C.H. Robinson (Nasdaq: CHRW), the largest trucking freight brokerage, is in a challenging spot that isn’t strictly due to the Great Freight Recession. Its stock is trading near the lows of the COVID lockdown (closing price on April 26 was $70.22; the COVID low was $63.91), with investors asking tough questions about the company’s long-term prospects.
For three and a half decades, C.H. Robinson’s position was uncontested. It was in an enviable position — it had information and access to fleets that no one else did. After all, with the largest number of offices around the country and the largest network of carriers, almost no one could compete with Robinson’s pulse on the market or connection to fleets.
Early on, this information and trading arbitrage became C.H. Robinson’s unfair advantage.
However, other freight brokers emerged, and the share of freight that brokers handled grew faster than C.H. Robinson’s business.
Less than a quarter-century ago — in 2000 — freight brokerages handled only 6% of all trucking freight. Today, FreightWaves estimates that 25%-30% of freight is handled by 3PLs; others have suggested that the figure is more than 50%. Regardless, it’s a huge number.
Brokerages gained market share by taking freight from the largest asset truckload carriers, playing the role previously reserved for companies with trucks.
Shippers used to be reluctant to give freight to companies that didn’t own their own trucks. Still, they eventually realized that freight brokerages provided unparalleled flexibility and could offer rates that shifted as the market did. (Freight costs are massively volatile.)
Because brokerages were not constrained by fleet size, they could handle surges much easier than asset-based carriers. In that regard, a brokerage can provide a superior product compared to a single-source truckload provider.
Those circumstances have caused large over-the-road truckload providers to struggle for years. It is not just freight brokerages taking share; intermodal (railroads) is also eating their lunch.
A few companies, like J.B. Hunt, Werner and most recently, Covenant, saw these changes coming. They largely moved away from their dependence on the for-hire truckload market.
Others failed to pivot fast enough — Celadon, CFI, U.S. Xpress, Interstate, etc. — and each paid dearly.
In addition, shippers benefited from the fact that brokerages were faster than the fleets about investing in technology and customer success initiatives.
From 2000 to 2015, the industry saw the scale of startup or small brokerages explode (Brokerage 2.0): TQL, Echo, Coyote, Command, Access America, Nolan, GlobalTranz and many others grew exponentially.
This caught the attention of private equity (PE) firms, corporations and even UPS — they all bought into the belief that the freight brokerage market was ripe for consolidation.
The Brokerage 2.0 players sold out, and middle management at those firms left and started their own versions of what we’ll call Brokerage 3.0.
Meanwhile, technologies emerged that eroded Robinson’s information and fleet access advantage.
Emerging firms like Arrive, Molo and Steam popped up, and hundreds of others were created, requiring little more than a computer, a motor carrier number and a load board account. These firms grew very quickly — understanding that the secret to freight brokerage was recruiting new brokers and creating a dynamic sales culture — something that “stuffy” corporates, PE and UPS would never understand.
The new firms cleaned the clocks of the incumbents.
PE firms and strategic acquirers soon learned that there was little differentiation between the various freight brokerages, and it was hard to retain talent unless the management teams stayed intact (which is hard to do after they’ve sold out).
Then, the most damning part of the story took place: Silicon Valley discovered freight brokerage. Startups like Convoy and Uber Freight were funded — and all focused on blitz-scaling. Even Amazon joined the party, leveraging its vast resources and huge freight spend to take an additional share.
In the U.S., Amazon moves more freight through its network than FedEx.
Early on, these startups tried to achieve critical mass, offering heavily discounted pricing to “buy share.”
And they did. The digital natives grew exponentially without concern for short-term profits. However, many of those same firms have found profit elusive or worse.
At the same time, tech vendors made it easier for new entrants to join the industry and existing players to scale quickly.
DAT Rateview, Truckstop Rate Insights, SONAR and FreightWaves removed Robinson’s information advantage — now, everyone understood what was happening in the market in near real time.
Public and private load boards (DAT, Truckstop, Loadboard123), digital matching apps (J.B. Hunt 360, Loadsmart, Emerge), Trucker Tools, and others took away Robinson’s capacity access advantages. At the same time, systems like Mercury Gate, Ascend TMS, Macropoint, P44, FourKites and Transflo destroyed Robinson’s advantages in system infrastructure that enabled the brokerage to scale so quickly.
Perhaps the biggest blow to C.H. Robinson’s business model is the emergence of payment networks like TriumphPay that make it seamless for brokerages to fund growth without needing large balance sheets.
Now, anyone can start or grow a freight brokerage with little upfront capital and play at the same level as (or even better than) C.H. Robinson.
After successfully fending off the pressures of competition for three decades, C.H. Robinson finally gave in.
Bob Biesterfeld, the former CEO of C.H. Robinson, declared in 2019 that the company would protect its market share by investing $1 billion in new technology.
But it was too late. Robinson had been losing market share, but this was hard to see because of the growth of the underlying market. As long as the freight brokerage market grew, few would realize that C.H. Robinson’s business was under real stress.
Then, the freight market exploded during COVID. Robinson made a fortune during the peak COVID cycle, handily beating analyst estimates like everyone in the space. However, that peak cycle turned, followed by the Great Freight Recession — one of the biggest and most painful downturns in freight market history.
Although Robinson replaced its CEO, the new CEO can do little to fend off the inevitable decline of its core business.
In recent months, FreightWaves has received reports of many veteran brokers leaving the firm, something that was unfathomable just a few years ago. Sources told FreightWaves that the departures were caused by compensation restructuring initiatives and a change in the company’s operating culture.
Margins are under pressure from the Great Freight Recession, which is now in its third year, and the cutthroat competition of thousands of freight brokerages all bidding on the same loads.
Sources have told FreightWaves that Robinson’s new management wants to change the company’s cost structure and has pursued a series of changes to its compensation structures to change the unit economics of the business. These changes have been controversial and unpopular; some veteran reps with decades of tenure have left Robinson to protest the company’s new operating culture.
However, the company must reduce operating expenses to offset the impact of declining brokerage margins.
There are few good short-term answers for C.H. Robinson.
Competition is only going to increase. Robinson’s one-time advantages are largely gone, killed by innovation and direct competition. Its leadership has little choice but to address compensation packages representing the largest operating cost at freight brokerages. But, as noted above, as those changes occur, the company will continue to lose some of its most successful sales and carrier reps. Shippers are likely to leave as a result, as often, the personal relationship with the sales and customer service teams is what keeps the shipper from moving to a competing broker.
Worse still, as a public company, all of Robinson’s challenges are visible to everyone, including competitors, employees and customers.
A huge business model reset with some long-term thinking is required, but that may be difficult for a publicly traded company to satisfy investor expectations every quarter.