Uber Freight, the digital freight brokerage division of Uber Technologies Inc. (NYSE: UBER), announced Sept. 9 that it is moving its global headquarters to Chicago from San Francisco. Uber Freight will maintain offices in San Francisco and Amsterdam.
Last month, the Chicago Tribune reported that Uber would be the anchor tenant in the newly redeveloped Old Main Post Office after the company signed a 10-year lease for approximately 450,000 square feet. Construction on Uber’s space will begin in the spring of 2020; Walgreens will be another large tenant, housing about 1,800 employees in 220,000 square feet.
While Uber is consolidating its Chicagoland personnel across its rideshare, Eats and Freight businesses in the new office, the majority of the space will be dedicated to Uber Freight. Morgan Stanley equities analyst Brian Nowak, who attended Uber Freight’s Deliver shipper conference last week, wrote in an investor note that Uber Freight has 1,100 employees. While that is only 4% of Uber’s workforce of 27,000 employees, it represents remarkable growth for a freight brokerage founded 28 months ago.
An Uber spokesperson said that the company would hire 2,000 people in Chicago in the next three years, with the majority being dedicated to Uber Freight. Operations teams will manage both domestic and international moves from the Chicago headquarters.
“Trucking represents an enormous opportunity for Uber, and this milestone is a testament to our long-term commitment to our Freight business,” said Dara Khosrowshahi, chief executive officer of Uber, in a statement. “Chicago is the heart of America’s transportation and logistics industry, and there is no better place to open our dedicated Freight HQ. Uber has long recognized the incredible history, innovation and talent that Chicago has to offer, and we’re excited about the thousands of new jobs our Freight business will help bring as we become one of the city’s largest technology employers.”
Indeed, Chicago is at the center of the transportation industry, especially freight brokerage. The city has a rich history and culture of freight brokerage going back to Hub Group (NASDAQ: HUBG), founded in 1971, and American Backhaulers, founded in 1983. The subsequent history of the Chicago freight brokerage industry is a complex web of family connections and mergers and acquisitions that spawned new generations of brokerages.
Young brokerages like Redwood, MoLo, Forager, CoLane, Arrive and Edge have direct connections to their predecessors, which also include Coyote, Echo and Command. In fact, Bill Driegert, the co-founder of Uber Freight, served as Coyote’s chief innovation officer for nearly eight years. And as Uber Freight grew its presence in Chicago, it hired veterans from Coyote and other established brokerages.
In our view, Uber Freight’s move to Chicago is significant for two reasons. First, Uber is making a long-term commitment to growing its digital freight brokerage business. Second, Uber has realized that it will need the expertise of a large number of logistics professionals in order to manage its increasingly complicated operations, which have expanded to Europe and may soon include flatbed.
We knew that Uber was continuing to seek revenue growth through the Freight business based on the company’s second-quarter results. From the third quarter of 2018 through the first quarter of 2019, it looked like Uber Freight’s adjusted net revenue (ANR), which is more akin to what the freight brokerage industry calls ‘gross revenue’, had begun to plateau. The “Other Bets” segment that includes Uber Freight and Uber’s bike and scooter business recorded ANR of $125 million, $137 million and $145 million in Q3 2018, Q4 2018 and Q1 2019, respectively, which is single-digit sequential growth. But in the second quarter of 2019, Other Bets ANR jumped to $195 million, an impressive 34.4% sequential growth rate.
Uber Freight’s new headquarters and its plan to roughly double headcount in the next three years means that Freight will remain Uber’s fastest-growing division. By the time the new headquarters is staffed up, Uber Freight should be a multibillion dollar business.
Just as importantly, Uber Freight seems to have realized where that growth will come from over the next few years: Chicago’s deep bench of freight brokerage talent, which is available at a scale that is unique in North America. Official statements characterized Chicago as a “tech hub,” but while that may be true to a certain extent, it is not the case that more high-end tech workers are available in Chicago than San Francisco. What Chicago has to offer is an army of freight brokers who can grind on a floor and generations of leaders who have rapidly scaled logistics businesses.
In our view, by moving from San Francisco to Chicago, Uber Freight is embracing its destiny as a serious, technically sophisticated logistics company. The move accords with our thesis that digital freight brokerages will grow to resemble traditional brokerages more closely by finding ways to use people to create value for their customers.
One way that digital freight brokerages could converge toward traditional brokerage is through their business models. Morgan Stanley analyst Brian Nowak noted that at the Deliver summit, Uber Freight management signaled that at maturity, the brokerage will try to achieve gross margins approaching the industry standard of ~15-20 percent, rather than the eight percent that Nowak had previously baked into his model. Gross margins at that level won’t allow Uber Freight to significantly undercut traditional brokerages on prices quoted to shippers. Instead, Uber Freight will have to add value with a higher EBITDA conversion rate, presumably on the back of its technology.
Convoy’s Innovation Labs, comprised of teams of supply chain consultants who collaborate with customers on bespoke logistics solutions, are another example of the trend in digital brokerage toward human expertise. At the same time, traditional freight brokerages are increasingly digital, especially as a host of inexpensive, cloud-based tools (Parade is one example) has entered the market and promised to make voice brokers more efficient.
“Since the beginning, the team at Uber Freight has been made up of the best and brightest minds in technology and logistics, with major talent hubs in San Francisco and Chicago,” said Lior Ron, head of Uber Freight, in a statement. “We are thrilled to deepen our investment in Chicago, which is known for its logistics expertise. We are excited to bring on board thousands of team members to help build the future of logistics together with our growing list of customers and to support the massive growth trajectory we see for Uber Freight in this industry.”