2018 Truckload Brokerage Roundtable: Game On

No matter who you talk to about the trucking market, one thing is very clear: market conditions just may be the best that they’ve ever been. There are a host of reasons for this, including strong demand, tight capacity and a growing economy.

What’s more, the truckload brokerage market, a segment that continues to see rapid gains in technology adoption and has a longstanding presence in securing needed capacity for shippers, is on a smooth road to profitability—and is certainly reaping the benefits of current market conditions.

How long can these good times last for brokers and the overall trucking market? To help Logistics Management readers gain a better understanding of market dynamics we’re joined by three prominent freight transportation and logistics experts.

Our 2018 roundtable participants include Bruce Chan, vice president and senior analyst of global logistics equity research, 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.

LM: How would you best describe the current state of the truckload brokerage market?

Bruce Chan: In a word: dynamic. Brokers tend to do best in a market with some degree of capacity dislocation, whether it be very loose capacity (where they are a resource to the carrier), or very tight capacity (where they are a resource to the shipper). As most readers know, we’re facing an unprecedented tightness in domestic trucking capacity, which, in our view, is structural.

The means there is no easy, fast or obvious solution on the horizon. So, despite some gross margin squeeze from rising capacity costs, truck brokers with relationships and access to what’s otherwise diffuse and fragmented capacity are seeing significant demands for their services.

At the same time, there’s no ignoring the rising importance of digitization and technology, which has created a rush of investment among incumbent players and new entrants alike. Whatever your view on the viability of the digital brokerage model, there’s little question that technology has and will continue to be an important differentiator.

Ben Hartford: Demand continues to exceed supply—as it has since the third quarter of 2017—with spot rates up over 20% year-over-year. This imbalance creates meaningful spot opportunities at healthy gross margins for brokers, as shippers seek help moving uncovered loads.

At the same time, incumbent contractual business is facing gross margin compression, as the cost of hiring capacity has well outstripped agreed-upon prices from customers. While brokers are walking a line between yield opportunities in the spot market and yield compression among contractual business, the market’s dynamism provides brokers the opportunity to demonstrate value to shippers that was absent in the more balanced market conditions earlier this decade.

LM: What’s driving growth in the market?

Evan Armstrong: Tight truck capacity and increasing truckload carrier rates are driving overall growth in the domestic transportation management third-party logistics segment. Domestic transportation management gross revenues increased 16% over 2016 to $71.7 billion, and net revenues were up 6.4% to $10.9 billion.

The difference in growth rates reflect some gross profit margin compression due to quickly tightening truckload capacity in the third and fourth quarter of 2017, requiring brokers to pay rate increases to carriers faster than they can negotiate increases with shippers.

Hartford: Indeed, and keep in mind that supply constraints have played the dominant role, in our view, in driving the market’s imbalance since July 2017. The weakness in freight rates beginning mid-2015 and extending through 2017’s bid season led to extended weakness in Class 8 truck orders, drawing down future supply.

The implementation of the ELD mandate in December 2017 added another layer of supply restrictions. A tight overall U.S. labor market in early 2018 has compounded the much discussed shortage in driver availability.

The storm-related activity in August/September 2017 added an acute disruption to supply as well. And lastly, economic growth has finally emerged this cycle, with industrial end-market and consumer/business confidence readings reaching cycle-highs in early 2018. Added together, the rate of growth in both spot and contractual pricing into 2018 has truly been “one for the ages.”

Chan: Despite headlines and economic concerns over rising fuel costs dampening discretionary spending, structural debt issues, potential trade wars, interest rate sensitivity and geopolitical uncertainty, the fundamental freight demand indicators are very healthy.

Demand remains robust across most facets of the economy and across most geographies with a consistency that hasn’t been seen in a long time. Meanwhile, trucking supply is constrained. Large carriers can buy new trucks and utilize equipment more effectively, but they can’t augment capacity meaningfully without drivers to seat the trucks.

Moreover, it’s the small fleets that make up the vast majority of the industry. Keep in mind that companies with 10 or fewer trucks control approximately 90% of the market—and one of the most efficient ways to access these small companies is through truck brokers.

LM: What are the biggest changes or advancements that you’ve seen in the last five years?

Hartford: Shippers’ growing emphasis on broad supply chain visibility is among the most notable changes in the brokerage industry over the last five years. New technological capabilities—including the emergence of APIs and blockchain—have underscored the ongoing transition of brokers’ valueadded capabilities from simple load procurement to broader supply chain applications.

