquisition is so important.  The complexities of buying a big box item over the internet are lifted from the consumer and put where they belong - on the delivery agent.  No one has been able to do this better than Optima and now Optima is exclusively part of the XPO / 3PD network.  

Bradley Jacobs has, in one masterful stroke, accomplished two great things for his company.  First, he has given the company the ability to make a seamless end to end solution for home delivery all the way through delivery and service.  Second, and probably as important, he took the leader of this service, Optima, off the market for other home delivery agents.  Now, if you were a local home delivery agent and behind the scenes you were using Optima, you will no longer be able to do to that as Optima is exclusive to 3PD.  

This is the equivalent of a "Pick 6" in football.  Your great defense not only makes a great defensive play but it also scores a touchdown.  

The last frontier for potentially preventing people from buying big box items over the internet is now just returns - and don't bet against XPO in this space - they will figure it out. 

XPO Logistics and 3PD - An End Run Around Coyote Logistics?

Back in November of 2012 I reported on XPO Logistics and their "insane" growth pattern.  The company, and its CEO Bradley Jacobs, seem to have no lack of money or desire to expand and acquire. In that post I said you should watch this company and time will tell. 

Today supported my claim I made back in November in a big way.  They have purchased one of the premier home delivery or "final mile" companies in the Country - 3PD.  This puts XPO in an entirely different league than most brokerage houses because it puts them squarely in the middle of a growing trend:  Final Mile Logistics. 

I have reported on FML extensively as well and now it appears there is a marriage made in heaven.  It will be interesting to see if the two can be brought together.  One thing this acquisition does prove is XPO logistics is not just about "dialing for diesels" but rather they want to get into the heavy lifting of logistics.  I think it also shows incredible foresight as the mega trend story for sure is the massive growth of this final mile segment.  Will a broker model win out over an asset based model?  Do they serve the same customer?  Can XPO overcome the inherent high costs of home delivery?  

All of this is yet to be seen and I can say however it appears that if anyone can do this right it will be XPO Logistics. 

Now the question is where does this leave the fast growing upstart, Coyote Logistics and the old guard of brokerage C.H. Robinson?  Coyote has grown rapidly and shown a great skill set in putting new and innovative technologies to use.  However, this move by XPO Logistics appears to be an "end around" around, over, and through Coyote's model.  Does this leave Coyote to be just "another broker" while XPO logistics is now branching out into more innovative services?  The initial reaction would be yes however I do think time will tell.

As far as C.H.Robinson is concerned, I think they will continue to be the "broker to the stars" - meaning a big brokerage house for huge industrial shippers.  I am not sure they will compete in this space with XPO Logistics or even want to.  

Finally, I must say the reaction of the market is ludicrous.  If I were a gambling man I would short the hell out of this stock.  Right now we are talking about a company (XPO) that is losing money and losing a lot of it.  Even with this purchase and even if 3PD is wildly profitable it does not change the fact that the base business is losing money.  Further, there is a real question if there are any core synergies between a truck brokerage company and 3PD beyond the fact that they do not own assets.  I just cannot in my wildest dreams comprehend how this purchase could or should add 15% to the value of the company.  

But, again, as I am fond of saying... we shall see. 

Crowd Sourcing Logistics Comes to Wal-Mart

We have heard of crowd sourcing when it comes to many areas and specifically, mostly, in IT work.  Essentially you allow the "crowd" to do the work for you and a lot of times it is free.  Think "open-source" type work.  Everyone donates, everyone helps and everyone can become a worker for your entity.

Another big area where this is popular is in crowd source funding where just about everyone can be a mini bank and provide micro loans to entrepreneurs.  While this has been a niche area in logistics, Wal-Mart now announces they will test this for home delivery. 

Remember what I have written about which is the last mile / final mile / home delivery is the most expensive part of the logistics chain getting products from production to a consumer.  One reason why stores exist is because it allows a company to aggregate the product and you, the consumer, essentially handle the final mile to your home.

Now imagine you are checking out at Wal-mart and the following interaction occurs:

• YOU:  I am checking out and paying for my product..just as I am about to leave the cashier turns to me
• CASHIER:  I see you live on Smith Drive in Springfield.  I have a customer who just ordered some items and their house is only 1/2 mile from your house.  Would you mind delivering the product for me?
• YOU:  [GULP!]  Huh?
• CASHIER:  Yes, it is only this small bag and I will give you $10 off your purchase if you do this for me.
• YOU: [Still thinking this is odd yet intriguing] - Really?
• CASHIER: Yes, really (channeling Austin Powers).
• YOU: [As odd as it seems you think what the heck] OK, sure.

Wal-Mart gives you a $10.00 discount and off you go to deliver your product, get your $10 off and the home shopper gets very low cost home delivery.

Of course, there are all sorts of security concerns and other issues (What stops you from taking the product and never delivering it) but this is such an interesting idea I think it is worth investigating and perhaps this is the beginning of a huge trend in "Crowd-Source Logistics".  

