Online sales are shifting import flows and shrinking the middle mile for intermodal
Dan Bresolin wasn’t surprised by news from the U.S. Treasury Board in April that “non-store” or online retail sales in the United States in February had surpassed general merchandise sales for the first time in history.
“I see it in my home every day with my family,” says Bresolin, a Toronto-based assistant vice president with Canadian National’s international intermodal services. “They buy stuff all the time online. At Christmas, that’s how my wife does three-quarters of her shopping now.”
Bresolin is equally nonplussed by reports that e-commerce and the accompanying need for speed in delivery times are reportedly driving the uptick in infrastructure investment and freight traffic to ports on the demographic-heavy Eastern seaboard of the United States and Canada.
“Brick and mortar sales have changed and so has the way of getting goods to the door,” says Bresolin, who handles CN Rails’ sales and relationships with ocean carriers and port stakeholders on the three coasts the company serves. “The traditional last mile of getting in your car and driving to the mile is definitely shrinking.”
The Internet was still science fiction when the word ‘intermodal’ was coined in the 1960s to capture the need for and growth of transportation involving more than one form of carrier.
But the rising fortunes of virtual businesses like Amazon are having real-world impacts on supply chains. And no where is the potential shock greater than on the so-called “middle mile” that connects goods between ports and end consumers in Eastern North America.
Shop ’til you drop
According to an investors’ report released by Germany’s Deutsche Bank in April on the potential implications of rising e-commerce sales on U.S. transportation stocks, online sales in the U.S. doubled between 2013 and 2018 to more than US$500 billion a year.
“But e-commerce penetration is still less than 15 per cent of retail sales, implying still significant runway for growth,” reads the report. It adds that big-box retailers like Walmart are now closing stores and scrapping plans to build new ones in order to invest in omni- or multi-channel retailing and so-called fulfillment centers that enable merchants to outsource warehousing and shipping and provide consumers with a more seamless shopping experience.
The result has been a 30 per cent reduction in delivery times for e-commerce sales by traditional retailers, a performance the report predicts will only improve due to increased competition and the emergence of new and future transportation technologies, including everything from driver-less vehicles to drones.
“Faster delivery times require more fragmented supply chains, namely inventory positioning near final destination points via more fulfillment sites closer to major demand centers (including store-based e-commerce fulfillment),” reads the report. “Density and demographics make the East a natural focus for retailers in this context.”
U.S. imports into Eastern ports have increased by 56 per cent since 2012 compared to a 22 per cent increase to West Coast ports, resulting in “a more consistent share” between the two coasts.
The report notes that 15 of the 20 biggest American cities and two-thirds of Amazon’s fulfilment centres are located east of the Mississippi River, resulting in an eastward migration of port investment aimed at handling the upswing in e-commerce-driven demand for seaborne consumer goods.
According to the report, U.S. imports into Eastern ports have increased by 56 per cent since 2012 compared to a 22 per cent increase or West Coast ports, resulting in “a more consistent share” between the two coasts.
“We expect this trend to continue, driven by e-commerce and the need for faster delivery times together with port infrastructure projects (New York’s raising of The Bayonne Bridge as well as several other projects at the Ports of Savannah, Virginia and Charleston).”
“East coast volumes have growth two times faster and the largest port in Canada (Prince Rupert) has grown five times faster than the two largest West Coast ports (Los Angeles and Long Beach),” reads the Deutsche Bank report.
It adds that major ports in the Eastern U.S. and Western Canada plan to invest between three and eight times more on a dollar-per-TEU basis to expand throughput capacity than major U.S. West Coast ports.
“We believe these investments, coupled with ongoing e-commerce demand shifts, will result in the volume growth exceeding large West Coast ports. This has significant implications for intermodal vs. truck penetration vis-à-vis length of haul, as the middle mile migrates east,” reads the report.
It also predicts that the “cyclicality” of the truckload market will accelerate over the next few years “as truck supply/demand imbalances and lower length of haul allow trucking to recapture lost market share.”
