Brick and Mortar – It’s What’s Inside That Matters

Brick and mortar are dead …

In 2016, demolition of Rolling Acres Mall began. The mall opened in 1975 on 260 acres on the southwest side of Akron, Ohio. In its heyday, it featured 140 stores on two levels,1.3 million square feet of retail space, and 7,500 parking spots.

However, the mall’s demise began long before on-line shopping became prominent. Safety and security issues scared shoppers away. The mall was offered at auction in 2009 and received no bids, and the last retail store closed in 2013. It took a lot of trucks to haul away all that brick and mortar when they tore it down.

It is now rumored (there is a name on the proposed blueprints), that a new Amazon fulfillment center will be constructed on that vacant land. Amazon fulfillment centers are somewhat more than a million square feet, so it will be just about the same total flooring as the old mall. Naturally, it will only be one floor, but stand taller.

Brick and mortar lives!

And what will the center be built from? Brick and mortar are not dead! But it will take considerably less materials to construct the fulfillment center than to build a mall with 140 separate stores, including five large anchors. However, this will be a much more efficient use of brick and mortar due to the spectacular productivity going on within those walls.

Productivity is the key factor. If someone presented a business case based on Amazon’s system in 1994 (when Amazon started) it would have been quickly dismissed, because it would have been thought to be inefficient and unproductive.

But what about the books? Amazon selling books did not become profitable until its seventh year. You could say it practiced on books. Once it achieved a level of operational productivity combined with volume, the profits began to roll in, and Amazon determined that other products could be channeled through its system.

How productive is an Amazon fulfillment center? It has been reported that the Kentucky operation can process 426 orders every second (read that sentence one more time). In the old mall, if one shopper were present at every register in every store (adding a few registers at the anchors) at the same time and assuming it took two-and-a half minutes to process the transaction (including 30 seconds waiting in line), the fulfillment center would be 400 times more efficient. If the registers were only in use 45 minutes of every hour, the fulfillment center is 500 times more efficient and, if you factor in when the mall was closed at night…whoa, sorry, my calculator just exploded.

Amazon achieves this extreme efficiency by using the most advanced technology available including robotics and 14 miles of conveyor belts per center. It has also been reported that it squeezes maximum productivity from its workforce.

Now thousands of on-line retailers are striving to emulate Amazon, which had a huge head start and holds a dominant competitive and technological advantage. The U.S. is in a “warehousing boom” (lots of brick and mortar), as distribution centers spring up across the country. These centers also are high-tech because efficiency is critical to being able to generate profits and compete with Amazon and others. So, inside the walls of the fulfillment center is the pinnacle of efficiency and productivity; but once those cardboard boxes hit the outside world, peak efficiency stops. This is because the transportation/logistics sector is trying to figure out how best to deliver packages that “final mile.” (home delivery).

The transportation players should not be faulted for a slower response. On-line sales have exploded as the baby boomers’ lust for product selection and customization melded with Millennials’ need for convenience and immediacy. These are the same factors that influenced sales methods and distribution historically.

The Sears catalog, first published in 1894, provided people with a much wider selection of goods than was available at the old General Store and was an immediate success. Sears serviced the country out of a 3-million square foot warehouse and made so many efficiency improvements along the way that Henry Ford studied their processes.

Sears opened its first department store in 1925, which provided the convenience of having many different products available in one location, with the immediacy of taking the product home with you rather than waiting weeks for delivery. This concept was so popular that Sears store sales (more were opened) exceeded catalog sales in just six years, which I find remarkable when considering the pace of life back then. It’s probably comparable to the way Amazon is adding fulfillment centers today.

Digitization has revolutionized the news, music, and many other industries. The Internet took the Sears catalog and digitized it by a trillion. (It may not be a trillion, but I don’t have time to count every individual product sold on-line). And then products were able to be delivered in days, then a day, and now sometimes in hours.

It’s not surprising that logistics is trying to catch up with all the various problems that exist with home-delivering a growing number of packages faster and faster. There are reports of traffic jams in neighborhoods caused by all the delivery vehicles on the streets. (Wouldn’t it be great if all the packages were on one truck?) And then there are the porch pirates. (Wouldn’t it be great if there was a central location for neighborhood pick-up and delivery.) And there are numerous inefficiencies. For example, my mailperson delivered a football jersey to me one day at 8:30 a.m. and then returned to deliver my mail around 1 p.m. in the same van. I think I could have survived those four hours without the jersey – or anything else for that matter. (But then I’m not a Millennial.)

