Will the meaty profit margins long enjoyed by traditional freight brokers eventually become the meat in an Uber-Amazon sandwich?
Much interest has been generated by a report late last week in the digital publication Business Insider that Seattle-based Amazon.com Inc., the world's largest e-tailer, was building a freight-matching app to be launched in mid-2017. The information was attributed to people familiar with Amazon's strategy. Jeffrey P. Bezos, Amazon's founder, chairman and CEO, is an investor in Business Insider through his investment arm, Bezos Expeditions. Bezos was also personally involved in raising capital for Seattle-based Convoy, a truck brokerage startup.
Three days earlier, DC Velocity reported that San Francisco-based Uber Technologies, Inc. was developing a full-service brokerage operation with an office in Chicago and a planned location in San Francisco, and was hiring up to 90 brokers to support Uber's digital platform with value-added services that traditional brokers provide on a daily basis.
The common threads in both stories are that Amazon and Uber have already upended their current core markets of retailing and for-hire passenger transportation, have set their sights on applying their scale and digital prowess to freight and logistics, and, if history is any guide, will use their immense leverage to take share by compressing providers' prices and, by extension, their double-digit profit margins.
For example, Uber's nascent brokerage arm is building in only a 5-percent average margin for its net revenue per transaction, or the revenue generated by a broker after its cost of purchased transportation, according to a person familiar with Uber's strategy. Traditional brokers generate net revenue of around 15 percent for a typical transaction. Once the Uber brokerage's other costs are subtracted from its net revenue threshold, the business would operate at near break-even levels, or even be a loss leader for its San Francisco-based parent.
According to the person, Uber will strive for maximum market share so it can feed volumes to a network that will be designed around Otto, the autonomous vehicle company acquired by Uber in August for $680 million.
However Amazon and Uber's plans shake out, it has become clear that technology will trigger significant change in a segment that is immensely profitable by effectively arbitraging its buying and selling prices. In recent years, a growing number of digital freight-matching services have been launched to exploit supposed inefficiencies in the traditional brokerage model. These services aim to drive down prices while being profitable. Many of the newbies will fall by the wayside. However, more than a few are likely to survive, and they will leave their mark on the sector.
Greenwich, Conn.-based XPO Logistics Inc. began life five years ago as a broker. However, Bradley S. Jacobs, XPO's founder, chairman, and CEO, soon began expanding into other areas of transport and logistics and the company eventually became a $15-billion-a-year colossus.
Industry observers have speculated that Jacobs pivoted away from a primary focus on brokerage because he saw margin compression in its future, driven largely by the proliferation of technology. In an e-mail yesterday, Jacobs said margin concerns were not a key factor in how XPO's strategy evolved. "Our decision to diversify years ago did reduce risk in our business model, but our main motivation was to position ourselves as one integrated source for multiple solutions across the supply chain," he said. "We acted proactively to give customers what they increasingly want."
Zvi Schreiber, CEO and founder of Freightos, a Hong Kong-based logistics technology company, said in an e-mail that the battle for brokerage share will take the form of an "e-commerce Cold War" to be won by the companies best equipped to leverage technology to expand their services. Schreiber acknowledged that the traditional brokerage model has stood the test of time. However, its biggest test may lie ahead, because Amazon and Uber have "shown (the) willingness to use tremendous amounts of capital to enter new markets," he said.
To survive, incumbent brokers will need to "improve technology, differentiate with decades of experience and, most likely, reduce margins, in order to retain market share," Schreiber added.
Others remain skeptical, having heard the story innumerable times in recent years. Benjamin J. Hartford, transport analyst for investment firm Robert W. Baird & Co., said that any near-term impact from Amazon's purported entry into brokerage would be limited by the amount of time needed to scale up an effective brokerage operation, as well as by the sector's extreme fragmentation. After big companies like Eden Prairie, Minn.-based C.H. Robinson Worldwide Inc., XPO, and Chicago-based Coyote Logistics and Echo Global Logistics Inc., the vast majority of brokers fall into the small to mid-size category. Coyote is a unit of Atlanta-based UPS Inc.
Evan Armstrong, president of Armstrong & Associates, a research consultancy that closely follows brokers and third-party logistics (3PL) providers, said it will be extremely difficult for any newcomer, regardless of its cache, to challenge the established providers, which possess formidable scale and unmatched access to carrier capacity. "This is why anyone's pitch to charge customers lower margins is countered by the market reality that a large broker such as Coyote or Robinson, with billions of dollars of purchased transportation, can make a 15-percent gross margin on a load, and still price lower than a small broker only making a 10-percent gross margin," Armstrong said in an e-mail.
Armstrong said he has a metric in mind to determine when Amazon might become a sustainable player in brokerage. "When Amazon has $1 billion of purchased transportation running through its freight brokerage operation, then it might have something disruptive," he said.