Contract rates for trucking are still sliding while spot rates are flat to up, compressing freight brokerages’ gross margins. In a challenging freight environment for third-party logistics providers (3PLs) like the current market, brokerages that want to grow must figure out how to free up working capital.
Commentary from the management at publicly-traded 3PLs confirms that tough conditions are expected to persist through the near-term.
“We believe that CHRW is expecting the current challenging truckload and brokerage market conditions to persist for several more quarters,” wrote UBS analyst Tom Wadewitz in a September 10 investor note. “While CHRW’s truckload brokerage business performs well in the first several quarters of a softer freight market, falling contract rates eventually become a source of pressure on GM% and net revenue performance in NAST.”
Freight brokerages have different books of business with varying mixtures of contract and spot revenue, but most of the industry is facing slimmer margins on lower revenues per load. While brokers’ share of the total truckload market is growing, we believe that margin compression is a secular trend.
Despite those business conditions, many brokerages have mandates to grow both rapidly and profitably. To that end, new services and technologies have been developed to shift freight brokers’ fixed costs to variable costs and free up capital for growth. A new generation of cloud-based transportation management systems have reduced technology expenses for small and mid-sized brokerages. Creative staffing companies help brokerages near-shore headcount and cut payroll costs.
Carggo is a digital freight fulfillment platform that partners with brokerages to help them more efficiently move freight.
“Early on, and especially in today’s market conditions, we recognized the potential of the partnership program,” said David Letourneau, director of partnerships at Carggo. “Carggo provides a unique and simple solution that enables companies to grow their business without making major, time consuming investments. Finally, small to medium sized brokers can take advantage of technology that has, until now, only been available to digital freight brokerages and multi-billion dollar companies.”
Digital freight brokerages like Uber Freight and Convoy aim to improve EBITDA conversion by automating much of a human broker’s work and decoupling volume growth from headcount growth. The idea is that an individual operator will be able to cover many more loads per day and convert slimmer gross margins on more loads to higher earnings.
Carggo is bringing that technology to other brokerages and 3PLs. For a per load fee, a freight brokerage can use Carggo’s platform to cover a load. A brokerage can use Carggo for as many or as few loads as it wants, and using the company for a load from one customer on a specific lane is not obligated to use Carggo for the next load from that customer on that lane.
“3PLs can register without any obligation and with the flexibility to choose how they work with Carggo,” Letourneau said. “Our job is to provide capacity when and where it’s requested through a simple and intuitive portal. This way, our partners can operate more efficiently themselves – moving more freight at competitive prices.”
Carggo’s offering allows brokers to grow aggressively in a low-margin part of the freight cycle. Hiring new brokers is expensive because there’s a year-long learning curve before a broker reaches mature productivity, and many new sales and carrier reps churn before that point arrives. Ramping headcount in response to customer demand, in other words, is expensive and too slow to make an impact on the immediate need.
By tendering extra loads through Carggo’s digital platform, a brokerage can confidently bid on new business and handle surges in volume from unpredictable accounts. Instead of constantly hiring new people to get ready for anticipated volume growth that may or may not come, and always locking up working capital in new employees who are not yet productive, a brokerage can run much leaner.
In essence, Carggo gives the brokerage a backstop and lets it continue operating close to peak capacity without hiring new people and grow wallet-share with customers with little additional fixed cost.
In our view, all the pieces are in place for a further rise in spot rates through the rest of the third quarter and into the fourth quarter. In August, U.S. retail sales grew 0.4% year-over-year, above economists’ expectations. Meanwhile, trucking capacity continues to leave the market to the point that we feel capacity relative to volume (up 3% year-over-year) is now supportive of rates.
Shippers are typically the last to get on board, especially as the freight cycle turns against them, so expect contract rates to slow their decline on a lag compared to spot.
Brokers who want to grow their accounts in this environment will likely not enjoy the advantage of wide gross margins and high revenues to fund that growth. Instead, they will need to be creative about how they allocate human and technology resources to seize new opportunities. In our view, Carggo is a great example of a new technology solution that, uniquely, can allow brokerages to grow without placing further constraints on working capital.
