Noel Perry heads Transport Futures in Harrisburg, Pennsylvania. In addition, he heads Transportation Economics, a consulting company focused on strategy, market research and forecasting for the North American freight transport market. Previously, he was a Corporate Economist at Schneider National, and Director of Market Research at CSX Transportation and Cummins Engine Company.
Broker margins are climbing? FreightWaves published a sponsored article penned by Scott Simanek, Chief Commercial Officer of Unis Fulfillment and Transportation. In that article Mr. Simanek cites improvements in the margins of two prominent publicly traded brokers as evidence of brokers leveraging declining conditions in the spot market to their gain – at the expense of carriers. He attributes the increase in margins to the brokers’ ability to strongarm vulnerable carriers in the soft market. His conclusions are clearly wrong for three reasons:
- What did Adam Smith teach us? The North American brokerage market is as freely open a market as any in the world, regardless of commodity or service. There are no pricing regulations and precious few barriers to entry. If the two brokers cited, or any other brokers, were mistreating carriers (carriers they in many cases have been working with for years), the carriers need simply to shift to another of the 16,000 licensed brokers, most of whom are hungry for business. For Mr. Simanek’s conclusion to be accurate, there would have to be an extraordinary, and illegal, conspiracy involving thousands of brokers.
- What goes up eventually goes down. The arithmetic phenomenon cited in the article is a long-standing and well-known fact of truckload pricing economics. In softening markets, carrier prices always fall moderately faster than shipper prices, with broker margins rising. Of course in rising markets the reverse happens – carriers’ rates rise more rapidly than shippers’ rates and broker margins fall. Using Unis’ logic, brokers must have been scrimping on their profits to help the carriers in 2017 and the first half of 2018. Did Unis sponsor an op-ed praising the brokers to document that phenomenon?
- Accounting 101. The cycle in broker margins is primarily an accounting issue. Market economics tell us that scarcity or surplus of assets affects the pricing of assets and the cost of services provided by those assets. Intermediaries, like brokers, add a relatively fixed cost to facilitate the match of assets and demand and the accompanying transactions. It follows that such a fixed cost will occupy a smaller portion of a total rate, in a tight market with high rates than in a soft market with low rates. A simple calculation using average rates for the period from the second half of 2018 to the second half of 2019 referenced in the op-ed shows an increase in brokers’ margins of 306 basis points using a fixed absolute value for the brokers’ take. This example yields the same internal broker dollar return in both cases – same service, same ‘profit.’ Note importantly that the Unis example cites a 134-basis point improvement in brokers’ margins, just over half of the expected gain. Apparently, the brokers cited are sharing in the market’s pain, suffering about a 10% reduction in their take.
Here’s the point – Generalizing two data points from a pair of SEC filings to characterize the workings and ethics of a $300 billion market has little value.
Under the examination of a skilled financial analyst, those filings may well illuminate the results and strategies of the two companies involved, but they shed little light on the economics of a massive and highly variable market.
Brokers exist and have a growing share of the market because they provide a useful service to shippers and carriers. Those services retain their value throughout the business cycle, even if carriers are happy at the top and unhappy at the bottom.
The notion that an entire group of market participants is operating to the market’s detriment is a preposterous claim that provides no insight to carriers, shippers or any rational actor in this market.