And just as Amazon uses the latest in technology to make the warehouse most

efficient, final milers are experimenting with drones, robots, and self-driving vehicles to deliver packages. Future technologies might even be developed to solve this specific problem.

Class 8 freight haulers have issues because they must service both traditional retailers and on-line sellers as the market rapidly changes. But when all those new warehouses get built, it should make the logistic system easier to navigate and better than it is now. There is speculation that the optimal store of the future (free standing) has a traditional showroom/sales space in the front and a large distribution center/warehouse in the back.

But the final mile problems will all get solved. We just need some time to figure out the most efficient and effective ways to do it. Why am I so sure of this? 

Well, history is on our side. At the start of the 20^th century, the major catalog retailers, Sears and Montgomery Wards, had a huge problem in that 65% of the population didn’t have access to their goods and the infrastructure to fix this didn’t exist. So, after moving the products hundreds of miles by rail, they couldn’t get them delivered the…, the…, wait for it…, the final miles. Yep, the goods market had a final mile problem, but eventually they got it fixed and sales exploded. If our ancestors could figure it out using the technology of that day, I’m confident we can too.

When Will We See Driverless Big Rigs?

The question I get asked the most by people inside, and outside, the industry is: When will there be driverless trucks on the highways?

This, of course, is a difficult question because it not only involves adaptation to technology, but a host of other complicated factors as well. 

But my answer is this:

You will see driverless trucks as soon as the general population accepts driverless cars. When people are comfortable riding in a driverless car, then they will not object to a fully-loaded, driverless tractor-trailer behind them on the highway.

I realize this is not a specific answer but providing an exact year at this point amounts to SWAG. It is difficult to calculate an adoption rate curve because, in addition to economics, there are cultural, political, and other issues to resolve.

I believe most people are currently fearful of self-driving cars. This fear will, of

course, be reduced by all the “self-adjusting/correcting” options (braking, parking, lane-assist, speed-adjust, etc.) available on newer vehicles. In addition, there will be public service campaigns trumpeting the increase in safety provided by self-driving cars. Reduction in accidents, deaths, and drunk drivers will be the main benefits. Improved traffic flow is also an expected plus. 

And traffic safety is of growing importance as millions of baby-boomers with diminishing skills share the road with the texting Millennials. Throw in increased marijuana legalization, and we all may end up demanding self-driving cars.

Personally, I know I will be extremely distressed the first time I am in a driverless car. I have never even used cruise control, because I must always be in total control of my vehicle. However, I do look forward to the day when I summon a car to take me to my doctor’s office. A robot will load me in the vehicle and another robot will lift me out. If I can adapt to this, I think other’s in my generation will also.

But the final push for self-driving cars may come from insurance companies. If you drive your car, your rates are $10,000 a year, but they fall to $1,000 if the car drives itself. “This is America, so it is your choice. We are not telling you what to do, but…”

Why is public opinion so important? Because Congress is not going to approve the use of driverless trucks if people are fearful. It may take years to even write the regulations. Of course if one political party writes them, they will be too lax, and if it is the other party, they will be too tight. But there will be extensive debates and lobbyists promoting various interests, etc.

You can argue that the financial incentive for driverless trucks is so significant it will overrun all the obstructions and objections: “It is so obvious that they have to pass it!” Yes, and the government is working so well, it is currently shut down. And I will refer you back to the history of legislation on freight weight and trailer size. “When is that 33-foot trailer legislation going to pass?”

Now, you can also argue that the truck will always need a “driver,” but that is based on today’s technology and logistics framework. Twenty years from now technological improvements in automation, robotics, and logistics adaptation may change everything. Maybe then you will just need an “attendant” to ride in the vehicle for emergencies. This could even spark a new form of ride sharing. “Ride in the truck for free from Kansas City to Memphis and call us if anything goes wrong.”

I do agree with those who say “platooning” will come first. This involves two or more trucks connected by automated driving technology traveling down the highway in a line, separated by a close, set distance from each other. Successful platooning will also help people to accept the self-driving truck concept. However, this still will need to be legislated, with regulations, etc.

And that’s why it is difficult to put a timetable on it. If you forced me to place a bet, maybe 2027. But driverless trucks will remain a hot topic of discussion until it ultimately happens. As I said, it is the topic I am asked about the most. I was actually giving my opinion on the subject to an anesthesiologist as he waited for me to go under before a recent medical procedure. So, it has to be an important subject because if something went disastrously wrong, those would have been my final words! 