With this evolution, the industry has seen brokers broaden the scope of their service offerings while developing TMS platforms that serve to deepen their penetration and collaboration with shippers. The adoption of mobile devices has also led to a broadening of focus among brokers from desktops to include mobile apps.

Given the above changes in technology applications coupled with the industry’s attractive return on invested capital characteristics, the industry has attracted new entrants focused on “disrupting” incumbent brokers and agents.

Chan: The evolution of e-commerce would have to be up there as well. For a long time, transportation and logistics was a cost center—an expense line only to be managed and minimized. But the advent of e-commerce has caused a lot of shippers to rethink logistics and supply chain as a competitive tool, and it’s driven significant investments in software
and visibility, outsourcing, modal shift, inventory strategies and much more. And I think there’s still a lot more to come.

Armstrong: Bruce and Ben are both right on. I would add that technological innovation is changing domestic transportation management operations. We’ve seen optical character recognition coupled with applications such as HubTran utilizing machine learning to streamline back office document gathering processes, eliminating significant amounts of data entry.

Visibility tools such as project44, FourKites, and MacroPoint, and proprietary applications developed by third party providers such as C.H. Robinson, Coyote, and TQL are reducing
the need for manual check calls and the corresponding data entry. TMS applications such as MercuryGate are continually adding functionality and improving on the user experience.

We’re also anticipating disruptive changes on the horizon from thirdparty providers adapting artificial intelligence (AI) over the next five years into core TMS functions automating
carrier capacity tracking, shipper load requests, and load/carrier matching.

LM: How has the truckload brokerage market reacted to ebbs and flows in truckload capacity and demand?

Chan: As mentioned earlier, brokers a highly fragmented carrier community via the brokers to find trucks.

Armstrong: We’ve progressed to a point where approximately 50% of carrier capacity pricing is being determined daily in the spot market, while most domestic transportation management pricing with large shippers is still under annual rate agreements, or tied to historical lane pricing. If you have spot pricing on both the shipper and carrier side, the market is very efficient, and carrier price changes can be easily translated into market-driven shipper pricing.

Hartford: While the manner in which brokers interact with shippers and carriers is evolving given the technological changes, the basic characteristics of the ebb and flow of the
cyclical elements to truckload demand and supply remain very similar. The market dynamism that has developed since mid-2017 has compressed yields on committed business while presenting spot volume opportunity.

As capacity enters in response to robust industry pricing growth, this will likely inevitably result in a normalizing of the current supply/demand imbalance, which will reduce spot volume opportunities but likely create opportunities for gross margin expansion among brokers.

LM: What about the impact of current economic conditions?

Armstrong: The bottom line is that the economy is still very strong, and barring any escalation in trade wars, or drastic regulatory changes, we anticipate solid growth over the next five years.

Hartford: Evan is right. We keep a very close eye on the key economic indicators, and they have reached cycle-highs in recent months reflective of accelerating economic growth since mid-2017. The addition of growth in aggregate demand exacerbates what had been a cyclical drawdown in supply resulting from the challenging 2015- 2016 economic conditions, amplifying the current supply/demand imbalance.

Consensus growth forecasts for U.S. GDP and U.S. industrial production reflect healthy growth for 2018, but forecasts also reflect decelerating growth in 2019, likely owing to tightening financial conditions, recent strength in the U.S. dollar, and incremental risk from uncertainty surrounding U.S. trade policy.

LM: Emerging technologies and start-ups continue to pop up on the scene. Where do these elements stand?

Hartford: Given the accelerating pace of change in technology coupled with the industry’s attractive return on invested capital characteristics, the industry has attracted new entrants focused on “disrupting” incumbent brokers and agents. However, incumbent brokers aren’t standing still in the face of these changes.

Concepts including freight automation, machine learning, AI and real-time supply chain visibility present meaningful opportunity for the logistics industry to continue to penetrate the broader freight transportation market through the innovation and introduction of new, value-added service to customers.

We expect this accelerating pace of technological change to drive consolidation within the freight brokerage space, with share migrating to models proactive in adopting new technologies that both satisfy evolving customer preferences as well as improve internal operational efficiencies.

Chan: Scale and capabilities are important in truck brokerage. There are a lot of emerging companies with some innovative technology or a slick app. But to really be a viable player, many of these companies will need to develop more than just one facet of technology. And in order to really attract shippers, they will need to build sufficient density in their carrier bases.