Michael Broad, president of the Canadian Shipping Federation, doesn’t see any perceptible shift in investment or traffic to Canada’s East Coast ports due to e-commerce.
Instead, he credits improvements to the Suez and Panama Canals and free trade deals like the pending Canada-European Union Comprehensive Economic and Trade Agreement (CETA) for fueling big growth-sustaining projects like the Port of Montreal’s planned Contrecoeur container terminal.
“It’s all about the cheapest way to get it to destination,” says Broad, whose organization has 71 core members and represents some 250 shipping lines worldwide. “Money is a prime driver. Everything is cargo driven and shipping costs drive cargo. At the end of the day freight goes where it costs less.”
Phil Shook agrees that the bottom line in the movement of freight is money, especially in regards to the value of cargo and related carrying costs.
“You can’t sell it on the water,” says Shook, vice president of C.H. Robinson, one of the world’s leading third-party logistics providers with the largest network of motor carrier capacity in North America. “You want to get your freight into DCs (distribution centres) as quickly as possible.”
According to Shook, who has been with C.H. Robinson for 21 years, the slow shift eastward of freight and port investment has long been a topic of debate and conversation in the U.S. transportation industry.
“The East Coast has grown faster in recent years but the West Coast is (also) doing well,” Shook tells Canadian Shipper from C.H. Robinson’s headquarters in Aurora, Illinois.
He said ports on the U.S. East Coast have been “beefing up” since the expansion of the Panama Canal, while Long Beach and Oakland remain “intermodal friendly” because they provide significant length of haul. “It’s all about where freight lands,” he says.
He remains unconvinced that the current eastward migration of infrastructure dollars will have a ground-shaking impact on the transportation industry in the U.S. and Canada, a market in which most inbound container traffic remains intact on trains headed to Toronto or Montreal, where C.H. Robinson opened a facility 18 months ago to handle its intermodal operations.
“The concern is that it could lead to a shift from intermodal to truck,” says Shook. “But that would require a sizeable shift. I don’t see that happening. At least not to the point of having long-lasting ramifications.”
Another American trucking, intermodal and logistics expert and executive—Rob Bulick, senior vice president and general manager of First to Final Mile with Wisconsin-based Schneider National—believes that e-commerce is indeed driving the amounts of freight and infrastructure spending east.
And he thinks the need and ability to get goods straight from regional ports to consumers will drive efficiencies in networks, but only to the point where industry challenges like recruiting and retaining drivers limits capacity.
“What we feel this change in this middle-mile network will give us is a much more fluid and reliable and consistent way to move freight into (major East Coast population centres) and then ultimately closer to the consumer for the final mile of e-commerce deliveries,” says Bulick.
He added that the growing need for the faster movement of freight through Schneider’s 24 terminal networks across the contiguous U.S. (the company services Western Canada through its operations in the northwestern U.S.) was the impetus for both the company’s 2016 acquisition of Watkins & Shephard Trucking and the broadening and connectivity in April of its middle-mile configuration to include its Van Truckload and Intermodal assets, providing access to more than 10,700 trucks and 22,000 intermodal containers.
“The ability to utilize both truckload and intermodal modes to access and to move east and into end-of-lane areas is not going to diminish—on the contrary,” says Bulick.
He added that while ongoing constraints and needs for drivers and continued regulations act as brakes on capacity, those limitations will give rise to both efficiencies and disruptive solutions in the transportation network.
“Both the retail and transportation industries are working to meet those challenges,” says Bulick. “It’s all about being able to access markets and understanding lead times and delivery schedules (and) the ability to access goods and services from any customers online and being able to generate that delivery into their home or business.”
According to a report from Deutsche Bank, two-thirds of Amazon’s fulfillment centres are located east of the Mississippi River.
Whatever the reasons for the rising tides of the freight-handling business in East Coast ports, Tony Boemi, vice president growth and development at the Port of Montreal, says his facility welcomes it with open arms.
