As Losses Mount, Schneider Shutters First To Last Mile Delivery Business

While fellow truckload carrier J.B. Hunt JBHT has been expanding its last-mile delivery business, Schneider National SNDR is going in the opposite direction. The company announced on August 1, 2019, that it is shutting down its First to Final Mile (FTFM) operation within its truckload division due to "operating performance of the FTFM business and the assessment that the long-term prospects of that business and its markets were not favorable."

The announcement was made in a Securities and Exchange Commission 8-K filing in conjunction with the release of the company's second quarter earnings results. The company will take total pre-tax restructuring charges of between $50 million and $70 million through the end of the year as a result, separate from a one-time goodwill impairment charge of $34.6 million recorded in the second quarter. The operation will be fully closed by December 31, 2019, the filing said.

"We have made the difficult decision to execute a structured shutdown of our FTFM service offering," Mark Rourke, chief executive officer, said in a statement. "This decision followed a careful assessment of the near and longer-term prospects and alternatives. We believe this course of action allows us to fully focus on our services within truckload, intermodal, and logistics, is consistent with our portfolio management and capital allocation disciplines and is in the long-term best interest of our company and our stakeholders."

In the second quarter investor earnings call, Stephen Bruffett, executive vice president and chief financial officer, said FTFM amassed $26 million in losses in the first two quarters of 2019 and another $9 million in losses are expected in the third quarter.

FTFM offered services for business-to-business and business-to-consumer movements of product categories such as furniture, carpet and appliances. The network was comprised of 26 terminal locations. All freight currently in the system will be delivered over the next few weeks, the company said. Bruffett said the facilities in the FTFM operation are all leased with variable terms. "Those with the longer lease terms that we are obligated to, we will be in the market to sub-lease those," he said.

Equipment in the FTFM business, mostly tractors and trailers, will be redeployed, Bruffett said. "We're in the unique position where we can repurpose a fair amount of the equipment from the First to Final Mile business," he said. "There will be roughly 800 tractors and 2,000 trailers that will come out of the [broader] business as a result."

People, though, may not be as lucky. "Unfortunately, there will be people that will be coming out of the organization," Bruffett added. "The total amount will be determined as we assess the broader business need going forward," but some would be offered jobs in other Schneider divisions.

In the earnings call, Rourke noted that Schneider was not leaving the final mile. "We'll play in e-commerce in different ways in our portfolio, we just won't play in the way [we have]," Rourke said.

Online furniture revenue in 2018 by country. (Chart: Statista)

Schneider's exit comes at a time when e-commerce furniture sales are growing. According to eMarketer, U.S. furniture and home furnishings e-commerce sales grew 18 percent in 2018, and Amazon.com, Inc. AMZN reported $4 billion in furniture sales in 2017. Wayfair W reported a 44 percent increase in revenue (to $6.8 billion) for 2018. Statista's Digital Market Outlook reported more than $60 billion in online furniture sales in the U.S. in 2018.

Globally, online furniture sales are expected to grow at an 11 percent annual rate through 2022.

The delivery of large format goods, such as furniture and appliances, is expensive, but an increasingly important part of the supply chain as more of these items are purchased online. Delivery of these goods usually requires "white glove" service in which drivers not only bring goods to the final destination, but in some cases, also assemble the pieces in the home. It also requires specialized equipment, often with lift gates, and because many of the deliveries are to residential addresses, 48-foot and 53-foot trailers are usually not the preferred equipment.

Schneider jumped headfirst into the last mile segment in 2016 with its acquisition of Watkins & Shepard and its 800 drivers and 20 terminals. It also acquired Lodeso, a technology provider specializing in last-mile freight tracking. It competed with J.B. Hunt, XPO XPO and Werner Enterprises WERN in this segment, as well as hundreds of smaller companies that specialize in last-mile delivery. Less-than-truckload carriers such as Estes, Saia, Eastern and R+L Carriers are also competitors in the space.

J.B. Hunt acquired Cory 1st Choice Home Delivery for $100 million earlier this year to expand its capabilities. It had previously purchased Special Logistics Dedicated, bringing each company under its Final Mile division, which has over 100 locations and 3.1 million square feet of warehouse and facilities space. XPO has more than 85 hubs in its last-mile business, which employs more than 750 people and generates more than $150 million in revenue each year.

Most popular online destinations for furniture and appliance purchases. (Chart: Statista)

Schneider's FTFM operation never achieved the results the company had hoped for, but as recently as April the carrier was investing in its ability to offer an end-to-end shipping solution. An integration with its intermodal and van truckload operations in April was the final effort to improve the bottom line of the FTFM service by adding resources already under the Schneider banner.

"A seamless delivery experience – whether it's the first mile, the last mile or the miles in between – means there's a consistent, reliable network working hard for a customer's business," Rob Bulick, senior vice president and general manager of First to Final Mile, said at the time. "Expanding our middle-mile strength to include Schneider's owned assets and data-driven network optimizations ensures we're constantly meeting the high expectations for final-mile delivery that customers and consumers can depend on and trust."

Schneider said its FTFM operating losses widened by $9.9 million in the second quarter compared to a year ago. FTFM suffered a $9.4 million operating loss in the fourth quarter of 2018 and at the time, it said it was "adjusting its FTFM execution model to improve financial performance, which centers around reducing variability in the first- and middle-mile operations, converting more freight to intermodal, for-hire truck and third-party capacity, as well as refining its commercial focus."

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