A year ago at this time, it was widely stated that trucking market conditions were booming due to heightened demand, tight capacity and a strong economy. Today, while it may not be operating at the same elevated levels, the market remains strong overall, even though rates have taken a step back, capacity has loosened and ongoing trade tensions have sent ripples throughout the economic outlook.
And while those boom times of 2018 may be in the rearview mirror for now, the truckload brokerage market remains a dynamic sector given the many technological advancements being applied within the sector. And to help Logistics Management readers keep pace with these market developments we’re joined by three prominent freight transportation and logistics experts.
This year’s Truckload Brokerage Roundtable participants include: Bruce Chan, vice president and senior analyst of global logistics equity research at Stifel Capital Markets; Ben Hartford, senior research analyst at Robert W. Baird & Co.; and Evan Armstrong, president of third-party logistics (3PL) provider advisory firm Armstrong and Associates Inc.
Three prominent freight transportation experts put this quickly evolving market into perspective in an effort to help shippers keep pace with one of the most dynamic sectors of logistics.
Logistics Management (LM): How would you best describe the current state of the truckload brokerage market?
Bruce Chan: I would say it’s cyclically softer. A looser capacity environment and difficult comps have driven significant year-on-year declines in spot pricing, putting pressure on the top line for the brokerage industry as whole. That pressure has been somewhat offset by lower capacity costs, the magnitude of which varies by individual strategy. Structurally, though, we believe the brokers are in good shape—at least the larger ones. The growing importance of technology favors outsourced solutions, especially from large, innovative providers.
Meanwhile, shipper attitudes are changing about the role of brokers in a capacity procurement strategy—partially as a result of the acute tightness in the market last year and partially because the marketing prowess of the digital disrupters continues to normalize the concept of brokered freight. I’ll add that structural shortages in the driver population means that the long tail of rolling asset capacity will continue to get bigger, as will the need for intermediaries to tap that capacity efficiently and effectively.
Evan Armstrong: After an extraordinary 2018 it’s not surprising that we have seen a less than stellar start to 2019. The comparable financial hurdles are daunting. For 2019, we anticipate lower double-digit net revenue growth for the non-asset-based domestic transportation management segment (DTM), which primarily consists of freight brokerage services.
In 2018, DTM led all other 3PL segments with overall gross revenue increasing a whopping 20.6% to $86.5 billion. DTM providers’ top-line revenues benefited from heavy port to warehouse and warehouse-to-warehouse moves, the strong domestic economy, rising carrier rates, increased fuel surcharge revenue, and continued outsourcing amongst shippers.
To find a better growth year, we had to go back to 2005, when the DTM segment had year-over-year growth of 21.2%. We anticipate that DTM’s will capitalize on the slight loosening in carrier capacity by increasing net revenues and corresponding gross profit margins.
Ben Hartford: I’ll add that the market is “normalizing” after a state of significant imbalance since the second half of 2017. A combination of factors, including elevated inventory levels after late 2018’s tariff-induced pull-forward and below-seasonal spring temperatures across the United States, have led to softer volume levels since early 2019. Supply has also been added to the market given robust pricing growth during 2018—all of which have conspired to create soft spot activity in 2019 and a return to a more balanced market. In fact, unless underlying demand conditions improve meaningfully in the next couple months, the pendulum likely continues to swing in favor of shippers as the industry progresses through 2019.
LM: While the truckload market may not be booming as it was a year ago, it’s still moving in the right direction. What’s driving growth in the market?
Armstrong: That’s correct. And while it has softened slightly in first quarter of 2019, trucking capacity is still tight. So, shippers are continuing to turn to DTMs for help finding carrier capacity. And even though this year has started off softer, it seems like pricing levels are beginning to stabilize and volumes should come back.
Hartford: Overall, consumer confidence measures remain near cycle-high levels, helped by cycle-low levels of unemployment. As a result, U.S. retail sales growth remains positive, which is supportive of freight volume growth. U.S. industrial production growth also remains positive.
However, both retail sales and industrial production growth rates have slowed from 2018 levels, and leading indicators—such as May’s PMI reading of 52.1, the lowest since October 2016—suggest further slowing in growth rates, particularly on the industrial/manufacturing side. Inventory levels are still elevated given the tariff-induced pull-forward during late 2018, which is expected to continue to mute freight volume growth into the second half of this year.
Chan: Despite fears of a broader economic recession, fundamental demand in the U.S. has held up, in our view. Consumer confidence remains healthy, unemployment is still low, and the economy is still expanding. Tough weather in the first quarter and inventory draw-down from pre-tariff shipping have had an adverse effect on freight volumes early this year, but these issues so far appear to be temporary.
