United States / Analyst Insights
Local Specialized Freight Trucking: A Risky Industry
by IBISWorld
Feb 13 2013

As Seen In American Bankers Association Journal

Although the Local Specialized Freight Trucking industry is less sensitive to adverse market conditions than other trucking industries as a result of its dependence on many markets and relatively stable demand, the industry is considered to be high risk, due to its high level of competition and low barriers to entry. The industry locally transports food, beverages, hazardous materials, agricultural products, items requiring dump trucks and other oversized goods. In this  highly competitive industry, with about 48,943 companies vying for market share in the United States, local freight trucking companies can choose to specialize in a niche market or provide an array of services. Therefore, industry firms primarily compete on price, reliability and quality of services provided, technology developments and constant labor needs.

The Local Specialized Freight Trucking industry is sensitive to consumer sentiment and growth in household disposable income,which affect demand for goods and the willingness of retail, wholesaling and manufacturing companies to outsource their transportation needs. Additionally, a booming construction market also increased demand for related freight services to such companies until 2008.  When market conditions began to sour in this year, due to the fallout of the subprime mortgage market, residential construction plummeted and led to a substantial decline in demand for the transportation of construction material, steel, gravel, sand and cement. During this time, demand for transporting retail goods and manufactured components also fell. These declines spilled over into 2009; as a result, in the five years to 2012, Local Specialized Freight Trucking revenue has fallen at an average annual rate of 1.0% to $35.7 billion.

Additionally, fluctuating fuel prices threaten the industry by increasing revenue volatility and adding risk to the market. Diesel is the industry’s second-largest cost, and rising prices have eaten into profit. In 2008, the world price of crude oil increased 36.3% and hit record highs of about $140.0 per barrel. As a result, many industry operators introduced fuel surcharges to protect profit margins. Small companies are under significantly more pressure from higher costs because they have no price-setting power and are forced to accept the rates offered by bigger competitors.

Industry Risk Methodology

The Local Specialized Freight Trucking industry has a medium-to-high risk level: 5.5 on a 9-point risk scale. To calculate the overall risk score, IBISWorld assesses the risks pertaining to industry structure (structural risk), expected future performance (growth risk) and economic forces (sensitivity risk). On the scale of 1 to 9, 1 represents the lowest risk and 9 the highest. The primary factors affecting this industry are high competition and low barriers to entry. Companies in the industry aggressively compete for market share and may incur expenses to differentiate their offerings, keep prices low to entice demand or both. Due to these efforts, however, industry firms are subject to constrained profit margins. Adding to the already-high level of competition, existing firms face the prospect of even greater competition, given the low barriers to entry, which enable new players to easily enter the marketplace. Moreover, a lesser threat to operators is the moderate level of revenue volatility, making the industry a less stable investment. Industry companies that are not able to prepare for these conditions are susceptible to significant losses and even bankruptcy.

High competition

The industry is highly competitive; there is little service differentiation within each segment, so there are many other factors contributing to internal competition. To start, geographic reach limits smaller firms; major operators can dominate a market by operating a larger number of trucks in a given area. Aside from physical location, customers are highly dependent on regular, timely delivery services, which is especially pertinent for companies offering to transport perishable merchandise. Firms with a proven record of reliable service will win and retain business. Furthermore, firms also compete on their ability to adapt to the specialized transportation needs of customers. A wide range of vehicles with different (or changeable) capacities allows firms to be more competitive. For example, some clients need to divide refrigerated trailers into compartments that operate at different temperatures, while others require freight to be loaded and unloaded quickly.

Additionally, companies face competition based on price. Firms that can undercut the price of competitors will fare better than those that cannot, as the cost of operations plays an important role in determining prices. Because diesel is the industry’s second-largest cost, it is a significant consideration for pricing. In many cases, larger companies have the financial resources to purchase fuel in bulk or to enter into forward fuel purchase contracts, whereby agreeing to take a delivery of a set amount of fuel at a fixed price on a specified date. Such deals can mitigate large fuel price increases that smaller firms would have to pass on to customers. Additionally, operators can use fuel surcharges, in which they pass the extra cost on to consumers in the form of higher prices. However, nonemployers and other small operators are price takers, meaning they must offer prices similar to larger firms to compete effectively. This factor limits smaller operators’ competitiveness on a grander scale.

Low barriers to entry

Although industry operators must contend with health, safety and environmental laws once they have entered the industry, there are no regulatory requirements that prevent firms from entering the Local Specialized Freight Trucking industry. Furthermore, there are no resource constraints relating to capital equipment or labor (for short-haul work) that are significant enough to avert potential entrants. According to the latest data by the US Census Bureau’s Statistics of US Businesses, about 70.2% of total industry enterprises have zero to four employees, meaning they are owner-operated or very small. About13.8% of enterprises employ five to nine employees, reflecting the relative ease of entry into the industry.

Outlook

Revenue for the Local Specialized Freight Trucking industry will continue to improve as the US economy regains its strength and demand revives from petroleum, chemical and automotive freight transportation. Although industry revenue is expected to grow at a steadier rate of 2.4% in the five years to 2017 to reach $40.3 billion, competition will remain high and barriers to entry will stay low. Additionally, fuel price volatility is expected to persist over this period, with the world price of crude oil rising at an average annual rate of 4.3%. Fuel prices are dependent on a number of factors, many of which can change frequently and quickly. For instance, fluctuations in supply, demand and market power can change prices in any given year. Additionally, formal or informal barriers to entry are not expected to change significantly over the next five years, allowing companies to easily enter and exit the industry. Overall, high competition, low barriers to entry and volatile revenue make this industry a risky investment.