May 5, 2014
transportation report | Motor Freight

The road not traveled

The road not traveled

Freight brokers confront a new world where the old models might not work.

By Mark B. Solomon

In early 2008, Michael Feig, a trader at the then-investment firm Bear Stearns & Co., ditched his long Wall Street career. The move was prescient, as Bear soon went into a death spiral that led to its failure and subsequent sale to J.P. Morgan Chase & Co.

Feig decided he'd had enough of the financial rat race. The following year, he cofounded a property brokerage firm hauling produce off the West Coast for large grocery chains.

Today, Feig's company, White Plains, N.Y.-based Capital Logistics, grosses about $20 million a year and is profitable. The job has the usual hassles associated with running a brokerage outfit, not to mention the time zone challenges associated with Feig's being on the East Coast and his business 3,000 miles away. Still, Feig says he would never return to Wall Street. More to the point, he discovered that the skills he honed during years of securities trading were ideally suited to his new role.

Three years before Feig joined the business, Jeff Silver returned to it. Silver was a pioneer in post-deregulation brokerage, joining the executive suite of a newfangled broker called American Backhaulers in 1984. Backhaulers would come to revolutionize the brokerage business by providing automated visibility to all participants.

After Backhaulers was sold in 1999 to giant C.H. Robinson Worldwide Inc. for $136 million, Silver left the industry to pursue an M.B.A. from the University of Michigan and a master's of engineering and logistics degree from the Massachusetts Institute of Technology. In 2006, he and his wife, Marianne, founded Chicago-based Coyote Logistics LLC. Rather than follow a traditional model of having each team of employees work with shippers and carriers, Silver set up two teams. One would procure loads. The other would find trucks. And the teams would communicate freely with each other.

This approach, labeled "Chicago-school" brokerage by Robert Voltmann, president of the Transportation Intermediaries Association (TIA), after the city's aggressive, high-energy financial trading culture, has been a smash. Coyote's first-quarter revenue soared 35 percent over the prior quarter's, making it a $1.4 billion-a-year company in terms of gross revenue. In March, Coyote acquired rival Access America Transport for an undisclosed sum. The move creates a $2 billion-a-year broker, a large fish in an ocean of minnows.

Feig, 38, and Silver, 51, are different breeds of brokers. They weren't born into the business (though Silver started the day after he graduated from college). They didn't inherit it from mom and dad. They have become the sweet spot of the broker demographic. TIA is casting a wide net for these types, and if appearances are any indication, it's succeeding. Several attendees at its annual conference in April remarked that the membership seemed to be getting younger and full of new ideas, problems other old-line transportation groups would love to have.

TIA, and the brokerage industry at large, will need all the vitality it can generate. That's because the field is rapidly changing. There are between 10,000 and 14,000 registered property brokers in the U.S., depending on the source of the estimate. Many are one-trick ponies, performing domestic dry van "transactional" services that match loads with trucks. Though that will always be an important job of brokerage (ask any traffic department if it wants to sift through the rates and services of thousands of truckers), it is expected to become a less profitable one because of the fierce competition and a shift to a seller's market for increasingly scarce trucking capacity that will make it harder and more expensive to procure space.

For the last three quarters of 2013, C.H. Robinson, the nation's biggest broker and a large third-party logistics service provider (3PL), saw net revenue (revenue after the costs of purchased transportation) from truckload brokerage decline year over year or rise just incrementally. Robinson's net margins from those activities fell year over year during the same period. John G. Larkin, analyst for Stifel, Nicolaus & Co., reckons that Robinson is unable to fully pass through its higher costs to shippers in the form of higher rates. (Robinson had not released first-quarter 2014 results as this story was being written.)

Eden Prairie, Minn.-based Robinson, with more than $12 billion in 2013 total revenue, can afford to insulate itself from the commoditization of its core business. In 2012, it paid $635 million in cash to buy Phoenix International, an international freight forwarder and customs broker. However, few brokers have Robinson's financial muscle to go beyond their dry van knitting. Those who can't will find their margins "getting narrower and narrower," according to C. Thomas Barnes, president of Con-way Multimodal, a big broker and 3PL that operates under the Menlo Worldwide Logistics banner. Menlo is a unit of Con-way Inc.

Coming to the table with a singular capability may no longer earn them many points with today's shippers who want more services from their brokers and may whittle down their provider universe to get them. High-performing companies increasingly seek a strategic relationship with their brokers, a challenging proposition for smaller firms that can't go beyond the transactional world of load-to-carrier matchmaking. That, in turn, opens the doors for the big well-heeled truckers like J.B. Hunt Transport Services Inc. and Schneider National Inc., as well as the parcel carriers such as FedEx Corp. and UPS Inc., to lock up all aspects of a customer's business. Conversely, it threatens to slam the door on brokers that aren't in a position to offer more products and services.

Barnes, Dr. Karl B. Manrodt of Georgia Southern University, and Dr. Mary Holcomb of the University of Tennessee made a presentation at the TIA conference urging brokers to begin positioning themselves as 3PLs capable of handling a broad range of tasks. However, a broker with under $10 million in annual gross margins may find such an endeavor far easier said than done.

Bradley S. Jacobs, founder, chairman, and CEO of XPO Logistics Inc., a fast-growing broker and 3PL, said he's met with enough shippers to recognize that one-dimensional brokers "are just not interesting" to them. When XPO launched in 2011, Jacobs' stated goal was to expand the brokerage division through acquisitions and organic growth. But XPO's last three buys, last-mile delivery company 3PD, the supply chain business of Landstar System Inc., and intermodal provider Pacer International, have taken Jacobs away from brokerage. Jacobs has said the nonbrokerage acquisitions will, over time, be integrated with XPO's brokerage operation to provide customers with a full range of logistics solutions.

Smaller brokers may also find themselves disintermediated by technology whose use has barely scratched the surface. By the end of 2016, all truckers will be required to install electronic logging devices (ELDs or "on-board recorders") in their cabs. Donald Broughton, analyst for investment firm Avondale Partners LLC, reckons that embedded in these devices could be mobile application software similar to the popular "Uber" app that connects passengers with for-hire drivers of private vehicles, thus bypassing traditional taxi fleets and their dispatchers. Broughton said at the TIA conference that an app model for truckers could allow shippers to reach out directly for drivers, lessening the need for brokers to locate them.

Asked how brokers could combat this type of disruption, Broughton—rarely at a loss for words—initially replied that he didn't know, and followed up with this advice: "Be part of the solution."

For many brokers, the solution may lie in just continuing to do what they do best. And that may be good enough. According to the Barnes, Manrodt, and Holcomb presentation, a lot of shippers aren't interested in forming strategic alliances. Many either don't understand the benefits, are satisfied with the status quo from their brokers, perceive the services offered by all third parties to be essentially the same, or a combination of all three, they said in their presentation.

So if ignorance is bliss in this case, perhaps the bulk of transactional brokers could indeed continue to live well and prosper.

About the Author

Mark B. Solomon
Executive Editor - News
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.

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