Small fleets equal big profit opportunities

June 1, 2002

Michael Foxhoven, national sales director for Hercules Tire & Rubber Co., originally delivered a speech about truck tire trends and fleet opportunities for tire dealers at Hercules' 50th Anniversary Stockholder Meeting in January. Since then he has updated his research, which is showcased in this exclusive article written for Commercial Tire Dealer.

Evaluating the commercial truck tire market in the current economic environment is ugly.

Replacement medium and wide-base truck tire shipments decreased 9.6% during 2001 to 13.6 million units, according to the Rubber Manufacturers Association (RMA), as a result of the contraction of the manufacturing sector and the weak economy in general. Original equipment demand for medium/wide base truck tires fell nearly 38% in 2001 to 3.4 million units.

A modest replacement truck tire shipment rebound of 1% is forecast for 2002 and a 6% replacement truck tire shipment increase is predicted for 2003 by the RMA. So where are the opportunities, and what can we do to capitalize in a depressed truck tire market? It helps to remember that under every cloud is a silver lining of opportunity.

Let's review where we are currently and, more importantly, where our customer, the trucking industry, expects to be within the next five years. We also will look at what you can do to profit from the current economic fall-out.

When we initiate any discussion of the commercial truck tire market, it is naturally assumed that this market continues to be dominated by large manufacturers with deep pockets -- the Michelins, the Goodyears and Bridgestone/Firestone. It also is assumed that these manufacturers target large fleets with very competitive national account programs paying low delivery commissions to their dealers.

For the most part, these assumptions are correct. Although these large manufacturers buy this business and do pay very low delivery commissions, this picture is not complete and is somewhat distorted.

There also is a perception that the majority of wheel positions are owned by the Top 100 commercial fleet carriers with their thousands of power units and tens of thousands of trailers. This simply is not true and is not supported by the facts.

We need to review the facts and seize profit opportunities that exist in the truck tire market. As independent dealers, you first need to determine where profits are going to come from and what opportunities you can capitalize on.

Consider the most recent facts from the American Trucking Associations (ATA). These statistics are compiled from national transportation statistics, federal highway statistics and Commercial Carrier Journal (CCJ) on an annual basis. They are presented in a publication known as the United States Freight Transportation Forecast to 2008, published by the ATA.

In order to understand some of the following data, it is necessary to understand what gross vehicle weight, or GVW, means. Classifications are made for the size of commercial trucks based upon GVW. As the size and weight of vehicles increase, they are given progressively higher class ratings. In other words, most semi-tractor power units fall into the classification of Class 8. However, the data that follows will cover Classes 3 through 8.

Currently, there are approximately 9.7 million people employed throughout the economy in jobs that directly relate to the trucking industry. This is an increase of 200,000 people from two years ago.

More than three million of these people have a main occupational classification of "commercial truck driver." This is only a slight increase from the figures reported two years ago, which illustrates the continuing labor shortage in the trucking industry. This classification includes line-haul, local, courier, government, etc.

In 1998, trucking was a $486.1 billion industry, accounting for 86.5% of the nation's freight bill and 63% of all freight moved within the United States. This represents an increase of more than 20% in freight moved by truck over the past 30 years and is projected to grow an additional 27.5% by 2008.

In 1998, it took more than 20 million trucks of all weight classes to haul 7.7 billion tons of freight. Of those 20 million trucks, 2.3 million were Class 8 trucks. This is an increase of more than 36% from the figure reported two years before. In addition, there were 4.4 million commercial trailers registered in 1998.

All of these facts point to a growing truck industry. Before the Motor Carrier Act of 1980, there were fewer than 20,000 interstate motor carriers registered in the U.S. As of March 2000, the Office of Motor Carriers reported that there were more than 500,000 interstate carriers on file, including for-hire carriers, private fleets and owner-operators.

