Intermediaries muscling in on LTL market, poised to change the pricing game

Transportation intermediaries are gaining more clout in the less-than-truckload (LTL) industry than ever before, a trend that is changing the landscape for all concerned.

Third-party logistics companies and freight brokers have long been involved in the LTL segment. But their presence had been relatively small compared to their involvement in the much-larger truckload category, where there is far more freight to be procured and marketed.

Yet brokers have been penetrating the LTL segment at a faster clip than they have in the truckload market. According to estimates from Milwaukee-based investment firm Robert W. Baird & Co., LTL volume handled by brokers roughly doubled between 2007 and 2011. Growth in broker-handled truckload volumes gained at a more modest clip during that time period, according to Baird estimates.

In 2007, truckload freight represented more than 90 percent of a publicly traded broker's business profile, with LTL representing less than 10 percent, according to Baird estimates. In 2011, truckload freight handled by brokers accounted for about 85 percent of total volume, the firm said.

Baird based its estimates on company data.

C.H. Robinson Worldwide, Inc., the nation's largest broker and a major 3PL, said its third-quarter 2012 truck volumes tendered to LTL carriers rose 17 percent from the year-earlier period. For the first nine months, LTL volumes were up 18 percent over the same period in 2011, the Eden Prairie, Minn.-based company said.

Truckload volumes over the same periods rose at about half the pace of LTL gains, Robinson said. Pricing to its customers on LTL freight rose in the quarterly and nine month periods, while customer pricing on truckload freight was flat to down, Robinson said in its quarterly results issued in October.

The encroachment of brokers has not gone unnoticed by LTL executives. Jeffrey A. Rogers, president of YRC Freight, the long-haul unit of LTL carrier YRC Worldwide Inc., said YRC Freight's customers are increasingly relying on 3PLs and brokers to manage their transportation with the carrier. However, Rogers warned that his company would not work with intermediaries that do little more than troll the LTL market for the lowest rate and that he would use the hammer of capacity allocation to reinforce his point.

"The big [intermediaries] are figuring it out," he said. "They better bring value to the relationship or they will be out of capacity."

Like other LTL executives, Rogers—who took over YRC Freight in September 2011 after a highly successful three-year stint at the company's Holland regional carrier division—has tried to restore rational pricing to the sector after several years of destructive rate wars. For Rogers, that includes reducing truck capacity and culling unprofitable freight from the carrier's system. It has also involved an ongoing process of balancing YRC's customer mix. YRC has worked to attract more local and smaller accounts that generate higher margins and de-emphasize larger corporate accounts that use their sizable volumes to drive down prices and compress YRC Freight's margins.

Rogers said rate hikes on YRC's noncontract customers are sticking, and that he's seeing "good returns and solid [rate] increases" on corporate accounts. Still, the bigger customers account for roughly three-quarters of YRC's business, he said.

Evan Armstrong, president of Armstrong & Associates, a West Allis, Wis.-based consultancy that closely follows the 3PL and brokerage businesses, said the nature of an intermediary's involvement would depend both on its level of sophistication, and the size and complexity of the customer relationship.

If the intermediary manages a large-scale transportation network, it will focus on optimizing the shipper's investment by selecting carriers and transportation modes based on the customer's needs, Armstrong said. This type of relationship generates "a lot of value" for the customer, he said.

By contrast, in a transaction-based relationship the broker or 3PL will try to maximize its own gross margin by scouring the carrier universe for the lowest rates and then marking up its costs to the customer, according to Armstrong. "Outside of finding its customer carrier capacity and resolving any service problems, the broker is generating little value," he noted.