“We’re expanding and investing heavily in infrastructure because of what we’re seeing and experiencing.”
According to Boemi, the Port of Montreal has enjoyed a 17 per cent compounded increase in volume since 2017, with 12 and nine per cent jumps in January and February respectively in 2019.
The port is also investing $55 million to add six kms of track to its own 12-km, on-site railway network infrastructure and adding another 250,000 TEU capacity to its Viau container terminal—not to mention the planned Contrecoeur project, which will add 1.1 million TEUs if and when it opens as planned in 2023.
A port terminal is also now experimenting with offering trucks windows of time to come aimed at helping companies speed up delivery times and the port to better manage the number of trucks coming in to the facility.
“Our growth has taken our projects from ‘nice to have’ to ‘need to be,’” says Boemi, who credits the Port of Montreal’s location on the St. Lawrence River, 1,600 kms inland from the Atlantic Ocean, for making it a prime location as an intermodal hub.
“We’re within eight hours of trucking to 40 million consumers and we’re lucky to have two Class A railways—CN and CP—which enables us to access another 70 million consumers through the Midwest U.S.”
A growing percentage of the port’s inbound traffic, he added, comes from companies that are developing trans shipping ports in Europe where cargo from major vessels used for Asia-Europe crossings is transloaded onto smaller vessels that sail to Montreal.
“It’s mostly cargo that’s not necessarily time sensitive or major companies that readjust their supply chain to factor in the additional transit times,” says Boemi.
For his part, CN’s Bresolin believes transit times—not e-commerce—is the ultimate driver behind increased cargo movement through Canada’s East Coast ports.
When you talk about the movement of products from West Coast ports to East Coast ports, being near the population is a big factor—but so is transit time and the origin of where the goods are coming from,” says Bresolin, who works daily with the world’s largest ocean carriers on supply chain-enabling contracts to do inland transportation from ports to inland terminals.
“If it’s coming from northern China and you want to get it to Chicago, the fastest way to do it is through the West Coast. If you are dealing with Southeast Asia—and there’s a point around Hong Kong where it’s almost equidistant—on whether you come through the West Coast or East Coast ports, there are opportunities now more than ever to move goods through the East Coast versus the West Coast or through the Panama or Suez canals, which you can now get bigger vessels through,” explains Bresolin. “The cascading effect of all these vessels is really pushing a lot of larger vessels into the East Coast trade lanes.”
Though the mostly 10,000 to 14,000 TEU-range ships that visit East Coast ports are smaller than the 18,000-plus TEU behemoths than ply West Coast waters, according to Bresolin, the densely populated East Coast remains the most lucrative retail hub in the world.
“No ocean carrier is going to design strings for their business that don’t touch New York,” says Bresolin, who lauds the raising of the Big Apple’s Bayonne Bridge as a shipping game changer. “New York is such a huge local consumer market that you want to bring the biggest possible ship you can into New York.”
Geography, he adds, also allows Halifax and Montreal to be critical players in international shipping string design.
“You can drop off all your containers for Chicago and the Midwest in Halifax, then go down to New York and discharge your local cargo,” says Bresolin. “Halifax has plenty of capacity and plenty of upside to grow there. We’ve had a real good five-year stretch of growth there.”
Aiding and abetting the eastward migration of freight, he added, are warehousing costs in West Coast U.S. ports in particular and the potential for freight-blocking labour disputes in U.S. ports on both coasts.
“You’ve got bigger ships heading east (and) historical issues with strikes that have clogged up terminals in the past,” he says. “The large retailers and forwarders of the world have used Canada—namely Vancouver, Prince Rupert and Halifax—as opportunities to mitigate risk.
“Even the Gulf terminals we serve like Mobile [Alabama] and New Orleans have been successful in being part of that mitigation strategy,” he adds. “L.A.-Long Beach is a really big, big, big terminal, by far the largest centre for imports into the U.S. But, if there’s a labour disruption there, you don’t want to have all your eggs in one basket.”