 This post first appeared on the FTR website with minor changes here..  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)

Why The Last Mile Is Such A Big Deal

Why the last mile is such a big deal…

(The last mile refers to the final distance covered to get an on-line purchase delivered to your door. The journey from factory to your house may take over 7,000 miles, but the last leg of that journey is gaining importance in the transportation sector)

Think about a common, small-ticket item which you hate to purchase. A good example for me are windshield wipers, and, on a recent rainy drive to Pennsylvania, I realized it was time to change my blades.

The usual buying process for the product is as follows:

1.    Drive to the auto parts store, which for me is “not on the way” to anything, about a 10-minute trip one-way. 

2.    Find the wiper blade catalog which is dirty, roughed-up, and missing some pages. The large book is difficult to hold because it is chained to the shelf and there is no place to set it down.

3.    Find your car in this book. The book is not easy to read because the type is small, the pages are thin and the store lighting dim.

4.    Find the cryptic code for the wiper blade you need. Something like: FGR3T-47 and if you need two sizes: FGR4T-47.

5.    Search the stock of wiper blades trying to remember the secret code that you need because you can’t write it down.  The blades are not displayed in any particular order, so it’s difficult to find the right one.

6.    After searching for a couple minutes, you determine that the blades you need are not stocked in that brand.

7.    Repeat Steps 2 through 5. Usually you can find your wipers in the second brand searched, but if not, you need to repeat those steps for brand three.

8.    You finally find them and head to the check out. On at least one time in your life, you grab the wrong ones, foolishly confusing FGR3B-47 for the blades you wanted.

9.    Wait at the checkout counter as the cashier is on the phone having an in-depth discussion about the transmission on a ’68 Mustang.

10. Pay for your purchase and receive four grease-coated coins as change.

11. Drive home. Estimated time of total trip = 35 minutes.

Who needs that?

A Better Way?

I was running behind on things after returning from my trip and having difficulty finding time to go to the auto parts store. So, one day at lunchtime I Googled “windshield wipers.” The first website up was Walmart.com. Clicked, entered the make, model, and year, and was instantly presented with four brands of wipers at various price points. Selected the second-best brand and went to checkout. But I was $4.59 short of free shipping. What to do? No problem, the website showed me four related products, that would raise my total over the

Free Goods, Even!

threshold. I selected the Glass Water Repellent for $4.69, entered my payment information, and bada bing, bada boom, the purchase was completed in about five minutes.

I didn’t even look at the delivery information since I didn’t need the blades right away. So, I was startled to see the delivery guy scurrying across my yard (I work from home) with the Wal-Mart box the very next day. Alas, they had not delivered in 24 hours, it was actually 25.

Now today we consider this commonplace, we even expect it, but let’s ponder just what happened here.  What would be the reaction, if just several years ago I called the auto parts store and said this?

Here’s my car information. Now go get me prices on every brand you carry.  Then I’m going to choose one and have you process my payment over the phone. Then I want you to go pull my blades off the shelf and package them up for me. Yeaaah, I’m going to need you to deliver them to my house tomorrow. Oh, and I’m not paying any delivery charge. If you could do that, that would be greaaaat.

Now spread this hassle-free buying experience over millions of products and you can hear the collapse of the brick-and-mortar, as the last mile explodes. And, of course, this trend is accelerating. Millennials demand ease of purchase in everything, and baby boomers (like myself) are learning we don’t have to put up with the annoyances of yesterday, because there is really a better way. Everyone will eventually want it fast, easy, and free.  And the “last mile” will cease to be a common term, it will just be normal, standard practice.

The transportation/logistics network has been adapting to these consumer/cultural changes. The system is better than it was, but not optimal. Eventually, one can imagine a network of automated warehouses, serviced by a fleet of self-driving delivery vehicles. And drones, don’t forget drones. Lots of drones.

This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)

They Said 4% GDP Was Unreachable? What Now?

The conventional economic wisdom (as defined by the forecasts of the most respected economists) last year, was that GDP would not be able to hit 4% for any quarter in 2018. When the economy achieved 4.1% in Q2 2018, the

conventional wisdom was that it was a blip and that growth rate could not be sustained. But it looks like Q3 will come in around 4% again.  Now the conventional wisdom is that economic growth has peaked in this cycle. The economy will start to slope downward in Q4 and continue to ease in 2019, eventually returning to trend growth of somewhat above 2%.

The question I have been asking colleagues and analysts lately is: What happens if these so-called experts are wrong again. What happens if we get two more quarters of 4% growth?

