The freight market remains in flux as what once was a persistently inflationary upswing gave way to the current lingering down market. At this year’s Future of Supply Chain event in Atlanta, executives of companies ranging from freight brokerages to back-office solutions providers to factoring companies talked about what’s next in logistics and their thoughts regarding the current freight cycle, giving insights into their strategy once the market turns.
A common theme among executives at the event was how the current freight cycle feels quite different from cycles past. Part of this comes from the prolonged upswing as consumers shifted purchasing patterns away from services and spurred unprecedented goods demand. This yearslong strain on the supply chain created a modern-day gold rush for carriers and brokers who hoped to capitalize on the higher prices and increased demand. Talks of a “new normal” and rebalancing of goods and services demand following the pandemic and reopening of the services economy further clouded outlooks. It became clear that timing the freight cycle, which in normal conditions was relatively predictable, became nearly impossible.
Clayton Griffin, EVP and chief strategy officer at OTR Solutions, told FreightWaves that the key is knowing when to seize the opportunity. “The market is by and large uncontrollable for market participants, so you have to be available and have the ability to capitalize when the market turns in your favor.” One way to think of market turns is understanding the freight cycle.
Brokers gain market share, hope to keep it
A frequent topic of discussion surrounding this freight cycle has been the rapid rise in freight brokerage market share, which historically was reserved for large, asset-based carriers. In 2005, freight brokers accounted for only 5% of all domestic truckloads, but by the end of the decade, broker market share had nearly doubled. The growth only intensified in the years following the global financial crisis from 2008-2010.
The same crisis fueled early brokerage growth from the Fed’s zero-interest-rate policy (ZIRP). For an industry whose businesses are reliant on capital, the policy created fertile ground for the fast ascent of freight brokerages fueled by loads of cash from venture capital and private equity with no immediate demand for profitability.
This new breed of digital freight brokerages, which used automation and load matching to turbocharge their workforce, gained market share at a rapid pace, compared to the first generation of tech-enabled brokerages that used brute force cold calling paired with early forms of automation to create market share.
Slowly these tech-savvy digital brokerages ate away at the asset-based carrier firewall, but it would take a pandemic before this wall would be breached. Freight brokers are now estimated to have 30%-50% of the for-hire load market share as shippers found it was easier and often more cost-efficient to utilize a 3PL for their transportation needs.
With great market share come even greater expectations in the forms of technology and visibility. For brokerages and factoring companies, an added side effect of the pandemic demand boom came from the Federal Reserve.
With the ZIRP environment that fueled early brokerage growth coming to an end, a new challenge for brokerage and factoring companies arose: deciding whether to pass on or eat the added costs from higher interest rates. Despite rapid increases in rates, Griffin notes factoring rates have not gone up over the past two or three years.
The federal funds rate has “gone bananas,” he said. “For more than a decade, it was near zero interest rates, and what’s interesting as we press forward is that a lot of the new additional interest rate costs — and this goes for factoring companies and freight brokers — are being absorbed into the efficiencies that those businesses are creating.”
Brokerages and factoring companies float lines of credit to shippers and carriers, but that gap in credit to collecting the cash isn’t cheap. Credit lines often come from banks and get more expensive when the Fed raises rates. Griffin observed that in a low interest rate environment, the extra debt was less a concern. Now that rates are higher, pressures mount.
“When you think about gross margin and how that flows down to the bottom line, interest rates for a factoring company are obviously a huge component. They’re also a huge component for freight brokers who are floating funds for 30-45 days, just like factoring companies in many cases because of how shippers are paying, and so as interest rates start to increase, their debt service becomes more of a concern.”
Giffin adds, “That’s where you have to get creative.”
“Combine that with other market factors like freight rates coming down . … The fact that you haven’t seen top-line margin expansion in factoring or freight brokerages generally speaking means that the players are making less bottom line, or they’re finding ways to supplement those costs with efficiency gains.”
Technology: Burning or investing cash for productivity gains
Faced with higher costs and a stagnated market, freight brokers focused on countering added costs with greater operating efficiency. “Before, it was all gas, no brakes,” said Griffin, but the current downcycle is forcing a more strategic approach.
To burn or not to burn cash: That’s now the question when anticipating the next upswing. The problem, Griffin states, is the downcycle has lasted longer than predicted. “Traditionally that has worked because in six or nine months, you can weather the storm, but if you’re burning cash for two years or longer, that becomes less sustainable.”
Griffin also highlighted two key ways technology investment could be allocated.
“Investing in sales resources and go-to market, those types are somewhat contingent on how the market is going to pay off those investments, and occur in a relatively short amount of time,” he said. “Investing from an infrastructure perspective can make sure you capitalize on those growth opportunities, but it’s a slightly different way to invest, abeit worthwhile.”
Other companies in the brokerage and payment space also felt the pressure to be on the bleeding edge of tech but needed a strategy to make it happen. For many digital freight brokerages, boom times saw a rapid hiring spree and created an army of software engineers ready to conquer and scale up their businesses. Others took a measured approach, given that a freight boom can quickly turn into a bust.
Following the demise of one of the earliest VC-fueled digital freight brokerages, a new approach is needed to take advantage of the next freight cycle upswing. With higher interest rates impacting everything from factoring company lending costs to brokerage margins, the near term strategy continues to be finding means of cost reduction.
To maintain competitiveness, brokers must control their costs
Freight brokers face increasing pressure on operating margins from all directions. Ensuring visibility and controlling costs has a direct impact on not just profitability, but sustained competitiveness in the market. In today’s environment, only those who can operate profitably in the carrier market and shipper market simultaneously have a chance of maintaining existing lanes and the opportunity to acquire market share. OTR notes that one way to cut costs is to reduce the time it takes to acquire and process payments, as both brokers and carriers can quickly run into a cash flow crunch if there is a delay or their accounts receivable days to pay reaches a critical point.
OTR’s Epay Manager focuses on back-office automation and carrier payments, which allows brokerages to reduce the cash flow crunch and pay carriers faster while collecting from shippers. Freight brokerages, carriers and shippers often have an army of accounts payable and receivable reps who must manually inspect invoices, then spend extra time reaching out to the party to verify the correct data attached to each load. Adding in complexities like detention, added stops or out-of-route miles can extend an invoice turn time from days to weeks.
OTR notes that the combined features from its automated invoicing and audit system reduced accounts payable processing time by up to 75%. For carriers and brokerages that are dealing with low rates and higher costs, speeding up revenue collection and reducing costs associated with that process is a winning strategy.
Click here to learn more about OTR Solutions Epay Manager.