LM: How has the truckload brokerage market reacted to ebbs and flows in truckload capacity and demand?
Chan: As information flows faster, as global markets become more connected, and as supply chains become increasingly complex, freight markets have become more volatile, in our view. In response, many brokers have and continue to turn to technology to better-manage the ebbs and flows of both capacity and demand through better data, better intelligence, and better visibility and predictability. Larger brokers are also looking to manage risk and volatility by diversifying their business across modes, customer types, and by adding a certain share of committed business to smooth profit streams.
Armstrong: The spot market is very efficient with supply and demand happening daily and hourly. In this current capacity softening, DTMs have benefited from higher than current market contracted rates that shippers negotiated last year while sourcing capacity in the spot market. This dynamic is boasting gross profit margins.
Hartford: Since early 2014, the brokerage market has been in a state of flux, which contrasts from the relatively “quiet” or balanced environment experienced in the early part of this cycle (2011-2013). The industry has reacted as it should. When market conditions tightened in 2014 and 2017-2018, brokerage margins compressed, but spot volume opportunities rose materially. As supply conditions eased in 2015-2016 and in 2019, brokerage margins expanded while spot volume opportunities diminished.
LM: What about the impact of current economic conditions? Is the apparent slide in capacity demand hindering brokerage activity?
Hartford: Economic conditions generally remain in expansionary territory, but growth rates are undoubtedly slowing. The slowing of demand growth and the incremental growth in supply is having a dampening effect on brokerage volumes in 2019, leading to more competitive pricing within the sector in an effort to maintain or grow volumes. Such a dynamic is normal behavior in a slower environment and is cyclical.
Chan: In a word, yes. But to elaborate, brokers typically perform best in exceptionally tight or exceptionally loose markets. In the former, they offer a significant value-add to shippers seeking out scarce capacity. In the latter, they offer a significant value-add to capacity providers seeking out scarce freight. In a more balanced market, though, it is said that freight has an easier time seeking capacity on its own.
The current market seems to be one that is closer to equilibrium. However, there’s a structural component to brokerage activity that supplements what would otherwise be cyclical market doldrums: significant volatility coupled with the rising complexity of contemporary multi-channel supply chains have highlighted the value-added nature of what many large brokers do.
LM: Emerging technologies and start-ups continue to pop up on the scene. Where do these elements stand and what are the main differences on that front now compared to a year ago?
Armstrong: It is imperative that DTMs develop a digitalization strategy. In addition to AI, TMS augmentations such as Parade, there are solid account management applications such as Winmore and back office automation tools such as HubTran. The real emphasis for freight brokers should be on determining an overall growth strategy and then identifying methods to digitalize your operations from account management through carrier settlement.
Hartford: The higher-profile start-ups such as Uber Freight and Convoy continue to focus on taking volume share and expanding its scale through its platforms. Little has changed on this front aside from Uber Freight’s parent company undergoing a public offering of its equity. We would expect continued efforts by investors to continue to fund similar start-ups, particularly as equity markets remain attractively valued and costs of capital remain relatively low.
Chan: Over the last couple of years, many of these emergent technologies, technology applications and startups have had a chance to decant. The market has an incrementally better idea about which technologies are more meaningful in the short-run, which are more meaningful in the long-run, and which may not be meaningful at all. In the meantime, customers, competitors and investors alike now have a better idea where to spend their dollars.
At the same time, many startups have had a chance to trial their solution in the marketplace and adapt their strategies. In many cases—and specifically in the brokerage and freight-matching arena—we believe these startups have realized that the core business may not be as simple to digitize and automate as initially believed. As a result, many have started to build out more traditional operational capabilities. But as a whole, they continue to push the envelope on innovation and fresh thinking and challenge the old guard—especially those incumbents that are inflexible and slow to adapt.
LM: How have regulations like the electronic logging device (ELD) mandate and the potential pending changes for HOS made an impact on market conditions in terms of capacity and pricing?
Hartford: In hindsight, the ELD mandate likely amplified the strength in spot market pricing during 2018, though it’s difficult to quantify to what degree, and that strength has allowed marginal carriers to remain in the market longer than they otherwise would have. Given the ongoing softness in spot pricing experienced thus far in 2019, we would expect increased exits in supply during the second half of 2019 and into 2020.
The looming regulatory changes could further tighten supply in 2020, though any relaxation in HOS could offset some of this potential tightening. What the net effect will be in 2020 to supply or pricing is not yet known; but as it stands today, expectations based on recent conversations reflect the likelihood of flat or negative contractual truckload and domestic intermodal pricing into 2020’s bid season even accounting for the potential changes to regulations.