Now, there are several things that support the conventional outlook. The economy is very cyclical and, now that the economy has been allowed to upcycle, we should expect some type of downcycle, maybe even a recession. Unemployment is at a 49-year low, and the unemployment rate usually bottoms out as the economy peaks. So, how low can it go? Also, it makes more sense this time because companies are having trouble finding more workers to produce more stuff. If you can’t sell and produce more stuff, the economy can’t maintain its current growth rate.

Establishing A Baseline

The current GDP forecast from the Wall Street Journal Economists Survey and the forecast from FTR (Freight Transportation Research) are shown below.

	2018Q4	2019Q1	2019Q2	2019Q3
WSJ Survey	2.9%	2.5%	2.5%	2.3%
WSJ – Lowest Forecast	1.7%	1.0%	0.9%	0.0%
WSJ – Highest Forecast	4.9%	4.4%	4.0%	3.9%
FTR	3.9%	3.6%	3.5%	3.3%

The WSJ survey reflects the “conventional wisdom” view described previously, with the economy back to trend growth, possibly early in 2019. There is a wide gap in the low vs. high forecast numbers in the survey, indicating the next year contains a high degree of uncertainty. However, these outlier forecasts do not seem feasible. It would be difficult for the economy to accelerate going into 2019; likewise, it would be a surprise it the economy cooled that rapidly, unless there were a shock to the system (however, as I am typing this, the stock market is plunging again). The FTR forecast is more optimistic, showing a gradual easing back from the peak, and still growing at a healthy 3.3% rate into the second half of 2019.

A Look At The Forward Looking Indicators

Now that we have a baseline to work from, let’s see what some forward-looking economic indicators are saying.

Leading Indicators

The Conference Board Leading Economic Index has cooled from the hot numbers of last October through February, but they are still vibrant. However, the Weekly Growth Index from ECRI has cooled considerably from Q1, even briefly touching negative in August.

Manufacturing

The ISM index for New Orders and Backlogs indicate manufacturing growth should slow slightly in the coming months.  However, the numbers remain historically strong.  Growth in Factory Orders flattened during the summer.

Housing

Recent numbers on Building Permits show a small y/y gain.  The Housing Market Index (HMI) has edged down from the high readings in Q1. The future of the housing market appears to be more of the same, providing neither a boost nor a drag to the economy.

Consumer Spending

My Discretionary Spending Index (based on key elements of retail sales) shows consumers have plenty of discretionary income, and they are spending it. Wages are finally beginning to increase, and this, combined with low unemployment, bodes well for the consumer segment of the economy.

Confidence/General Indices

The NFIB Small Business Optimism Index continues to run hot. Tax reform is really boosting this segment, and the high numbers should lead to more new jobs. The General Activity Index from the Philly Fed is still strong, but lower than it was through the first half of the year. The same is true for the Moody Survey of Business Confidence.

What About the Awful Tariffs?

I have not seen an accurate forecast yet regarding the impact of new U.S. tariffs and retaliatory foreign tariffs. All initial forecasts tend to say the impact will be disastrous and then gradually wither to a forecast of moderate to negligible effect. However, some tariffs are only starting to kick in, so it’s too early to judge. The doomsday forecasts typically assume that if a tariff produces negative consequences, it will be allowed to continue indefinitely. If you view the U.S. tariffs as punitive, this would be the case. If you think the tariffs are strategic in nature, then they will be fluid, and change as circumstances dictate. The tariffs do increase short-term risk for the chance of long-term rewards.

The Trucking Markets

Trucking fleets are ordering Class 8 and commercial trailers in huge, unprecedented numbers. So they expect this economic boom to continue through next year.  However, fleets tend to be reactionary and are placing these orders based on the current conditions they are experiencing. As we have seen, the indicators do not predict this trend will continue. The FTR freight forecast is for moderating truckloads in the second half of 2019. Therefore, all the trucks being ordered today will probably not be needed. Expect order cancellations to be pervasive throughout next year.

Conclusions

The data backs up the conventional wisdom that the economy will not maintain its hot pace for much longer. Almost all the indicators point to lower GDP growth in the coming quarters. However, most of the numbers remain relatively strong, which signals only a moderate change.

The Call

There is no basis to support a GDP exceeding 4% in the next nine months; however, it doesn’t appear we are headed down to 2% either. There could be a dip to near 2% in 2019Q1, just because recent Q1 readings have been inexplicably low. Therefore, I like our FTR forecast of 3.3-3.9% GDP over the time period.

This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)