There is a company which has a very interesting model called Zipments.  This is a fascinating idea which I must apologize I had not seen before.  Zipments matches required shipments with approved and screened couriers in big cities.  This is a little different as it is probably closer to independent contractor courier services than true crowd sourcing however it does appear this model is going to be very disruptive, in some form, to the normal delivery method. 

I could actually think about this going one step further in a Wal-Mart or Target.  I could see them having your credit card number and using the chance of a penalty charge ensuring you make the delivery and also a "load board" on the wall so even non customers could come in, see deliveries needed, and taking them.  

Everyone has a smartphone so getting a signature and passing that signature back to the company is easy.  I could even see, rather than a load board, a live APP existing where you could see what is being offered at multiple stores, bidding on the delivery, and building efficient routes all within a simple APP. 

Everyone can be a final mile delivery person!  Watch out Amazon.. Something like this will work.  

"Home Delivery" Lockers at Wal-Mart

In another twist to the race to home delivery and the attempt to de-throne Amazon, Wal-Mart is now testing lockers in their stores.  Along with a beefed up web presence Wal-Mart will try to entice you to order through the web (capture the web based buyer) however avoid the huge costs of the final mile.

This is the dilemma all of the retailers have and ultimately will have to solve:  The logistics costs of the final mile (delivery to your home) are a huge part of the total costs of logistics when you deliver to the home.  In fact, if you just measure the variable cost of sending one unit of something to your home virtually all the cost is in that final mile delivery.

If Wal-Mart is successful they can leverage the huge advantage they have in store delivery logistics while not incurring the costs for that final delivery - or they may be able to appropriately segment in the consumers mind the differential cost of delivery to the store v. delivery to the home.  This is an area Amazon cannot compete in (they have no stores).  As a consumer, because their is no option, when I order from Amazon I will accept a delivery charge.  However if I am presented with a "free" to pick up at store and $6.00 to get to the home I may think twice about the $6.00.

So, what issue do the lockers solve?  This solves the final "three feet" of the purchase experience.  I do not want to interact with a sales person or wait in line to pick up my goods.  Now I will be able to walk into the store, find my locker, get my products and leave.  It is very compelling.

I probably overstated my position above saying Amazon could not compete with this although they would need a partner.  The UPS store seems like the logical partner as it solidifies the use of UPS for the package delivery and there is one on just about every street corner.

Of course, there is still partnering with the Post Office (interestingly UPS has already started doing in the sustainability space) which I think makes a lot of sense.  We shall see how this ever changing landscape is developed.  Stay tuned.

I have two labels you can come back to for reading all the news on both Same Day Delivery and Final Mile Delivery.  If this is your topic, come back early and often for updates to these labels.

Blue and Brown Make Green... Sustainability for The Final Mile

I have written before about the complexity of the final mile in the logistics network.  This includes both the final mile of the delivery and also the first mile of the reverse logistics networks created by final mile deliveries (i.e., Customers tend to order one size too big, one too small knowing they can return.. for example).   What I had not thought about was the unique nature of the sustainability challenges of the final mile network.

Thank goodness there are a lot smarter people than me in this world!

The Post Office (USPS) and United Parcel Service (UPS) have partnered together to share information and build out this carbon information for the final mile in the United States.  This is good news and I look forward to seeing more about this in the coming years.  The sheer volume of vehicles possessed by both of these entities and the fact they are working to reduce carbon gives me hope for continued sustainability initiatives.

Has Amazon Awakened The Sleeping Giant? - Walmart Same Day Delivery

I think one thing a lot of industries and companies have regretted is taking on Walmart.  Circuit City tried, Toys 'R Us tried and others continue to try.  Little 'ole Amazon was sitting very nicely with a great business dealing with parcel delivery in a few days.  However, that was not good enough.

They now want to turn their vast and sophisticated network of distribution centers into same day fulfillment centers.  There are pros and cons to this and clearly it is a very expensive proposition.  Except for the most densely populated areas, same day delivery is cost prohibitive.  It is especially prohibitive if you have a normal central distribution point system.  Distribution centers like Amazon has are designed to service large service areas - like 250 mile radius and are too big to blanket the Country with them.

Enter Walmart and their "test" of same day delivery.

Walmart sees the Amazon plans and basically says, "I see your same day delivery and I raise you by 4,500 stores / "Distribution Centers".  The interesting part of a Walmart store is the consumer sees it as a retail store yet the smart people in Bentonville see them all as distribution centers.  Let's say the average radius around a store is 15 miles before you hit another store.  Given this (and I am sure the statistic is available.. this is my guess.. not counting the outlands / badlands etc) you can see the advantage Walmart has and will always have over Amazon in same day delivery.  This will remain true unless Amazon wants to go on a mind boggling spree of capital investment to build out stores.  My bet is if there truly is a market for same day delivery (which is very questionable) then Walmart wins before Amazon even gets on the field.

A lot of people have lost a lot of money betting against Amazon over the years however this endevor may be a "bridge too far" even for Amazon.  My advice:  Don't take on Walmart.  Find the white space between you and Walmart (as Amazon has done so nicely over the years) and dominate that space.

The war of final mile delivery is about to begin!

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