Technology has made it easy for anyone to get into the game, but there are still obstacles
The latest craze in logistics is the “uberization of trucking,” i.e. digital freight brokers (DFM). In reality, though, DFMs are not new, with the first iteration of them appearing in the early 2000s with companies such as Power2Ship and TransMarkets. They have gained steam lately thanks to technological advances, but there is still some question about whether they are here to stay this time.
What is new is the rapid proliferation of DFMs. Companies like Transfix, Convoy, FR8, Load Express, Freight Rover and even Uber and perhaps Amazon (rumors are Amazon may be close to releasing a freight matching app) may be new to the scene, but they are loaded with technology and flush with cash.
“When you start talking about disruption in any industry, it’s difficult to tell whether the [newcomers] are just a fly on the wall,” Thom Albrecht, president of Sword & Sea Transport Advisors, tells FreightWaves.
Whether this new breed of startups is truly revolutionizing the freight transport business or not remains to be seen, but they are certainly generating a lot of buzz.
“The uberization of trucking is using app-based technologies for making the most use of empty space in trucks,” explains an analysis on the market from Cerasis. “This concept is not new at all. It is freight consolidation, pure and simple. What makes it exciting is how it could enable even more shippers to take advantage of direct-to-trucker shipping rates.”
Companies like Sleek Fleet are trying to stand out from the crowd and provide that direct to trucker connection. Sleek Fleet taps into available freight and sends that directly to drivers, who can choose loads based the pre-set rate and know exactly what their costs will be. No middleman, no additional fees exactly what Cerasis envisions.
In the transportation world, though, these startups are competing against established giants like C.H. Robinson, Coyote, Echo Global and others. Recent earnings reports for publicly held brokers are sounding a few warning bells, although Albrecht doesn’t believe the reports are necessarily because of the new competition.
“If you look at the comments the traditional brokers made, they all said truckload capacity tightened quicker than they anticipated,” he says. “My sense is that 90% of what occurred is the traditional tightening of the marketplace. But 10% is something else at work.”
When C.H. Robinson reported its second quarter earnings, the company reported a 15.5% gross margin versus 18% a year ago. Echo Global reported a similar drop, going from 19.2% in 2016 to 17.4% and J.B. Hunt reported 11.6% versus 15%.
One impact was likely rising spot rates in the second quarter, which outpaced contract rate growth, putting pressure on some broker’s margins.
And then along came the DFM startups. Albrecht notes that many of these new companies don’t believe the 20% gross margins that have been typical of the industry are realistic anymore.
The DFM startups are shooting for lower margins, and with technology in hand, the ability to compete on price is more pronounced. That could change, though, as contract rates begin to adjust later this year.
“The fact is there will be a point probably in the next two quarters where rates will start to rise,” Albrecht says. “I think what will be really telling is [if] there is margin recovery.
“It’s my opinion that [DFM startups] are already a factor, even if they are only 5 to 6% of the market,” Albrecht adds.
In trucking, though, price is good, but if the shipment doesn’t arrive, there will be no second shipment. That is one of the factors the startups face.
“Unlike calling a car for a ride, there are risks in the Uberization of trucking that must be considered,” Cerasis says. “Goods may be perishable. Shipments need intermodal transport options. Compliance is always growing stricter. Shippers demand more versatility in pick-up windows and back-house costs. Meanwhile, demand on the trucking industry is already threatening to burst at the proverbial seams. While some may argue Uberization could replace the value of third-party logistics providers, these concerns must be addressed first.”
“The early scuttlebutt was that Uber and its cohorts could potentially pose a threat to aspects of the 3PL industry,” says an article in the American Journal of Transportation (AJOT). “These companies could eventually become 3PL businesses by providing last-mile delivery services, and becoming a small LTL carrier and taking business away from small-volume couriers. Some of these app providers have actually moved to one extent or another into the realm of transporting physical goods.”
While all the talk has centered about the entries in the market now, it may be another newcomer that will finally tip the scales: Amazon.
The e-commerce giant is influencing retail across all sectors; it’s altering holiday shipping patterns and forcing companies like UPS to institute “surge pricing” during peak times, so it’s probably only natural that it will eventually impact the 3PL business.
“Amazon is working on app-based systems that would make truck-stop recommendations and include pick-up and drop-off options for payment and order tracking,” Cerasis says. “This comes on the heels of greater advancements in PrimeAir, which will probably enter national market within the next year. As a result, companies considering Uber-like technologies face an uphill battle.”
One thing all these startups will face at some point is adversity. When a customer whips out their phone and touches the Uber app to request a car, one shows up in relatively short order. The shipping world does not work like that. Empty trailers are not sitting waiting for the manufacturer down the street. That, in and of itself, makes digital freight matching different.
There are other concerns that need to be addressed as well.
“What happens to insurance premiums if a company outsources shipments to these apps? What about delivery, and if a shipment arrives late, will the app’s developers work to improve the experience for the customer who complains?” Cerasis asks. “The vulnerabilities in the Uberization of trucking are vast and growing, and while Amazon prepares for launching a similar product or service, small and mid-sized businesses must use what works today.
“The value of 3PLs for strategy and deriving actionable insights into operations, building a better brand through enhanced customer service and delivering on its promises is not lost,” it adds. “In time, app-based trucking may become reality, but it is not likely to happen, not on the scale that could replace 3PLs entirely, within the next year or two.”