Armstrong: It’s our estimate that the regulatory ELD mandate for carriers reduced total truckload capacity just over 3%. In terms of HOS or other regulations, any tightening of carrier capacity, which can be planned for, tends to increase the need of shippers to work with DTMs and increases 3PL demand.
LM: What practical advice can you offer shippers in terms of how to best manage their relationships with TL brokerages?
Chan: Shippers are well advised to treat their transportation service providers as partners instead of adversaries. For one thing, as 2018 showed us, capacity relationships of any kind are more important now than ever. Supply chains should not just be seen as cost centers to be managed down, but as an important part of an overall competitive strategy, in our view. Many medium-sized and even some large shippers assume that brokerage is a dirty word, thinking that a “middle man” has to take margin from somewhere. However, strategic use of brokers can often have a positive impact on a shipper’s overall freight spend.
Hartford: Despite the intense focus in recent years on the accelerating pace of change and investment in technology in logistics, the industry remains a people business. So balance your organization’s alignment with partners that are both technologically innovative and proven providers of service and execution, particularly in times of volatility. One without the other can lead to meaningful supply chain disruptions throughout various points of the cycle and be harmful to operating budgets.
Armstrong: I suggest that shippers take an internal control tower approach to managing their supply chains for carrier and 3PL procurement, visibility and service quality monitoring. Concentrate spend with one or two brokers along with your core carriers within a region, monitor performance and reward and penalize providers as needed. Act as a partner, be fair and expect operational excellence.
LM: Where do you see the market in five years?
Hartford: We think the term “evolution” as opposed to “revolution” is more appropriate when describing how the market develops over the next half decade. We expect the trends of enhanced visibility and automation to widen the separation between the innovators in the logistics space and those that will stand to lose share.
We likely see gross margins on a per-transaction basis continue to fall as a result of increased visibility and automation, which the innovators (both start-ups and certain incumbents) absorb in the form of increased volume share and improved operational efficiency. In short, we see a more digital brokerage arena, with fewer but larger providers.
Armstrong: We anticipate the DTM 3PL market segment to grow to $146 billion in 2023. At that level, these brokers will have penetrated 25% of the total potential market driving increased competition and industry consolidation. Those DTMs that digitalize operations and adapt new technologies will be more profitable and better able to meet customer service performance requirements.
Chan: In five years, we believe the freight brokerage market will be larger and more consolidated than it is now. Technology, breadth and capability are more important now than ever, and we believe that fact will drive shippers to seek out third-party help, especially from the largest, best-technologized and most capable providers.
LM: How should the overall market—shippers, carriers and 3PLs—view the arrival of Amazon into the market as a truckload brokerage?
Armstrong: They should think of it as a shipper who takes its internal carrier procurement operation to market as a DTM. Like other DTMs, Amazon will have to digitalize and perform for customers just like every other 3PL.
Chan: In our view, Amazon is focused first on its core product. It will continue to get bigger in truck brokerage and other facets of transportation and logistics in order to support its growing needs and in order to drive greater cost savings and efficiency. However, we believe Amazon’s aspirations are not to compete toe-to-toe with for-hire players.
For one thing, it can probably find a better ROI in other parts of its business, and for another, it does not offer a vendor-neutral solution, which may deter a significant portion of potential freight customers. Instead, Amazon will likely continue to insource base load capacity, backfilling density with third-party volume where possible or logical.
To date, most of its expansion in the logistics realm has been achieved organically or through vendor-customer relationships—but we don’t discount the possibility that it acquires into the space to build scale and operational expertise more quickly.
Hartford: I think the market should view Amazon’s arrival as a natural evolution of its model and the broader changes to supply chain management as a result of B2C’s continued development. Jeff Bezos was visionary in his understanding of the revolutionary impact that technology would have as it relates to how commerce would be conducted.
Amazon’s recent logistics developments—whether we’re referring to domestic U.S. freight brokerage or international freight forwarding capabilities, the creation of Prime Air or its Delivery Service Partner model—have been high profile, but consistent with its logistics strategy that has been in place for the past 20 years, when Amazon recognized that logistics should be treated as a core competency.
Other retail models in prior cycles have similarly utilized scale to gain competitive advantages—Walmart in the 1980s and 1990s comes to mind. So, treat Amazon’s logistics ambitions as instructive. Innovation is a necessity, but the logistics market is large, fragmented and inefficient, which creates opportunities for incumbent providers despite Amazon’s continued focus on developing its own capabilities.