Upstarts Uber Freight and Convoy continued to gain market share among freight-matching rivals, as more traditional load boards saw their market share ebb in the face of more heavily digitized competition, according to a report from investment bank UBS.
The study by UBS Group AG (NYSE: UBS) is the bank’s second annual deep dive into the market penetration of mobile apps from incumbent freight brokerages, digital brokers, load boards, and other tech services like track and trace.
The team from UBS Evidence Lab, the bank’s sell-side research division, issued their first report on app downloads and stickiness last summer. The newest report came out this morning.
The most obvious macro trend in the space is that insurgent digital brokers continue to take market share from load boards and incumbents. UBS has divided brokerages into “Truck Broker with App”, which includes J.B. Hunt Carrier 360, C.H. Robinson’s Navisphere, TQL, Landstar, Coyote, Allen Lund, and Echo, and “App-based Truck Brokerage”, including Uber Freight, Convoy, Transfix, and Loadsmart. UBS counted Truckloads, DAT, 123 Loadboard, Truckstop.com, Next Trucking, and Load Express under “Load Boards.”
UBS’s analysts, led by Thomas Wadewitz, pointed out that app downloads are most relevant for assessing how well a brokerage can source owner-operator capacity.
“We believe a broker’s communication [with] even relatively small carriers is more likely via other channels (phone, portal, email, files). But for owner operators (1-3 trucks) the App can act as an important mechanism of communication and a way for the broker to efficiently access capacity. For new tech focused players (Uber Frt., Convoy), the app downloads (+ recurring usage) may be more important for accessing capacity,” Wadewitz wrote in the April 8 note.
Sell-side analysts are most interested in digital freight brokerage because of the segment’s potential impact on publicly traded names C.H. Robinson (NASDAQ: CHRW), Echo Global Logistics (NASDAQ: ECHO), J.B. Hunt (NASDAQ: JBHT), and Landstar System (NASDAQ: LSTR).
UBS wants to know if incumbent brokers can successfully implement new technology to continue leveraging their scale, how well brokers’ mobile apps retain users, and at what point leading freight brokerages will begin competing with each other directly for market share.
“We continue to believe that CHRW’s large scale provides significant advantage in terms of both freight volume running through their systems and broad based access to capacity,” Wadewitz wrote. “We continue to have a positive view on CHRW stock as we believe that lower spot rates y/y support gross margin expansion in NAST and solid net revenue growth while operating expense performance is likely to be better than expected against an easy comparison in 2018 when equity incentive comp more than doubled and cash incentive comp was also up significantly.”
Wadewitz wrote that UBS believes Echo has the scale to invest in technology and compete with larger incumbents and new players, but that cyclical factors are not as favorable for ECHO as CHRW because ECHO’s revenue mix is more weighted toward spot prices, which declined dramatically beginning in the fourth quarter of 2018.
UBS noted that both CHRW and ECHO are currently trading well below their ten-year average price-to-earnings multiples.
“We expect Uber Freight and Convoy to add to competition in the brokerage market but it is unclear whether they will meaningfully change the dynamic in the medium term,” Wadewitz wrote.
Although the report is careful to quantify the fragmentation of the truckload carrier market, it does not provide similar numbers for the fragmentation in the freight brokerage industry itself, populated by an estimated 16,000 brokers. There are two important statistics that characterize the freight brokerage market which have a direct impact on forecasting when if ever digital incumbents will have the scale to directly compete for market share with C.H. Robinson and Echo Global Logistics.
The first is that the majority of freight brokerages, greater than 60% of the market, is composed of small brokerages with insignificant market share. According to Transport Topics, only eleven freight brokerages have gross revenues exceeding $1 billion and the twentieth largest brokerage posted $500 million in 2018 gross revenues. The industry must consolidate on a much larger scale before the largest players feel market share pressure from their peers.
The second statistic is that the proportion of overall truckload shipments handled by brokers continues to grow rapidly, and is still less than 30%. The pace at which the overall pie grows will tend to reduce competitive pressure between large freight brokerage, since even large operations can grow rapidly without taking business from another brokerage.
As Convoy CEO Dan Lewis pointed out at Stifel’s Transport and Logistics Conference in February, there is room in the industry for several winners, and it’s possible to build a billion-dollar business without dramatically affecting existing players.