The facts that should interest you as independent tire dealers include the following:

* of these 501,744 carriers, 72.1% operate six or fewer trucks. This figure is up from 70% from two years ago. This represents 361,757 companies operating six or fewer trucks -- an increase of 12.5% over the previous two years.

* 80.3%, or 402,900 carriers, operate 20 or fewer trucks. This segment represents an 11.3% increase from two years ago.

* the share of total carriers for the group with 20 or more power units in their fleets actually shrank from 21.5% to 19.7% of the total motor carriers registered. This segment does not include the significant number of trucks not registered for interstate commerce, as well as those dedicated to agricultural use.

What does this represent in the way of wheel positions? CCJ breaks down the market as follows. For all Class 3 to 8 trucks registered in the U.S., there are roughly 5.4 million power units:

* fleets that have 10 vehicles or fewer control 67% (3.6 million) of all trucks registered.

* fleets of 10 to 24 units control 4.3% (233,000) power units.

* fleets with 25 to 99 power units control 6.4% (342,000) trucks.

* larger fleets with 100 to 499 trucks control an additional 6.4% of power units registered.

* the mega-fleets control 16% (860,000) power units in fleets with 500 or more power units.

To define this market in another way, this segment of trucking companies operating 25 or fewer Class 3 to 8 trucks control 3.8 million power units (70%) of a national total of close to 5.4 million trucks. And this total does not include the 4.4 million trailers on the road today.

This defines a tremendous opportunity for commercial dealers to solicit, sell, service and capitalize on the profit potential from these smaller fleets.

In addition, compared to other domestic transportation modes, trucking dominates in tonnage and accounts for 86.5% of total freight revenues. This is an increase of more than 5% in total revenue share from two years ago, a growth trend for trucking in the overall transportation picture.

From 1990 to 1999, the Freight Tonnage Index grew an astounding 81%, from 81.5 to 147.9! In addition:

* revenue derived from primary shipments is expected to increase an additional 28.5% by 2008.

* the number of Class 8 trucks in the U.S. will increase from 2.3 million in 1998 to 3.08 million in 2008, an increase of 34%.

* the number of Class 6/7 vehicles will increase from 2.12 million vehicles in 1998 to 2.77 million in 2008, an increase of more than 30%.

* total ton-miles by all Class 3 to 8 vehicles will increase 46% from 1.282 billion in 1998 to 1.872 billion in 2008.

All of these figures are significantly higher than reported two years ago.

The top 100 commercial fleets, ranked in order of revenue, account for $118 billion in revenues. This is less than 25% of total freight revenues. This means that the bulk of freight is still being moved by the small 20-or-fewer truck fleets. These fleets exist in your territories and can provide tremendous sales and profit opportunities to you.

When discussing the top 100 fleets, many of the names and logos probably are familiar to you. The top 10 are: 1. United Parcel Service ($29.8 billion in revenue); 2. Federal Express ($19.6 billion); 3. CNF Transportation ($5.6 billion); 4. Ryder System ($5.3 billion); 5. Yellow Corp. ($3.6 billion); 6. Schneider National/Green Bay ($3.1 billion); 7. Roadway Corp. ($3 billion); 8. Penske Truck Leasing ($2.7 billion); 9. U.S. Freight Corp. ($2.5 billion); 10. Allied Worldwide ($2.4 billion).

Similar to what has happened in the tire industry, trucking is going through some huge consolidations. Just during this past year, Federal Express acquired American Freightways, Penske acquired Rollins, Swift bought Memphis, Tenn.-based M.S. Carriers, and, last month, Roadway acquired Arnold Trucking.

But what about the small fleet that exists in your own backyard -- you know, the fleet with 20 trucks or fewer? And what about the future of these small trucking companies? Will these companies continue to be a source of profitable sales?

Let's first look at the truckload segment of the trucking industry. These companies have become the workhorse of the U.S. economy, hauling raw materials to manufacturing plants and finished goods to wholesalers and retailers. This segment of the industry consists of more than 200,000 companies with the vast majority operating six or fewer trucks. They represented $230 billion in freight revenue during 1998, and this figure is projected to grow to more than $295 billion by 2008, an increase of 28%.