In our view, there are only a couple of contenders right now that fit that bill. That’s not to downplay the strategic importance of technology going forward, but there are a lot of
large players that have the resources to buy or build rather quickly—and many of them have already done so.

Armstrong: Those are great points. I will point out that digital freight matching companies such as Convoy, Transfix and Uber Freight have done a good job securing funding
(over $420 million in the U.S. alone) and are generating buzz. While operationally they are small to midsized companies wrapped in proprietary technology, some may grow into
market leadership positions.

LM: How has the ELD mandate made an impact on market conditions in terms of things like capacity and pricing?

Chan: There has been a lot of debate about whether the significant capacity tightness in the market is a result of the ELD mandate or some combination of other factors. However, the two ELD implementations certainly didn’t loosen capacity, and the same is generally true of most of the other regulations coming down the pike.

I think there have been and will be some interesting side effects of ELDs, though. For one, the amount of headlines around the mandate really helped to draw shippers’ attention to the capacity crisis and the need for higher pricing. Second, ELDs provide a wealth of data that’s already helping industry players to identify bottlenecks and find more efficiency,
so ELDs are not all bad news for capacity over the long run.

Hartford: Public safety remains paramount, which by and large the regulatory changes over the last 10 years to 15 years have been aimed at improving. The ELD mandate has garnered a significant amount of attention and interest, but it’s an iterative enforcement procedure of existing hours-of-service regulations regarding a CDL driver’s available drive time.

On the margin, the enforcement of the ELD mandate since late December 2017 appears to have tightened the market for available supply, but we believe the dominant driver of the current market imbalance is attributable to the cyclical reduction in supply following the challenging 2015-2016 freight market along with the recent acceleration in economic growth.

LM: What practical advice can you offer shippers in terms of how to best manage their relationships with TL brokerages?

Armstrong: We suggest developing an overall supply chain strategy to determine which functions will be performed in-house and which will be outsourced. If transportation management is a function to be outsourced, determine if it makes sense to enlist a lead logistics provider (LLP) in a managed transportation role and allow them to manage carriers, or non-asset transportation managers based upon your service requirements.

If an LLP approach isn’t desired, then these roles should continue to be managed internally. If managed internally, the transportation administration function should act as an internal lead logistics provider securing agreements with asset and non-asset transportation providers, establishing key performance indicators to service levels.

It should also be proactive in driving continuous improvement activities to reduce costs and improve service performance. Done right, this may require a significant investment in personnel and systems.

Hartford: While much of the discussion around the brokerage industry in recent years has centered on the threat and likelihood of disruption given the accelerating pace of technological change, freight brokerage remains a “relationship” business. Trust and collaboration are two offshoots of this dynamic.

Technological advancements, changing regulations, uncertainty regarding end-market demand: these variables underscore the value that proactive brokers can bring to shippers, particularly in this period of market volatility.

Chan: Agreed, and in this sense, brokers are like other capacity providers. Honoring commitments, providing visibility where available, and generally treating them as partners is advisable. Remember that ultimately, the broker has two customers: the shipper and the carrier. So, doing you part to reduce friction with the carrier is also helpful.

LM: Where do you see the market in five years?

Chan: In that time we expect technology to play a much greater role in how the business is conducted, which is not to say that digital startups will supplant the incumbent brokers. There will likely be one or a few new brokers that emerge and take share rapidly, and there will likely be a few among the existing pool of incumbents that separate themselves from the pack. Either way, we believe the intelligent and effective use of technology will be a significant factor in the success of both of these groups.

Armstrong: We expect to see the U.S. domestic transportation management market segment grow to over $115 billion by 2022. A lot of the growth will be from continued outsourcing with companies harnessing a third party to reduce costs and improve transportation performance.

Innovation will play a key role in decreasing the cost of using third parties, while maintaining requisite profit levels within those providers. Artificial intelligence could be the great enabler, driving significant process automation along the way.

Hartford: The industry is experiencing a transition arguably as great as that undertaken during the deregulation period in the early 1980s. Any period of truly transformational change presents risk along with opportunity.

We expect digital technologies to continue to be integrated into freight brokerage transactions, resulting in improved supply chain visibility and lower transaction costs for shippers as well as improved operational efficiencies and share gain potential for brokers. The net result is most likely a consolidating U.S. freight brokerage market, and a market that continues to expand as new, value-added services are introduced to serve customers managing increasingly complex supply chains.