Goldman Sachs: digital disruptors will compress brokerage margins

(Image: JB Hunt Carrier 360)

But incumbents can protect their market shares

Last week, a Goldman Sachs equity research team led by Matthew Reustle, CFA, released a report titled “Commoditizing Logistics: Assessing ‘Disruptive’ Links in the Supply Chain.” The report was apparently intended to answer investor questions about threats to large logistics incumbents’ margins and market share. 

It’s worth noting what is meant by ‘commoditizing logistics’. Commoditization is the process by which goods that have economic value and are distinguishable in terms of attributes (uniqueness or brand) end up becoming simple commodities, moving from differentiated to undifferentiated price competition. In other words, ‘commoditizing logistics’ means changing the industry from being network- and relationship-based with white glove customer service to something that is more standardized, automated, and fungible. 

Goldman presented a number of revealing data points contextualizing the rise of new digital brokerages like Uber Freight and Convoy. Perhaps the first number we should mention is a figure that sets the stage for the emergence of new brokerages: from 2012-4, about $260M of venture capitalist money entered the trucking technology space, but that number dramatically increased to $2.3B for the period 2015-7. Convoy has raised a total of $81M, Transfix has raised $78.5M and Cargomatic has raised $55.8M. 

The venture-capitalist-backed digital brokerages are compressing margins in two ways. First, these companies are focused on top line revenue growth more than profits, and are financing that growth with investor money instead of bootstrapping. That allows them to undercut incumbent prices and take their freight. Secondly, digital brokerages using technology to automate quoting, matching, and booking loads have lower costs than traditional incumbents, another factor allowing them to underbid their competitors. Convoy’s technology drove their costs per load 8% lower than Landstar’s agent-based model, Goldman Sachs estimated, largely because Convoy has been able to eliminate agents’ commissions. 

However, Goldman found evidence suggesting that the large incumbents, including CH Robinson and JB Hunt, are making large investments in technology to reduce their back-office expenses and drive costs downward. While Uber Freight has the most popular mobile app, with a 30.7% share of downloads, JB Hunt’s Carrier 360 took 13.5% and CH Robinson’s Navisphere took 10.2%. Furthermore, Goldman thinks that JB Hunt has actually been the most successful at monetizing their mobile app, generating more than $6,500 in revenue per download. 

Incumbents’ market shares are not currently threatened by the entry of well-capitalized digital brokerages, Goldman said, for two reasons. The first is that the overall brokerage market is rapidly growing, more than quadrupling since 2000. In 2000, about 4% of all truckloads were brokered; in 2017 brokerages handled 19% of all loads. Goldman’s chart of the growth of the brokerage market looks exponential. When load boards are added to brokerages’ market penetration, in 2017, they captured more than 30% of all loads. The most recent load origination surveys conducted by FreightWaves and CarrierLists showed that in mid-2018 brokers increased their marketshare to 23% of all loads, and load boards covered an additional 14%. 

Secondly, the landscape of American brokerages and logistics service providers is still fairly fragmented. CH Robinson has a 17% marketshare; Landstar has 6%; XPO has 5%; TQL and Coyote control 4% each, and Echo Global has 3% of the US brokerage market. The other 61% is ‘other’, i.e, small brokerages. There is still plenty of room for large brokerages to grow larger through consolidation rather than stealing each other’s marketshare. 

All large brokerages—new entrants and incumbents—are investing in technology, which has consistently driven down the ‘IT Gap’ as measured by Infosys Consulting. The IT gap is the spread between the percentage of shippers who say that the IT capabilities of their 3PLs are very important and the percentage of shippers who say that they are satisfied with their 3PLs’ IT capabilities (if 90% say it’s important, but only 60% say they’re satisfied, the gap is 30%). The IT gap has steadily fallen, from about 63% in 2002 to about 35% in 2017. 

Goldman estimated that about 25% of CH Robinson’s (NASDAQ: CHRW) revenues are at risk of disruption, that about 31% of Landstar’s (NASDAQ: LSTR) revenues are at risk of disruption, about 8.5% of XPO’s (NYSE: XPO) revenues are at risk of disruption, and about 8% of JB Hunt’s (NASDAQ: JBHT) revenues are at risk of disruption.

Goldman’s equity team rated Landstar a Buy (price target: $143), CH Robinson a Neutral (price target: $96), and XPO a Buy (price target: $129). JB Hunt was a Sell (price target: $111), and Expeditors was a Neutral (price target: $75).


John Paul Hampstead

John Paul conducts research on multimodal freight markets and holds a Ph.D. in English literature from the University of Michigan. Prior to building a research team at FreightWaves, JP spent two years on the editorial side covering trucking markets, freight brokerage, and M&A.