The second segment, the regional and inter-city segment and private segment, contributes $256 billion per year in freight revenue and handles about 53% of the nation's freight bill. This figure is expected to grow to $330 billion by 2008. There are more than 200,000 companies in this segment, again with the vast majority operating six or fewer trucks.

Total tonnage of primary freight shipments in the U.S. will increase from 12.2 billion in 1998 to 14.4 billion in 2008, an increase of 18% over a 10-year period.

The number of ton-miles driven by medium and heavy vehicles (Classes 6 through 8) is projected to increase by nearly 45% from 1998 through 2008. The increase in ton-miles is driven by the size of the commercial vehicle population, which is increasing dramatically; an increase in the number of miles recorded by vehicles each year; and an increase in the amount of tonnage shipped via truck.

Class 8 truck sales surged in 1999, hitting an all-time record high of 262,300 units. 1999 was the second consecutive year of sales over 200,000 units. With the dip in the economy, this rate probably showed some decline during 2000 and 2001. But a return to 150,000 to 200,000 annual unit sales to meet economic growth is forecast.

One reason for this growth is the Internet. The Internet will transform distribution patterns of consumers as e-commerce accelerates the speed of freight delivery. Trucking will reign as the ideal mode of freight transportation to service a just-in-time manufacturing and distribution environment intensified by e-commerce.

"More small packages being shipped directly to people's homes will create a need for more trucks on the road," says Max Fuller of U.S. Express.

Business-to-business e-commerce trade is forecast to grow more than 3,000% for the period of 1998 to 2008, while business-to-consumer freight tonnage will grow by 6,300%!

"Next-day delivery regional trucking is the fastest-growing segment in the trucking industry, and it's also more profitable than long-haul trucking," Michael W. Wickham of Roadway Corp. told The Wall Street Journal, Dec. 27, 2001.

It's a 24/7 world. The trucking industry must work 24 hours per day, seven days a week in order to keep up.

All of these statistics boil down to one thing: more tires needed by small fleets. No matter how you break it down, these figures reflect a healthy trucking economy that continues to grow. Trucking has transformed itself from an evolutionary business to a revolutionary force. Trucking has taken on a greater share of the transportation requirements of the economy with a corresponding need to increase not only the commercial vehicle fleets in use but also the employment of drivers and support personnel. But what impact will these changes have on you?

"In today's highly competitive truck marketplace, fleets are looking to eliminate or reduce every expense that does not contribute to their primary business of hauling freight," says Fleet Owner magazine. "So it's little wonder that tires have rolled to center stage. After wages and fuel, tires represent fleets' next highest operating expense.

"Following the same logic that has led many managers to turn over much of their shop operations to third parties, fleets are continuing to explore out-sourcing tire management to tire manufacturers, retreaders and dealers as a more effective alternative to in-house programs. While the number of heavy trucks increased in all maintenance groups, independent garages and dealerships witnessed the largest growth between 1992 and 1997 (independent garages grew 36%, while independent dealerships grew 41%). Both grabbed shares from owners and companies' maintenance facilities as more carriers are out-sourcing maintenance work."

Another reason many fleet managers will out-source tire maintenance is to avoid skilled labor shortages (driver turnover rates are running 95% annually for truckload carriers). Trucking companies are having enough problems trying to recruit and maintain a pool of drivers, much less staff their tire maintenance departments.

Transportation companies will continue to refocus their efforts on growth opportunities and their core competence. In other words, they will focus on what they do best: transportation and logistics.

Service will be the key criteria in securing this business. It will require a total tire management program including tracking purchases, retreading costs, scrap tire analysis, fleet inspections, tracking of tread and casing conditions, tire pressure monitoring, etc. But ultimately, the rewards can be tremendous.