Ryder Sees The Logic Of Logistics
Ryder System Inc.'s signature yellow trucks were conspicuously absent from a technology exhibit at Miami's Doral Ryder Golf Tournament in March. It was a hint of things to come. On July 19, three days before reporting disappointing second-quarter earnings of $31.6 million, Ryder CEO M. Anthony Burns, 53, announced plans to sell off the company's struggling consumer truck-rental unit. It was the latest of Burns's efforts to focus Miami-based Ryder on logistics--the organization and transportation of companies' supplies and products. Today, logistics makes up 17% of Ryder's $5.1 billion in sales, with revenues growing at 30% annually.
Wall Street, which had for a long time advocated the shift, approved--even though the stock barely budged from the mid-20s, where it has been mired for three years. "[The sale] frees up capital to pursue greater growth opportunities," says Michael F. Baxter, a portfolio manager at Hotchkis & Wiley, which holds 4.3% of the stock. Still, Burns knows that betting the farm on the highly competitive commercial logistics business is a big risk. "My credibility is at stake," he says.
NO PAYOFF. He didn't have much choice. Ryder, long a force in consumer truck rental, had been caught in a brutal spending war with privately held U-Haul International Inc. Starting in 1993, Burns spent some $200 million a year on trucks, systems upgrades, and a central reservations system. Yet the payoff never came: The unit's 1995 pretax earnings were $13 million on sales of $547 million, down from 1994's earnings of $27 million.
Ryder's bright spot has been its logistics division, which should hit $1.2 billion in sales this year, up from $416 million in 1991. As corporate downsizing has increased, companies have rushed to outsource logistics--and Ryder has seized the moment. In 1994, Burns bought LogiCorp, an Ann Arbor (Mich.) company that processes shipments for global carriers, for an estimated $20 million. LogiCorp helped Ryder design sophisticated systems and gave it many new customers. "It was the best acquisition we ever made," Burns says.
Here's an example of why: Previously, LogiCorp did freight-rate analysis for United Technologies Automotive. Now, Ryder is managing inbound supplies for United Technologies Automotive's car-interiors plant in Port Huron, Mich. This fall, it will start managing logistics for nine additional UT plants. In late 1994, Ryder beat out 18 rivals for Whirlpool Corp.'s inbound logistics business, which moves parts from some 900 suppliers to 11 plants. The deal has also boosted Ryder's global reach: Recent contract wins include a Brazilian Pepsi bottler and a unit of Volkswagen.
Such success stories have helped make Ryder the largest player in the logistics game. Yet in some complex contracts, there have been glitches. Most notable is a $70 million contract with OfficeMax, in which data-entry problems mixed up payments to carriers of merchandise. OfficeMax won't comment. Burns acknowledges problems but says they've been fixed. Whirlpool, too, hasn't yet met additional cost-savings goals stipulated in the Ryder contract. This has affected Ryder as well, since a "gain-sharing" contract lets it share in the savings.
Competition is heating up, too. With the logistics market expected to hit $50 billion by 2000, up from an estimated $16 billion this year, players such as Schneider Logistics Inc. and CSX Corp. have joined the fray. Competitive pricing means that the revenues have outpaced profits. Last year, Ryder took a haircut on margins to retain a contract with General Motors Corp.'s Saturn.
SHIFTING UP. To boost margins to 10% by 1998, Burns has embarked on a cost-cutting campaign and has raised spending on information systems. Already, Ryder's pretax logistics margins have more than doubled this year, to 4.5%, thanks to better pricing, greater contract selectivity, and more gain-sharing.
Can Burns keep Ryder trucking? Skeptics cite his poorly timed diversification into insurance and aircraft leasing in the late 1980s--just as both industries slumped. Burns then pared Ryder down to leasing, renting, and servicing trucks--slow growth businesses, all. Says Paul R. Schlesinger, an analyst at Donaldson, Lufkin & Jenrette Securities Corp.: "The perception of the success of the last 10 years depends on having the logistics payoff realized." Translation: It's time to kick into higher gear.