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BusinessFinanceNews

‘The broker wars’: Big bets pit new entrants against incumbents

The new competitive landscape of U.S. freight brokerage has been years in the making, but now it’s one of Wall Street’s favorite themes.

Bank of America Merrill Lynch transportation analyst Ken Hoexter published a client note on Tuesday titled “Primer: Broker Wars, Part I: Tech disruption & pricing wars shift landscape.” Hoexter focuses on the core metrics of growth, margins and tech adoption, highlighting the mobile app horse race. As Hoexter points out, it’s one thing to get carriers to download an app, but it’s quite another to drive enough operational efficiency to grow earnings on narrowing margins.

“The main near-term disruptive threat to the brokerage industry is pricing,” Hoexter wrote. “Pricing is being used by well-funded new entrants to gain scale by operating at thin or negative margins. This behavior risks triggering a race to the bottom, as established brokers, long accustomed to mid-to upper-teens net revenue margins, and mid-single digit operating margins, now see those profits at risk.”

The freight brokerage game is changing faster than ever. Uber Freight is now operating in five countries and building out a massive brokerage floor in Chicago. Convoy raised $400 million at a valuation of $2.75 billion. GlobalTranz and Nolan Transportation Group both recently entered the $1 billion revenue club. Mode Transportation bought SunTeckTTS in the largest private equity-backed merger of 2019. Redwood Logistics closed the Strive and LTX deals, launched Connect 2.0, and partnered with Truckstop.com on a new auction concept, Book it Now. Transplace made end-to-end visibility a platform-wide standard, free of charge.

On the other end of the scale, smaller brokerages are pursuing a variety of strategies to grow faster than the industry and take market share. Chattanooga, Tennessee’s Trident Transport, pursuing a tried-and-true strategy, opened new branches in Tampa, Florida, and Minneapolis. Meanwhile, Chicago’s Edge Logistics launched a digital freight-matching platform for its customers and carriers.

New venture capital-backed startups like Emerge and Turvo are democratizing access to the newest technology. Specialty services like near-shore staffing and asset-based lenders are catering directly to high-growth freight brokerages, helping them free up cash and grow even faster.

Even industry veterans are reemerging with new projects. Eddie Leshin, a veteran of American Backhaulers and Coyote, returned from private equity to lead the new Anthym Logistics, born of a merger of Atomic Transportation and Cousins Logistics. Leshin’s old partners, Jeff Silver and Paul Loeb, have founded their own software company, Mastery Logistics Systems.

But publicly traded brokerages are under increasing pressure, hence the theme of Hoexter’s note.

XPO Logistics (NYSE: XPO) is exploring a divestment of four business lines to become a pure-play less-than-truckload carrier, a divestment that presumably would include its freight brokerage business. CEO Brad Jacobs said XPO is paying a “conglomerate discount” because public markets are not correctly valuing the freight forwarding, brokerage and final-mile divisions of the company.

C.H. Robinson (NASDAQ: CHRW) struggled in the fourth quarter of 2019, its profits slashed by 45% year-over-year. Hoexter wrote that Robinson has lost market share for the past 10 quarters straight. The giant of Eden Prairie, Minnesota, is betting $1 billion over the next five years that technology investment will make its brokers productive enough to offset narrower margins.

Susquehanna’s Bascome Majors fretted about what potentially permanently higher technology and administrative spend would do to operating margins, writing “the spend is not your friend” in a post-earnings client note; Goldman Sachs’ Jordan Alliger cut his CHRW price target to $65.

Notably, Alliger did not cite competitive pressures from new entrants as a risk to Robinson’s business, instead anticipating margin compression from spot rates rising against lower contract rates.

“We remain concerned that 2020 will be tough to gain traction for the broker business — with the near term impacted by ongoing price pressure, and possible soft contract re-price environment due to competitive pressures and still soft spot volumes,” Alliger wrote.

J.B. Hunt’s (NASDAQ: JBHT) brokerage, Integrated Capacity Solutions (ICS), ran at a loss in the fourth quarter of 2019, deeper than the loss it posted in the third quarter. Hunt is investing heavily in technology to drive freight and capacity into its J.B. Hunt 360 platform, which Hoexter noted earned the highest marks in user experience and service/reliability in a survey.

At the same time, digital freight brokerages are experiencing explosive growth — also at the expense of steep losses. When UBS internet analyst Eric Sheridan initiated coverage of Uber on Tuesday, he estimated that Uber Freight would haul in revenue exceeding $2 billion in 2021. Uber Technologies (NYSE: UBER) reports fourth-quarter earnings on Feb. 6, but in the third quarter, Freight lost $81 million.

In our view, publicly traded logistics companies may be at something of a disadvantage to privately held 3PLs when it comes to growth.

