Last week, Con-way revised its earnings guidance for Q4 and outlined several actions it was taking (e.g., workforce reduction, expense curtailment initiatives) in response to the weakening economy. This morning, Ryder issued a similar press release, but the company’s actions are not just a response to the weak economy; they’re a shift (a refocusing) in strategy for Ryder.
The most significant move is Ryder’s decision to discontinue its Supply Chain Solutions (SCS) operations in Brazil, Argentina, and Chile, and transition out of SCS customer contracts in Europe (except for Fleet Management Solutions and Dedicated Contract Carriage offerings in the UK). According to the press release, these operations and contracts accounted for gross revenue of approximately $200 million and operating revenue of approximately $120 million, or roughly 3 percent of consolidated revenue in 2007. No doubt, the issues plaguing the automotive industry contributed to this decision. Ryder stated that about 45 percent of operating revenue from these contracts is linked to the automotive sector.
But I also think the current economic challenges are giving Ryder an opportunity to make some strategic changes sooner rather than later. And in many ways, these changes go against what’s been happening in the LSP industry over the past 5 years, where large service providers have sought to establish a global footprint (in many cases via mergers and acquisitions) to provide clients with a “one-stop-shop” solution. By pulling out of Europe and South America, Ryder is effectively retreating from this objective and value proposition. Is this a smart move?
It depends on the perspective you take, but I think that the positives ultimately outweigh the negatives. On the negative side, Ryder is limiting its opportunities with clients that seek a “pan-European” or “pan-South American” logistics service provider, or clients that want a single lead logistics provider to manage their global operations (few companies, however, are willing to put all of their eggs in one basket). Also, if the transition of these operations to new service providers doesn’t go well, clients will place at least part of the blame on Ryder for initiating the change in the first place. If the frontline employees currently serving these customers transfer over to the new service providers, the risk of failure is minimized. But even so, new relationships (and trust) will have to be established between the executive teams of the new LSPs and the affected clients.
On the positive side, Ryder is now able to focus its resources and investments in the NAFTA region, where it currently has a strong presence, as well as Asia, where the greatest growth opportunity exists for the company. Although Ryder enjoyed some success in Europe and South America, it was modest compared to other LSPs, especially in Europe where the market is more mature and competitive. Simply put, the company would have had to invest a lot of money and resources to gain market share in these regions, but the payoff, in terms of revenue growth and profitability, wouldn’t have been as great as investing in NAFTA and Asia.
A few weeks ago, I wrote a piece (“Does NAFTA Need Fixing?”) that highlighted the vast amount of surface trade the US conducts with Canada and Mexico. And barring any negative “renegotiation” of NAFTA by the Obama administration and Congress, trade in this region should grow in the years ahead (once the economy recovers, of course), especially as many companies seek to bring supply closer to demand (the so-called “near-sourcing” trend). By investing in the US, Canada, and Mexico, Ryder clearly plans to position itself as the leading LSP in this region.
Focusing on “the right geographies” for growth and profitability, however, is not the most important objective for Ryder. In my opinion, the most important objective for the company is briefly mentioned in the press release, easy to overlook if you don’t read it carefully enough. Here it is: “The actions described above will enable Ryder to…further diversify its mix of industries served (emphasis mine) and continue its pursuit of ‘tuck-in’ and strategic acquisitions that create synergies and/or expand capabilities.”
In 2007, General Motors accounted for about 42 percent and 19 percent of SCS total revenue and operating revenue, respectively. Enough said.
In October, Ryder announced that it was acquiring Transpacific Container Terminal Ltd. and CRSA Logistics Ltd (including their operations in Hong Kong and Shanghai). CRSA provides trans-Pacific end-to-end transportation management and supply chain services for Canadian retailers, and TCTL operates a Canadian network of off-dock import/export container terminal facilities. These two companies not only strengthen Ryder’s capabilities in Canada, but also expand the company’s presence in Retail and Asia. At this point in time, Ryder’s money is best spent in these types of acquisitions that diversify its revenue base beyond the automotive industry.
To divest a part of your business is arguably the most difficult decision a company must make, and oftentimes these decisions are made too late. Like I said earlier, I think the current economic environment forced Ryder to act sooner rather than later, and I think it’s the right decision. There is more than one path to success in the LSP industry, and at this moment in time for Ryder, the compass points them towards diversifying their industry mix and strengthening their capabilities in North America, Mexico, and Asia. We’ll have to wait a year or two to see if these actions take them where they want (and need) to go.
