Logistics Management Group News Editor Jeff Berman recently spoke with Doug Waggoner, CEO of Echo Global Logistics. Topics covered include the state the of the freight economy, regulations, and the digital freight marketplace, among others. A transcript of their conversation is below.
LM: How would you describe how things are going on a year-to-date basis, as they relate to the state of the freight economy?
Doug Waggoner: Normally, January and February are the worst months of the year from a seasonal standpoint, but, ironically, in 2018, they were two of the best months of the year. In fact, we saw prices and volumes at all-time highs…whether that was due to the ELD (electronic logging devices) mandate or a hangover from the hurricanes we had in October 2017, it created a bit of a perfect storm in January and February. It makes for tough annual comp, and you also had prices that had gone up 20%-to-30%. So, I think we saw in the fourth quarter, I think, were prices coming down somewhat.
LM: Where does that leave things now?
Waggoner: We have gone through a period of peak conditions with tight capacity a shortage of drivers and trucks, and elevated pricing to a market that is in equilibrium in the economy. Relative to the very peak conditions we had last year, we don’t have those anymore. The economy is strong. But I think there are a couple of other factors playing into it. One is that I think the trucking sector added capacity, and we believe that capacity came from the smaller truckers. In fact…there was anecdotal evidence showing there were some smaller carriers adding capacity, so we got curious and went out and did a fourth quarter 2018 survey of 6,500 trucking companies that had 40 trucks or less, with the replying carriers (around 8000 saying that, on average, they added around 11% in capacity annually. Whereas the big asset-based truckers held the line on capacity and were having issues finding drivers, and the trucks they were buying were most likely for replacement. It was the small truckers that excited about the elevated rates and pricing and went out and bought more trucks. If every person that owns ten trucks goes out and buys one or two more, that is a 15% of market capacity and a big thing. Part of what we are feeling now is more equilibrium in the market, because I think supply came into the market and demand ha been relatively constant and we are back to more traditional seasonality.
LM: Looking at pricing, can you address how things have been on the spot market?
Waggoner: In the fourth quarter, pricing came down and it is now stabilized. I think there is less spot freight now so people, whether they are an asset-based broker or trucker, have to rethink their strategies on contractual business. That is kind of what we do, in that we have to ebb and flow in the market just like truckers do and you have to have a strategy for whether you are going to have more contractual freight or more spot freight and you make adjustments.
LM: Are you seeing any notable shifts, in regards to your customers, even though this time of year may not be viewed as seasonal or urgent, to a degree?
Waggoner: I think it varies by shipper depending on where they are in their RFP process. In other words, what was the timing of their last increase and where in the cycle did it fall, when rates were going up or coming down…and in the last renewal in their routing guide and what is the market like today relative to that point in time? In some cases you see them getting increases and decreases in some other cases. We all tend to generalize and say ‘rates are going to increase by 4% this year,’ but this is a kind of a gross oversimplification, as it is 4% but compared to what?
LM: How is the current state of inventories impacting logistics and supply chain operations?
Waggoner: The whole concept of this inventory pull-forward, due to tariff-related concerns, is hard or us to put our finger on. But I believe it is a bigger thing than people are aware of…and in Q4 and maybe in Q1 caused a little bit of an air pocket, where people pulled inventory ahead of schedule and then built up their domestic inventories in order to potentially avoid some increased tariffs. That kind of disrupts the orderly flow of goods, and when you do that it creates surges and what I call these air pockets.
LM: There has been a lot of made of the last-mile logistics market, as it relates to bulky and heavier items. What is your take on what is going on there?
Waggoner: That is not a market we are in today, but in looking at secular trends every retailer in the world is looking at ways of trying to compete better with Amazon. And when you think about the service levels Amazon promises to its customers, think about their mission statement, which says it strives for the best customer service on the planet. It is pretty aspirational, but I think they work pretty hard to achieve it. Their supply chain and distribution model and efforts to remove supply chain costs creates a huge challenge for brick and mortar retailers. It is forcing them to go into omnichannel strategies that will typically entail some sort of last mile solution. Echo does some last mile today but not for heavier goods. It is a legitimate market that is interesting to me and is certainly on our radar.
LM: With the new NAFTA, USMCA, yet to be signed into law, how do you view cross-border logistics?
Waggoner: It is an important market for U.S. shippers and transportation service providers. We have some presence in it and would like to have a bigger one, to the extent that any renegotiation of NAFTA creates more freight flows is something that is good for us.
LM: How do you assess the current state of digital freight matching, as there are several new and emerging players, coupled with the well-established and larger players like Echo that have been at it for a while?
Waggoner: I’d like to think that Echo, along with a couple other companies, was one of the first digital freight marketplaces. There are a few large competitors in our space, and I think all of us have been investing in technology for a long time. We built a lot of scale, and scale matters in this business…the same goes for lane density. And we have big IT and data science budgets. Everyone is enamored with these new start-ups and that is fine, we were once a start-up, too. But to get overly enamored with that and think that some of the big companies in our space are not applying massive amounts of technology and data science to an existing marketplace that has tens of thousands of participants is a gross oversimplification. Here is the problem with ‘build it and they will come’: it is a very big and fragmented space, with hundreds of thousands of shippers and carriers. No one company is going to capture and become the de facto market standard. In our case, we have 35,000 shippers and 50,000 carriers, and that only reflects a portion of the market. With the 35,000 shippers, they are using multiple [forms of] transportation partners and all of the 50,000 carriers are hauling freight for multiple shippers….it is just not feasible that someone is going to create a slick mobile app and website and have everyone come running to them.
LM: What about the importance of strong business relationships?
Waggoner: In our business, relationships matter, and having a relationship with a shipper and solving their problems and coming through for them when they are in a pinch matters. The same thing happens for trucking companies. We think the success of our model and other companies like us is, in part, due to the people component of our model and the relationships we built, and the service and solutions we provide. But, at the same time, because of the critical scale we have with size and density, and we have a lot of freight, relationships, and negotiating power and buying power lets us make that much more efficient. We can take a person moving 15 loads today to moving 75 loads per day in the future. I am really comfortable where we are and am not just speaking for Echo but also for a number of reputable companies in our space, whether are they asset-based or non asset-based. There are so many shippers out there that there is probably room for us and room for newcomers. We can all grow because the market grows.
LM: How do you view the current state of ELD, in terms of the impact it has had on the trucking market since having gone into effect?
Waggoner: I think the initial shock it created has been absorbed. And by that I mean trucking companies learned how to adjust their trips or the lanes they were interested in or maybe the pricing in the lanes they were hauling so they can account for some of the destruction that ELD caused. Rising prices last year caused a lot of shippers and receivers to make themselves more efficient so they were not delaying truckers because ultimately they would have to pay for that. There was a lot of talk about being a shipper of choice, and the people delaying the drivers were being hit with pretty big rate increases. One last part, though, has to do with AOBRDs. There was a certain type of equipment that was grandfathered in the automatic on-board recording device, and I have heard those devices have to be converted to ELD by December 2019. What is unknown is how many of them are in the market and will it have a similar impact like ELD did when it first became law.