While venture capitalists have reemphasized gross margins and unit economics post-WeWork, VC-backed startups are still encouraged to burn cash to grow faster. Although private equity firms care most about profit growth — as measured by earnings before interest, taxes, depreciation and amortization (EBITDA) — rich private valuations and low interest rates have made it easier to execute accretive rollups. Private equity limited partners’ capital is locked up for years, too, encouraging a long-term view of their investments.

Publicly traded logistics providers, on the other hand, have to strike a delicate balance between growth and profitability to build lasting equity value. If they lean too hard into growth during the troughs of the freight cycle, their earnings collapse, and they risk being traded like deep cyclical asset-based names.

“Freight brokerage is an extremely fragmented and competitive market,” commented Matt Pyatt, CEO of Austin, Texas-based Arrive Logistics, a private, 5-year-old brokerage that topped $525 million in 2019 revenue. “Significant investments in technology by well-capitalized companies are causing increased pressure for the entire logistics space to modernize. The opportunity continues to be with companies that innovate towards best-in-class service, technology and scale.”

For publicly traded 3PLs that have to open their books every 90 days, it’s getting harder to thread the needle.

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John Paul Hampstead, Director, Passport Research

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.

10 Comments

  1. Dude this is so true. Great article. Tech is everything now. we are all becoming digital brokers and carriers as we have no choice. We try almost everything we read about that might work for us. We moved from an old PC based TMS to AscendTMS 2 yrs ago, got EDI up with our 7 largest customers, got the drivers the Keeptruckin ELD’s, and we use Four Kites and Smart Capacity on the brokerage side for tracking or finding trucks and got rid of our DAT account (we kept truckstop as it was cheaper). None of this new tech stuff was even around 5 years ago. We do more business today will half the office staff we used to have (but we have more drivers tho). I can’t wait to see what the next 5 yrs brings to make stuff even easier. The truckstop and Smart Capacity book it now thing looks interesting. THere are still to many phone calls, paper shuffling and emailed pdf loads that we still have to re type in.

    We will try anything techy if it saves us money and time lol. Bring it on.

  2. XPO represents the smart money among the old guard. They are looking to exit before their business loses all its value. C.H. terrible earnings is just the start.

    1. But CHR still made 99m in profit for the qtr lol. Can’t say they are out yet. They have the customers, cash, name, and are investing big in tech. I’d rather be CHR making 99m in a qtr than Uber Freight or Convoy bleeding $.

      Agree on XPO. Brad is the man. But a soft market will hurt them so he is smart enough to try to sell what he can and raise $ to pay off their big debt. THe big question is who will take the bait an buy xpo’s parts at huge multiples in a tough trucking market????? We will see.

      1. Given Amazon’s recent results – would they be a player? I mean they want to get there eventually and are willing to spend $$. While XPO and Amazon have their differences, XPO’s leadership group has a fiduciary responsibility and if Amazon is the one that comes knocking for their North American Transportation piece or even both North American and European. They have a pretty good idea already of how/what XPO does given their prior history with them. They have the money. They have the desire to a big chunk of transportation in house. They understand supply chain and transportation and can buy, run and integrate without being worried 100% about the bottom line of the transportation department by itself.

    2. CHR is dying.
      They were the cash cow while new entrants (coyote, uber, convoy, etc) moved in for the low hanging 15+% margin fruit.

      All brokers who do not embrace change will be extinct.
      Its all about automating clerical functions and reducing headcount to accomodate low margins.
      Basically the loads will be built and covered with no carrier rep involvement.

      Self service for shippers and carriers.

      Carrier sales reps have a bleak future.

  3. All signs point to low margins for brokers and carriers as the future.

    The traditional 15% broker margin is unrealistic as tech automates the customer service aspect.
    The relationship aspect is being removed.
    Service commoditization.
    Little or no differentiation except freight cost.

    With brokers undercutting each other to gain business even at a loss (uber,convoy), this puts pressure on high volumes of cheap loads for the cheapest trucks regardless of service considerations.

    Uber, Convoy, etc are making trucking like airline ticket reservations.

  4. UBER YOU’RE THE MAN ! A GREAT BIG THANK YOU FOR HELPING OUT TRUCK DRIVERS GET THEIR VOICES HEARD !

    Quote:

    “Uber’s Freight App Rates Warehouses to Give Truck Drivers More Power”

    That being said , you’re a middleman drivers can do without , LOL !

    A little PINK FLOYD ?

    ” WE DON’T NEED NO EDUCATION ”

    “WE DON’T NEED NO THOUGHT CONTROL ”

    “ALL IN ALL YOU’RE JUST ANOTHER BRICK IN THE WALL ”

    In my humble opinion …………

    1. I’ll elaborate a bit more :

      Quote:
      Uber’s Freight App Rates Warehouses to Give Truck Drivers More Power

      LG Electronics Inc. got a surprise last year when Uber Freight showed the appliance maker how truckers rated its warehouses.

