June 3, 2014

In the last two blogs I looked at the history and structure of the relocation industry and the role of information in order to understand how we have arrived at a recent, significant change to the North American moving industry.

What is this important change? One of the largest global relocation companies (hereafter Relo Co. W.) has become an agent of a van line (hereafter Van Line A). A second relocation company soon thereafter followed suit. To truly understand why this is so significant, this final part of the blog series digs down into the operations and structure of the moving industry itself.

In the last blog we saw that the largest global relocation companies were coming to the head of a very difficult time. I argued that over time they had created an industry that has become commoditized at the highest levels of mobility. In addition to regular pricing pressures and the challenge of running ever larger businesses, these supra-large companies are facing the following headwinds: i) client cost constraint reducing per unit fee and referral revenue; ii) a greater percentage of renters reducing per unit real estate referral opportunities; iii) a mature outsourcing marketplace amongst the most mobile corporations; vi) client desire for flexibility creating inroads for slightly smaller suppliers and finally; vii) disintermediation (clients going directly to the source of the sub-contracted service).

Here are some recent signs that we are at a pivotal time in our industry’s history:

• Two years ago the industry’s third largest global relocation company purchased the second largest, only two years after it had purchased another large player (over a decade ago this same company had similar acquisitions in the Canadian marketplace. See part 1 of this series for those implications). This same company bought a German Destination Service Provider in the first quarter of 2014.

• Years after going onto the public markets, a bankruptcy and a sale to private equity, one of the world’s largest relocation companies / van lines has filed for an IPO to return to public markets.

• One of the largest global relocation companies recently held an RFP for approximately 50 destination service providers in London, UK and after months of review ultimately decided to award the business to…itself.

• One of the largest global relocation companies became an agent of a van line (the subject of this blog).

In isolation each of these anecdotes are not material; together they indicate an industry that is in flux and at the peak of its maturity with challenges to revenue growth at its highest levels.

Relo Co. W. could argue that joining Van Line A. guarantees its clients the best moves, however the famous saying is not “altruism makes the world go round,” and we would be foolish to think that it is not revenue motivated.

So, let’s get right to it and look at the moving industry.

A van line is not one thing. It is a collection of agents. Each agent owns a certain number of trucks and hires drivers and must have a warehouse. They may employ packing teams themselves, or certain drivers will sub-contract that work to packing teams that they source.

Larger agents have more trucks at their disposal, so they can accept AND haul more assignments than those with fewer trucks. Agents can make some of their own trucks available to all agents in the van line (this is referred to as the national fleet). Why would they make trucks available to the pool? It is all about the return load. The moving industry self-evolved out of the need for cost efficient return loads. It simply is not economical to drive a truck full of goods from Montreal to Calgary and drive it back empty. Pooling different agents of a van line gives you a higher percentage chance that while your truck is out in Calgary you will be asked to drive household goods from there back east.

Most corporations and relocation companies give their business to agents directly (a small handful do go to the van lines, as does the federal government). The agent hopes to use its trucks and drivers on the move where possible, or they might just book the move and another van line agent will haul it. Here is an imperfect breakdown of how the agents and the van lines earn their money.

1. Survey: surveys are paid for by the booking agent. If it is local, you will survey yourself, but if not you will pay another agent to do so.

2. Booking fees/commissions: This is described more below. It is a very important revenue stream with some of the best margins of all fees and is a large contributor to a mover’s ability to reinvest in its business. When you order from an agent this is the only guaranteed income they will have, because while they may provide some of the other services, they may provide none at all.

3. Origin team work: packing and loading.

4. Line haul (the drive itself).

5. Destination team work: unloading, unpacking.

6. Fee to the van line.

Remember, this entire complex system of different interacting agents, van line and sub-contractors is made possible by the fact that the agents with significant fleets contribute trucks to the system, as well as hold back trucks for their own work. This keeps a pool of trucks available for all of the move opportunities that happen.

What happens if the system runs out of trucks? We all know that summers are busy in the moving industry, but in fact the system comes close to running out of trucks every summer and what keeps the system from running out entirely is: a) healthy competition between multiple van lines (this disperses the work); b) those agents that contribute trucks to the national fleet.

Movers Playing Sandbox Games

So, let’s see what happens when Relo Co. W. becomes an agent of Van Line A. Larry Kruger of McWilliams Moving and Storage arrived at a description that is easy to understand.

He describes children playing a game in a sandbox. The game goes like this: each kid has a bunch of trucks and a parent has provided one huge pail to fill up with sand. The kids scoop up the sand, pour it into the pail and then once it is full, use their own toy trucks to cart away the sand. So each agent is collectively filling (creating the move orders) the pail (the capacity of the van line) and collectively working to take the sand away (moving the household goods orders). But then a new kid comes along (Relo Co. W), and he doesn’t really understand how the game is played. Just like the other kids, he starts pouring sand into the large pail. But then the other kids see that he did not come with any of his own trucks. He is not carting anything away. And still he just keeps pouring in the sand. The pail fills really quickly. If we step back to look at the moving industry, we see that this means that what was once a system at capacity in the summer (the toy trucks are barely able to keep up with incoming sand), now becomes more fragile (one more kid pouring in sand with no trucks to cart it away).

