Is Convoy’s Closure the Beginning of Brokerage Meltdown?

While news of the shuttering of Seattle-based digital freight network Convoy reverberated throughout industry circles last week, it raised the question of if there is another shoe to drop, in the form of another well-capitalized player, or players, potentially exiting the industry, too.

It is a fair question, especially when considering the current state of the trucking market, and the freight market, by extension, given the ongoing narrative of a freight recession being driven by various factors, including high interest rates; high credit card balances; inflation; lower consumer demand; and high gasoline prices, among others.

These, of course, are not the sole reasons as to why Convoy closed up shop, but, at the same time, they clearly factor into the lower freight volumes being seen over the last several months.

Buying volume

An industry stakeholder told Logistics Management that something to consider when looking at the financial viability of brokerages comes down to how many of them, whether they are digital or not, are trying to buy volume.

“They’re consciously exacting a strategy that has them selling to shippers at below market rates,” he explained. “No one can exert buying power in a fragmented market, so they are still paying the market when they cover it, and they are not making any money. That’s fine when the market is working in your favor. But when the market flips out of your favor and you can’t go to the tap to get more money from your capital markets, that is when things go south.”

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And with the market essentially flipping out of favor, he observed that it diminishes the $3.8 billion valuation Convoy had as of April 2022 when it announced $260 million worth of new funding, including a $160 million Series E preferred equity round led by Baillie Gifford and funds and accounts advised by T. Rowe Price Associates, Inc., a $100 million venture-debt investment from Hercules Capital, Inc.; and a new $150 million line of credit. The company said it was valued at $3.8 billion at that time. 

“They are valued at $3.8B on paper,” he said. “There is always a little asterisk that you really have to squint to read that says if they can get their next funding round, they’re valued at $3.8 billion.”

Nowhere to cut

While most brokerages can survive on low margins and high volume, he said the problem is when they get low margins and low volumes, they can’t cut their costs. What’s more, he said that the technology-enabled ones like Convoy cannot cut the cost base fast enough because they are not using recent college graduates that are “smiling and dialing.” Instead, they are utilizing multimillion dollar software systems and software engineers.

When asked if more industry exits are on the horizon for brokerages, he said it is likely to continue.

“The question then becomes: do we see broad consolidation? Or do we see the market kind of struggle?” he said. “Because I think there will probably be at least one other bigger digital broker that ends up getting bought or chopped up or something like that.”

More closures to come

That is certainly not out of the question, considering that, according to TruckInfo.net, FMCSA data cited more than 1,500 freight brokers have closed their doors in 2023, leading the firm to state that the contraction of the freight broker market in 2023 could be a foreboding sign of an economic downturn.

“While most of the economy suffered during the [pandemic], the freight market experienced a boon,” said TruckInfo.net. “Many expected the industry to cool off in the following years, but it’s the first time in the data provided by the FMCSA that more freight brokers have gone out of business than opened shop. The alarming trend of broker closures may not end here. If the industry returns to pre-COVID-19 levels, we could see thousands more freight brokers shutting down in the coming year or two.”

Evan Armstrong, CEO of Milwaukee-based supply chain consultancy Armstrong & Associates, said that with the freight recession, those 3PL models that emphasize spot-market versus contractual shipper business have seen the largest declines in business.

“Even digital freight brokers such as Convoy with leading tech are not immune from the overall spot-market declines in rates and volumes,” he told LM. “It has been looking for additional funding/investment, but with high interest rates, a lot of financial investors are on the sidelines.”