We’ve seen mergers of brokers and acquisitions by third-partly logistics providers (3PLs) indicating that this is a market with room for margin exploitation.
By Peter Moore
July 07, 2017
There are conflicting visions for the future of freight brokers here in the U.S. market. We’ve seen mergers of brokers and acquisitions by third-partly logistics providers (3PLs) indicating that this is a market with room for margin exploitation. With this in mind, what follows is a quick SWOT (strengths, weaknesses, opportunities and threats) analysis of the domestic freight brokers market to help shippers level the field.
Under strengths, there are traditionally high margins, and of course the demographic realities of baby-boom managers retiring and leaving gaps in expertise inside logistics operations. To meet this need, brokers are willing to invest in the technology that makes the ordering of several modes—particularly less-than-truckload (LTL) and truckload (TL)—easy for non-logistics workers to execute orders.
The business has grown steadily, with lower margin 3PLs snapping up higher margin brokerages to improve their bottom line, while offering shippers more one-stop shopping options. For shippers, this can be advantageous as larger, diversified service providers aggressively seek their business.
However, under weaknesses are the low legal and financial barriers to entry into brokerage and a multitude of software-based firms eyeing any higher margin businesses. Where high margin businesses exist, application firms are working to substitute an app for a formerly expert-dependent service.
These new apps—and in the near future self-driving vehicles—are pushing into the multi-billion dollar freight market and are expected to displace human dispatchers and various forms of “load boards” that characterize the brokerage market today. In the meantime, the other key weakness remains the trust factor. Shippers know that brokers are marking up the freight and are suspicious of the brokers taking too much of the margin. Low transparency continues to foster this perception.
Under opportunities, there’s the consolidation and integration with 3PLs. These firms can do much more than just move your LTL and TL freight. In fact, they can manage the shipper’s entire portfolio of domestic and international freight, while more sophisticated sales techniques focus on data collection and business problem solving rather than simply “covering the load.” Third-party logistics providers are growing at double-digit rates in part because of the “brain drain” and the need for investment in technology inside shipper operations.
The threats? Well, as indicated under weaknesses, there’s technology, but also process changes. New freight technology and a global shift to collaborative models means shippers can deal directly with carriers, even in complex transactions, through their transportation management system and the cloud. But more importantly, there’s the nature of contracts that brokerages usually seek, whether alone or as a part of a 3PL.
The traditional broker (and carrier) approach has been to freeze the shipper at a price level and allow the broker/carrier to be creative for their own margin making. For shippers, a poorly constructed deal can often result in a growing distrust. Eventually your customer learns that the discount you offer is only a portion of the discount you’re able to leverage with their volume.
The reaction often finds shippers insisting on non-exclusivity to reduce perceived risks or to be able to price shop directly with the carrier market. Classic “sign here; trust me” contracts reduce a shipper’s ability to respond to the new technology-based platforms (software and service) coming out of “silicon valley” that represent the new breed of intermediaries.
I recommend long-term shipper/3PL relationships; however, those relationships need to put a premium on transparency, pricing innovation and margin sharing—three things that freight brokers have historically found particularly distasteful.
The business model for brokerage is arbitrage, or the buying a reselling of services. So, this assumes that you can keep the real cost a secret and sell convenience to the customer at a premium.
My prediction is that, in a very short time, everyone will see costs and margins through instant market analysis, and they’ll be able to act on that information without high levels of logistics training. Those who cannot innovate on behalf of this new breed of shipper will be out in the cold.
About the author
Peter Moore is Adjunct Professor of Supply Chain at Georgia College EMBA Program, Program Faculty at the Center for Executive Education at the University of Tennessee, and Adjunct Professor at the University of South Carolina Beaufort. Peter writes from his home in Hilton Head Island, S.C., and can be reached at [email protected]