Keep on truckin’
It’s tough enough to get profitable; it’s a whole new species of tough to stay profitable in the face of wrenching change that undermines just about everything you had once based your success on.
Heartland Express, a truckload long haul trucking company, provides sobering and salutary lessons about what it takes to do this well: a paradoxical combination of dogged persistence and seemingly limitless adaptability.
Heartland, founded in 1955 and public since 1986, had carved out a niche based on serving a small number of customers in a well-defined region. This allowed it to provide superior responsiveness and on-time delivery -- dimensions of quality its customers were willing to pay for.
With the passage of the Motor Carrier Act of 1980, incumbent trucking companies faced essentially unfettered entry into an industry rife with unearned economic rents. In response, some trucking companies created a national service footprint by acquiring smaller players, intending to use economies of scale to dominate the industry through price-based competition. In contrast, Heartland doubled-down on its historical strengths: delivering better -- through superior service and revenue generated through price premiums.
With an average annual return on assets (ROA) of almost 18% through 1994 in an industry that averaged just under 2%, the merits of this strategy seem evident. This level of profitability is rare in most industries, let alone one considered by some to be utterly commoditized. “It’s 53 feet of empty space,” said one trucking company CEO. “How are you supposed to differentiate that?”
Not only did Heartland find a way to differentiate, it did so in ways that confounded established practices in the industry. For example, owner/operator (O/O) drivers provided their own rigs, and so a company that used them effectively could dramatically reduce its asset base, thereby increasing profitability. But that benefit typically came at too high a price: O/Os tended to command higher wages than employee drivers and be less reliable, providing lower levels of service. Consequently, most trucking companies saw O/Os as an on-call workforce best used to cope with temporary surges in customer demand.
Heartland stood that assumption on its head, generating more than half of its revenue from O/O-driven freight even as its higher service levels commanded a 10% price premium. How? Among other perquisites, it paid industry-leading wages and provided college scholarships for drivers’ children. The result was a higher wage and benefit bill than its competition, but the price premium and lower asset base more than made up for this: Heartland enjoyed both a return on sales advantage and an asset turnover advantage when compared to other high-performing trucking companies.
These halcyon days could not last forever, and they didn’t: Heartland’s ROA declined steadily through the late 1980s and early 1990s as the industry shakeout continued and less efficient players abandoned the field. And it is in Heartland’s response to these industry-level changes and increased competitive pressures that we begin to see just how useful the rules can be.
Heartland could no longer resist the pressure to expand its service area. Despite having spent the previous 30 years focused solely on organic growth, the company successfully executed several significant acquisitions, increasing its revenue by 50%. Despite having realized such remarkable results through a heavy reliance on O/O drivers, it reduced its O/O workforce to about 10% of total revenue. And despite having relied exclusively on a point-to-point route structure for decades, the company shifted to a hub-and-spoke model, building out a series of a dozen distribution centers. In short, it changed its geographic footprint, its human resources strategy, its asset base, and its fundamental operating model – which amounts to just about everything that matters in this business.
These changes resulted in some pretty dramatic shifts in Heartland’s relative performance. For example, rather than enjoying a material asset turnover advantage, it now found itself with materially lower asset turnover. Yet the overall result was a preservation of Heartland’s superior ROA: despite dropping from an average almost 18% to just over 12% from the mid-1990s to today, Heartland remains the envy of the industry.
Heartland’s changes were focused, laser like, on preserving its service advantages (better before cheaper) and its price premiums (revenue before cost). The company’s leadership seems to have understood that the trade-offs it had once broken (higher margins and higher assets) had eventually to be embraced (higher margins or higher asset turnover). And faced with that choice, the path the company followed – better service, higher prices – is a textbook example of how to use the rules to sustain exceptional performance.
Keep on truckin’.