      Of the company’s nine U.S. distribution centers, the one in Georgia kept truckers waiting for hours, earning it an average 3.7 out of 5 stars in drivers’

      For LG, the ratings spurred immediate change. “Getting the scorecards, which are necessary to review how your facility is really performing from the outside looking in, is pretty helpful,” said Paul Heffernan, LG’s vice president of supply chain. “It highlighted to the team that those wait times and load times were really extended.”

      End quote :

      REQUOTE :
      “For LG, the ratings spurred immediate change .

      Getting the scorecards, which are necessary to review how your facility is really performing from the outside looking in, is pretty helpful,” said Paul Heffernan, LG’s vice president of supply chain. ”

      You see , most times upper management are unaware . How come ? Because truck drivers don’t bother communicating with upper management !

      YOU NEED TO COMMUNICATE WITH THEM !

      Example : Once I was transporting for a huge company . They literally cornered the market in their field . The company is unionized as well .

      One day I come to the yard on a Monday after the weekend . The trailer I was supposed to pick up was extremely ignorantly parked by one of their shunters . It looked like either a very bad joke , or like the shunter couldn’t careless due to the shunter’s shift ending on the Friday and just put it quickly in a very bad position anxiously ending the work shift which caused a head ache for a sleeper truck to pin and then turn it around .

      So I approached the foreman and told him this was unacceptable , why cause truckers such unnecessary grief ? But when I saw his face , I could tell right away by his facial features that he was a low class arrogant type .

      Anyways so I told him , “I’m not going to break my head attempting to take that trailer parked in front of a huge sand pile hardly capable of getting a sleeper truck between it and the trailer “. He freaked and raised his voice at me . So I said , “due to that sort of immoral behavior I’m going to replace myself with another driver and I’m leaving ,this will never happen to me again here “. Then he really freaked out .

      But I didn’t like the job anyways , LOL ! I was going to replace myself anyways with another driver of my immediate employer who was brokering for a carrier . Talk about a maze , lol . The event just pissed me off and when the foreman freaked , I thought to myself , fine , you want to be an azz*ole , I’ll go higher .

      When I spoke with higher management about the situation , he asked if his employee raised his voice .

      I said “yes , however, I wouldn’t misinterpret the foreman’s misbehavior as the face of the company . I just want to assure that this won’t ever happen again since I intend on replacing myself with another driver , however , I left due to the situation and especially due to his verbal aggression ” .

      I explained had he not been abusive ,I would have hauled the load after asking him to ask a shunter to turn that trailer around, and then replaced myself after having hauled the trailer . But due to his ill behavior , now you’re losing out temporarily . Upper management was not pleased with this foreman as he explained to me , to say the least . I felt bad for the shipper because they were going to lose out on two runs that day due to their foreman misbehaving . That’s an employee costing them a big loss that could have been prevented by behaving properly .

      But I had a plan . Since upper management and I saw eye to eye and were on the same page , and I didn’t like the foreman , nor the carrier who was brokering the run to my employer , I called back upper management during the day and explained that they shouldn’t be a victim losing out due to the mishap of one of their employee’s misbehavior .

      So I offered to at least save them from losing out on one run out of two as a favor to them from one businessman to another. Then I asked if they were willing to meet with my employer to haul directly for them . My employer got to run directly for them bypassing a carrier .

      The point is , quite often higher management has no idea what is going on under them if it isn’t brought to their attention . You don’t need an app that can potentially tarnish a shippers reputation due to a few lower management clowns mismanaging . COMMUNICATE ! Communicate among yourselves and with the clients at the top . You would be astonished at how receptive they tend to be . Those at the top GENERALLY tend to be educated , well behaved and business minded . They’ll listen to you . If you have a few more drivers who are experiencing the same inconvenience , more power to you to have an inconvenience changed and improved .

      In my situation , LOL , as explained above , I used a negative to manipulate it into a positive for my employer and one of his drivers by removing myself from having to deal with two clowns , the foreman and the carrier in a job I didn’t like , by communicating with upper management and appearing to do them a favor out of compassion , LOL !

      In my humble opinion ……….

  5. No mention of TQL in here is interesting. They may be in the best slot of all right now. Still private yet in the multiple billions of revenues. Will be interesting to watch them continue to move.

  6. The take away is 4 separate outcomes long and short term.
    Large capitalized brokers and their relative size competitors will attempt to position themselves over time to compete w/the digital brokers as CHR stated in their long term plans w/the investment in tech and the reduction in body count. The medium brokers will focus on niche customers that require attention to detail beyond what digital can offer and cash in while they can in the short term. Carriers w/a brokerage arm will grow their brokerage business as they have the assets to cover capacity during up cycles as well as dedicate assets if required by the shipper. Finally the brokers who refuse to adapt will be gone. It’s beyond me that their are are people responsible for running these businesses who make no effort to adapt or improve while the world is changing all around them. Just continue on in the same old ways.
    Either way it’s a race to the bottom and regardless of the tech invested these trucks will not drive themselves in my lifetime. The only way forward for truckers is a greater barrier of entry to reduce current capacity so that a carrier of any size can get a more reasonable return on their investment.

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