Old Dominion Freight Service Center Strategy Drives LTL Business Growth

The surge in e-commerce and consumer demand for home delivery has made the less-than-truckload (LTL) industry hotter than ever, putting "door pressure" on Old Dominion Freight Line's service centers.

This pressure is literal and not entirely negative. Dave Bates, senior vice president of operations at Old Dominion, said the company monitors the daily usage frequency of loading dock doors and the volume of freight through service centers via a "door pressure report."

Excessive activity and door pressure (measured by higher numbers per door) can lead to operational congestion. Bates noted that simply adding manpower doesn't solve the problem, as workers and forklifts can interfere with each other.

When Old Dominion sees door pressure starting to rise, it realizes it's time to add capacity. Company officials say door pressure is a key indicator for evaluating whether to expand or build new service centers.

"You must have smooth dock operations," said Bates, comparing an overly busy service center to the crowded scene at Walmart on "Black Friday." "Once you exceed capacity, efficiency starts to decline."

These efficiency losses can also mean line-haul drivers stuck at the dock and delays in deliveries from the center to consignees.

To avoid too much freight flooding into overloaded service centers, Old Dominion announced it will open nine new centers in Brooklyn, New York; Edinburgh, Indiana; Grand Island, Nebraska; Louisville, Kentucky; Mansfield, Ohio; McDonough, Georgia; Mesa, Arizona; Milton, Pennsylvania; and Olympia, Washington.

The company currently operates 246 service centers, including these nine new ones, up from 117 in 2002. However, as Old Dominion expands, maintaining the industry's best LTL operating ratio remains a challenge.

One challenge is acquiring land for new service centers, and another is obtaining zoning approvals, a process that can be lengthy. On the business side, Old Dominion sees more e-commerce users demanding faster freight, quicker customer service, and faster delivery.

The Land Challenge

As Old Dominion plans to add more service centers, land availability issues are becoming more prominent. Service center locations must be close to densely populated areas where Old Dominion and its customers are located.

The higher the land price, the higher the cost. Old Dominion's 2021 real estate capital expenditure budget is $245 million for purchasing land, building, renovating, or expanding its service center network.

The size of each service center varies by market. Old Dominion customizes construction based on market demand and future growth, with sizes ranging from 15,000 square feet to over 300,000 square feet.

But Old Dominion believes the industry's best measure is not square footage but the number of dock doors. The nine new facilities have door counts ranging from 30 to 105.

"We try to buy land with room for future expansion, so our sites are typically between 10 and 20 acres," said Bates.

Buying land and getting approvals is not easy. Other strategies, like purchasing leased facilities, can be too costly. Bates mentioned that Old Dominion once asked a landlord in New Jersey if they would sell their building; the asking price was $80 million, and Old Dominion ultimately walked away.

Sometimes even when land is found, another issue arises: many jurisdictions classify trucking as heavy industry, so many of the sites Old Dominion eyes require rezoning. Planning and construction also face resistance from municipal authorities.

This issue is exactly what CEO Greg Gantt discussed in an interview with Transport Dive last December. Gantt said that in the past, Old Dominion could take over surplus properties sold by other carriers, but this strategy is fading because few such buildings remain.

"Over time, those buildings just disappeared," Gantt said.

"Trucking is not an industry everyone wants in their town."

— Dave Bates, Senior Vice President of Operations at Old Dominion

Bates said states with abundant land and fewer regulations often welcome Old Dominion and open their doors to its new developments.

"If we wanted to build a large service center in West Virginia, they'd welcome us with open arms," Bates said. "But in New York, New Jersey, California—it's much harder."

Old Dominion wants to operate nationwide, but company officials say that in densely populated areas like New York, New Jersey, and California, real estate prices are high, and finding suitable facilities near population centers is difficult.

Most municipalities try to accommodate sites for purely commercial use, but Old Dominion even faces resistance from some industrial centers because light industrial companies don't want to be neighbors with service centers.

"Trucking isn't glamorous," Bates said. "Not everyone wants trucking in their town." (Unless, he added, their shipments are delayed.)

Land issues have prompted Old Dominion to "turn over every stone" to find locations. In the Indianapolis area, for example, that means expanding on both ends, but both outside the state capital's borders. Old Dominion placed a service center in Lafayette, Indiana (off I-65 north of the city), and another in Edinburgh (off I-65 south of the city).

Pressure from E-commerce

Bates said e-commerce is part of the reason driving demand for service centers.

As people work from home, inventory must be closer to where people live, and consumers are emptying shelves faster.

Peter Stefanovich, managing partner at Left Lane Associates, noted that retailers and warehouses used to be satisfied with a week's worth of demand, but now they want to stock two to three weeks of product.

Old Dominion's expansion of service centers helps speed up delivery times, he said.

"The key is having a network that lets you reach the end user faster," Stefanovich said.

Stefanovich said the "Amazonization" of the economy and changing consumer demands have made the need for efficient, fast delivery more urgent.

"Our psychology has changed, expecting things to happen faster," he said.

Service Commitment

As freight demand grows, costs are also rising. On Monday, Old Dominion announced a 4.9% general rate increase (GRI) effective March 1.

"To meet customer expectations and deliver on our promises, we must continuously enhance our high-quality service network and systems," said Todd Polen, vice president of pricing services at Old Dominion, in discussing the rate increase, adding that part of the GRI will offset rising real estate costs.

Despite expansion challenges, analysts remain confident in Old Dominion. David Ross, managing director and head of global transportation and logistics at Stifel, wrote in a February 4 report that Old Dominion is again the leader in LTL operating ratio.

"Just as the sun rises every day, we think it's safe to say now that Old Dominion will report the best LTL margins every quarter," Ross and his team wrote in the report.

Stifel noted that Old Dominion hasn't always had such excellent ratios or as many service centers as in 2021.

"When we started tracking the stock, the company's operating ratio in Q3 2002 was 91.9%, while in Q4 2020 it was 76.3%, with much smaller geographic coverage (117 service centers in 2002 versus 245 today and growing)," Ross wrote.

Ross said the efficiency gains have pleasantly surprised investors, which is a good thing.

"The number one question investors ask us about Old Dominion is usually, 'Why are their margins so much higher than peers?'... or 'What's the secret?' 'How do they do it?'" Ross wrote.

Gantt answered that question in December, sharing lessons the LTL fleet learned during the 2007-2009 Great Recession:

"We've been very consistent, even going back to the 2009 recession," Gantt said. "We never cut service."

"Just as the sun rises every day, we think it's safe to say now that Old Dominion will report the best LTL margins every quarter."

— David Ross, Managing Director at Stifel

When the pandemic hit, the temptation to cut prices and services was real. LTL competitors slashed prices, and customers were well aware.

"We did lose some business early on due to pricing," Gantt said. "Suddenly, everyone had extra capacity."

But customers noticed some non-price factors were missing, Gantt said—such as on-time delivery, customer service quality, and cargo care. Old Dominion says its LTL on-time service rate has reached 99% and has maintained that for several years.

Eventually, the lost customers came back.

Bates said the service center plan means maintaining high-quality service and not letting freight linger at centers.

"Ideally, we pick up today and ship it out tonight," Bates said. "We want freight delivered the same day or the next day after it arrives."