Digital freight brokers are becoming all the rage and they are commonly referred to as the “Ubers of Trucking.” But in fact, what most of these companies should be called are the “Groupon of Trucking.” They are operating their business models to customers in a similar fashion to how the daily-deal sites operate. The once hot bubble of daily-deal sites has collapsed.
Back in 2010, Groupon held the reputation as being the fastest growing company in history. Thousands of copycats were launched hoping too they could cash in on a model that had revolutionized e-commerce and retail shopping. The pitch was that Groupon (and Livingsocial) had found a new-age business model and were able to match up small businesses with hungry and eager customers looking for a new experiences and services to try. Retailers would give Groupon a hefty-discount to entice customers to try their services hoping they would gain loyal customers after the funded promotion was over with.
What ended up happening was the opposite. As soon as the discounts went away, customers left also. The customers that Groupon targeted were price conscious and willing to try a new offering if the discounts were great enough. Lose the discount – lose the customer.
Groupon has become a niche ecommerce platform for discounted experiences, entertainment, and food. It went public with a market cap of over $16B and now six years later sports a market-cap of over $2B. Livingsocial, having raised almost a billion dollars (of which $175M came from Amazon), has become a division of Groupon after the daily-deal site purchased it for almost nothing ($1.3M according to TechCrunch).
The metrics at which the daily deal sites were giving in terms of “fastest growing company on the planet” were misleading and quickly vetted as soon as those platforms went public. They were able to grow top-line through hefty discounts to customers, but their margin metrics were and still are a joke.
This is exactly the way the freight market works with shippers and digital brokers. The only difference between Groupon in this analogy is that the digital freight brokers are Grouponing themselves and using investor capital to do so. They are offering below market rates calculating that as soon as the clients experience their fantastic service and technology, they too will stick with them. What they are finding is that the customers that are using their services are much like the Groupon shopper- willing to try the service under a discount, but as soon as the price discount is gone, their shipments (and revenues) are gone as well.
Rather than transforming the market with digital technology all they are doing is providing shippers with a discount off of normal market spot pricing. Most large volume shippers are already digital and are using TMS systems to electronically tender and route freight. Once a carrier gets through the carrier approval process and meets the service obligations, they are placed in a routing guide. Their spot in the routing guide determines how much freight they will receive from shippers. If you they are low-priced, they will get a ton of freight. If you are high priced, you will get less. Imagine it like booking an airline ticket on Kayak.com- except, it is all automated. A large percent of freight transactions are tendered through EDI or APIs and most of the process is automated.
In fact, if they are low enough, they can get as much freight as their heart (and investors) desire. Asset-based providers have known this for years and use low prices to shift out of backhaul markets. Brokers should only do this when they have a dense enough carrier network to find those anomalies in the market where capacity might be priced inefficiently. If they are high-priced, they will only receive loads after the shipper has gone through the routing guide and have been turned down from other carriers. Larger sophisticated players have known about this for years and often take pride in being #3 or #4 in the routing guide, rather than #1. Usually the lowest price guy on a lane is the sucker or has determined that a load is valuable enough to their network where they can service the customer at that rate, without sacrificing yield.
They assume that more volume will lead to more profits. They also assume that those shippers will stay with them indefinitely because of the quality of their service and technology offerings. This is foolish. Anyone that has been around long enough knows that the moment a carrier or broker that is the incumbent on a lane increases their price, their position in the routing guide is at risk. The shipper can easily move the freight to another carrier without interruption.
The digital brokers do not have this context. Most of them are not sophisticated enough in the business to understand how the trucking market works. Few of them have a pricing and yield optimization background and any hires that are from industry are made with operational backgrounds and lack the context of the cycles of freight. Most of the brave souls that jump onto emerging opportunities with the digital brokers were not in key leadership positions in the industry and have not gone through numerous market cycles. Most are young and have not seen volatile markets. Age and experience in freight are enormously valuable.
Most of the digital freight brokers started out their business model thinking that they could optimize the long-tail (i.e. Small and medium sized shippers) that would embrace their digital offerings with enthusiasm. What they found was that those shippers were heavily relationship based or lacked the infrastructure to take advantage of the digitization to begin with. The long-tail, is in fact, very transcationally intensive and inefficient for a reason. Plus, the customer acquisition costs are very high for these shippers and to satisfy the kind of returns that venture investors want, the digital brokers need to show massive growth.
The did, however, find that certain shippers are more willing or interested in adding these digital platforms to their carrier networks. These shippers are high volume, transactional discretionary shippers that can move hundreds of thousands of loads in an instant over to their platforms. They tend to place low prices (cheaper) as one of the most important carrier routing selections. They also tend to be in food, beverages, and consumer staple products- historically known for high seasonal surges, low cargo value, and low rates.
In return for the volume, the shippers got a hedge on high spot market rates because the loads were artificially priced below the going spot rate. They also could hold onto their contract rates longer than usual, regardless of what the spot market did, because these new age platforms give these shippers quick access to capacity at below market rates.
To attract investors, these outsiders started using terms like ARR (annual recurring revenue) and ignoring normal market metrics like gross margins. By shifting the definitions towards a SaaS offering and away from the usual trucking industry metrics, they were able to convince highly sophisticated Silicon Valley investors that moving freight is exactly like SaaS or like moving passengers. These investors clearly don’t understand that anyone on the planet could build a $20B brokerage if they didn’t care about price or margins and had access to investor capital to fund growth.
Where does this leave the industry? There will clearly be a shakeout in the near future. We are witnessing a bubble and it will burst. It happens in every industry in the early cycles of growth. Investors, not wanting to miss out on a gold rush in a sector that is undergoing digitalization, places big bets without understanding the key market metrics. You saw it during the first .com bubble, social media bubble, mobile bubble, digital couponing bubble, and payments bubble.
The optimistic outcome for these companies is to supplement the high volume shippers with the long-tail and inefficient small shippers. Use the large volume shippers to build out carrier networks and find efficient ways to source capacity. Optimize the transactions and drive cost out of the customer acquisition and transaction automation. Use price discovery and solicitation tools and enhance the experience for the fleets and drivers-alike. Operate faster decisions and better client experiences.
Most will not accomplish this. They will have a much darker outcome. Having burned through investor capital and unable to find long-tail shippers to supplement their volumes they will end up burning through all of the capital they raised. In an attempt to correct the margin problem, they will address it in pricing increases. What they will discover is just how easy and efficient shipper tendering systems already are. The rate increases will mean significant volume drops and a lack of customer loyalty. Investors will wake up to reality and realize they have made incorrect calculations and a gross misunderstanding of the freight market. They will not reinvest and the companies will be shuttered, having proved that the freight market is far more efficient that any venture capital investor knew.
The likely victors in the digital brokerage space will be companies like Convoy, Uber, and Transfix that have raised so much money they can make a ton of mistakes along the way and still have dry powder. Cargomatic, after nearly imploding, has been rumored to have made such a transition. After all, as we have learned anytime a market goes through evolution, simply being a survivor enables you to pick up the scraps even if your early assumptions about your business are wrong. And never count out the larger 3PLs. They will not only survive the digitization, but they will end up getting their pick of platforms and talent as the money well runs dry.
Subscribe to FreightWaves, the leading provider of FreightTech commentary and market impacts.