Now let’s take the analogy one step further. The original kids complain, “You keep pouring sand on top of our sand. The rules are that if the pail is full and we have more sand to pour in we must use our own trucks to cart it away (when the real system is full, agents must service new bookings themselves). So, if you want to put more sand in you need to get your own trucks. We’re not going to cart your sand anymore.” But the parent from the park bench (Van Line A) explains to the original kids that “No, you must cart Willy’s sand. You can’t say no to it (the industry term is “no blackout”, meaning that agents must accept this sand into the pail).”

The original kids begrudgingly agree, but they have a decision to make. They each have all these really awesome shiny trucks (they call these their best teams), but they also have (just outside the sandbox) a bunch of beaten-up trucks (they call these the lowest 20% teams) so they don’t usually use them. Now, they have to get those trucks and bring them into the game.

So, what just happened? Corporate Canada, pssst, I am going to speak directly with you for a second. “Please meet the lowest 20% of quality drivers, packers and service personnel. These are the drivers that have lower satisfaction records and have a harder time retaining dedicated teams, etc. The lowest 20% have not serviced corporate work consistently. They tend to provide more work to the private/COD market, or to those corporate moves that are lower profile and less rigorous. This recent deal will mean that they will now consistently service the corporate relocation market in the summer months and likely in the shoulder seasons as well.

What are the disruptive forces to the move industry?

Disruption #1: The first disruption is illustrated above with the sandbox analogy; the change will result in capacity and quality related issues. What the sandbox analogy does not illustrate is that the system could even less flexible. Everyone knows the saying “never put your eggs in one basket,” but that is what Relo Co. W has done. ReloCo.W. will argue that it will continue to give opportunities to competing van lines when required, but let’s test that out in practice. Over the fall and winter of 2014/2015, ReloCo.W, as agent for Van Line A, gives all opportunities to Van Line A and none to XYZ or YYZ van lines. When does ReloCo.W. need to call on XYZ and YYZ? In the summer. When are XYZ and YYZ van lines least in need of opportunities from Relo Co. W? In the summer. Over those fall and winter months, XYZ and YYZ have built stronger relationships with their other clients, have gone out and found new clients and new strategies to fill revenue gaps. The network of social relationships has changed, so the likelihood of them taking work in their busiest season has also changed. Yes, these changes are not limited to Van Line A; they will also spill out to agents in other van lines. This is the nature of a complex system – you don’t know the outcomes of minor, or in this case, major disruptions within that system.

Disruption #2: Revenue leaving the industry

One of the most important revenue streams in the moving industry is the booking fee/commission. This is an agent’s revenue for originating the move opportunity. Relo Co. W has placed itself right in the middle of this revenue stream.

Defenders advise that there will be some revenue left to Van Line A. agents. The problem with this argument is that “some remaining revenue” is not 100% of the revenue and the moving industry, in part, depends on that revenue to run its businesses effectively, maintain healthy margins, purchase capital assets, train drivers, invest in technology, etc. This change represents a direct siphoning off (called rent-taking in economic terms) of some of good margin revenue that allows for these investments. And again, with complex systems it is unknown how the ripples will affect other van lines and their customers.

Disruption #3: Reaction by other relocation companies.

This change is not fully in effect yet (we should be looking to 2015 for ripple effects) and we are yet to see the business choices of Relo Co. W’s largest competitors. Will they take similar actions or increase their rent-taking in other ways? The ripple effect could lead to even more revenue being removed from the moving industry in non-productive ways.

Disruption #3a: A denuded value proposition for the relocation companies – the final blow to information at its highest levels.

One of the significant forms of information that a relocation company has is supplier management: expert vetting, selection and management of a supplier network. This is of significant value to many corporations.

There have always been companies that provide both relocation management and moving services (or destination services for that matter). However, combination relocation management and moving companies do not crow about how well it manages other movers. It markets the strength of its moving arm. When a relocation company markets its supplier management capabilities yet is economically tied to maximizing services to only one of those suppliers, they have blurred the definition of supplier management. And it is not as if they can crow about their moving arm: they don’t move anything! What I suggest we have seen here for the largest relocation companies is the final devaluation of quality information for the most mobile corporate clients. The last two blogs showed a history of information devaluation, but nothing devalues it faster than lack of trust in what is being said in the first place. There are many great global relocation companies of all sizes that are not pursuing these trends and these companies would be wise to figure out how to adapt their business strategies within the context of these changes.

Not tinkering

This is not a tinkering type change. This is a significant alteration to a complex system. To change an interdependent system already at capacity in such a radical way can be dangerous. Corporations deserve to understand it better from vendors in the marketplace. I recommend corporations get a variety of opinions to improve their understanding of the industry structure and to manage their relocations accordingly. Information is the key. Good quality assessment of information means taking in a variety of viewpoints and that is the best way any company can prepare itself for future headwinds.