The disruption of digital platforms in brokerage-based businesses is just one of the many ways our world is increasingly becoming digitised.
Take the travel agency business as an example. Until the late 1990s, travel agencies dominated the market for travel bookings. The arrival of the internet enabled customers to book their vacation without going through an agency. The simplicity and cost savings of this model motivated customers to use online platforms. Penetration grew continuously despite initial adoption hurdles for some customer groups. Today most standard trips are booked online, and the number of travel agencies has declined by a third over the last decade.
The logistics industry is another brokerage-based business that is beginning to see the underpinnings of a similar disruption. Truck freight start-up funding has grown over past years. While start-ups have raised about US$180m in VC funding between 2011 and 2016, the last few years saw investment increase to US$470m. A large number of new players emerged, some of which reached unicorn status with valuations over one billion dollars, such as Convoy or Flexport. To understand where these companies play, a closer look at the US trucking market structure is necessary.
Truck freight start-up funding has grown over past years. While start-ups have raised about US$180m in VC funding between 2011 and 2016, the last few years saw investment increase to US$470m
According to data from American Trucking Associations (ATA), close to 71% of all freight tonnage within the US is moved by truck, and the total sales of the trucking industry are about US$800bn annually. Shippers have multiple ways to engage with carriers to purchase transport services, ranging from relationship-based interactions to purely transactional ones. The vast majority of freight loads today are directly sold from shippers to carriers, building on these relationships. At the other end of the spectrum, for fully transactional interactions, are the load boards. The middle ground is covered by brokers, who handle about US$70bn of freight volume. The market for brokers has been growing in recent years, and more than quadrupled since 2000. The general trend away from carrier-direct sales to brokers and load boards is expected to continue and by 2025, the domestic highway brokerage market is projected to grow to over US$200bn.
Certain characteristics of the brokerage segment make it open to disruption. The market is highly fragmented with a few large players, like C.H. Robinson, and many small players. These small players often lack sufficient capital to invest in new technology and provide an opportunity for digital players to disrupt the industry by creating a marketplace that allows shippers to book freight directly with carriers and cut out the broker. Traditional brokers’ margins historically range from the low to mid-teens, making this an attractive opportunity for new entrants who try to cut out a share of these margins.
Automation of more than just the front end?
Freight matching platforms are focused on automating various parts of the customer journey. When looking at the customer journey from a broker perspective, some areas are easier to automate than others. Front-end functions such as payments, document retrieval, and invoicing as well as some parts of the matching process such as pricing and quoting are relatively easy to automate. Other functions such as capacity planning, dispatching, and exception management are harder to automate and still require manual intervention. Most players are still far from full automation and the perceived automation level is often higher than the actual levels. Still, even at only partial automation, platforms can already significantly reduce the number of calls that a broker has to make for each load and thus increase productivity.
Freight platforms have truly disruptive potential once they solve one of the industry’s most challenging issues: empty miles
While this may sound as if this is simply making existing processes more efficient through automation, freight platforms have truly disruptive potential once they solve one of the industry’s most challenging issues: empty miles. Looking at the operational statistics of large carriers over the past decade, empty miles have consistently increased since 2010 and account for 13% of all driven miles today. A number of variables can impact a truck’s journey, and these variables multiply considerably when loading and delivery operations are factored in. For instance, a load may not be ready to collect, or there may be issues with the delivery point—either possibility will lead to a delay. This creates a risk of a whip crack through the truck’s near-term schedule—a late delivery today will mean a late collection tomorrow—and so the risk-reward calculation must include the possibility of reputational damage to the operation on the part of the delayed consignor. In sum, chasing US$100 at the risk of imperilling US$500 does not make operational sense.
The fact that empty miles do not go below the magic threshold of 10% implies that there is room to optimise the level of utilisation after which chasing additional freight becomes both counterproductive and counter profitable. Next generation freight platforms will aim at reducing empty miles by developing predictive capabilities through AI-based algorithms that can reliably project if a return freight will be available tomorrow at the destination of a trip that is sold today. Once this problem can be solved, a vast savings pool can be unlocked that goes far beyond the initial potential from automating manual processes.
The full impact of digital platforms will become visible long-term once platforms have real predictive capabilities and can unlock additional value beyond pure freight matching
Not only a playground for start-ups
Freight matching requires advanced computational power and ultimately AI capabilities which makes it a natural playground for tech-savvy start-ups. However, established players like traditional brokers and carriers are also investing in digital platforms to transform their business. JB Hunt is a good example of a carrier that has transformed from an asset-based company with technology to a technology company with assets over past two decades. While the company’s truckload business accounted for 37% of its overall revenues in 2002, this share has gone down to just 5% today. JB Hunt started its brokerage business around 2006, and 15% of today’s revenues come from this part of the business. The launch of the JB Hunt 360 platform in 2017 is a natural step in this transition and today over two-thirds of the brokerage revenues are generated by the platform.
A move in the other direction, from asset light to more asset intense, is Convoy’s introduction of a drop-and-hook platform. To support its digital platform, Convoy introduced a universal trailer pool, which it owns, for pre-loading and made this available to any carrier. The power units can now travel between logistics facilities, pick up the loaded trailers and move them to the next facility where another pre-loaded trailer awaits. This was effectively the first asset-based move from an otherwise virtual player and has since been implemented by others.
Disruption will happen, but slower than you think
As outlined above, digital platforms clearly have the potential to disrupt the trucking industry. Key questions remain, however, about how fast this change will happen and whether we can expect the same fast pace with which Uber rolled up the taxi business. While several of the conditions that made rapid ‘Uberisation’ possible in the taxi business also exist in the trucking industry, there are also clear differences.
Freight matching requires advanced computational power and ultimately AI capabilities which makes it a natural playground for tech-savvy start-ups
The two biggest similarities between the two industries are that supply and demand matching is largely a manual process—often using call centres. Price transparency is also low in both cases: shippers have limited insight into the true cost of transport, and taxi passengers used to see their fares only after the ride.
But there are also three distinct differences. For one, while the trucking industry is a very relationship-based business, taxi riders hardly have an attachment to a specific taxi provider. Secondly, Uber added new capacity to the market in form of privately-owned vehicles; this is not the case in the trucking industry. While digital platforms increase asset utilisation, they do not put new trucks on the road. And finally, before Uber, there was no real market maker in the taxi industry, but in trucking, broker networks already existed in the industry.
Overall, these differences will not prevent the disruption from digital platforms, but it will slow down their adoption. The impact of digital platforms over the coming years will largely be incremental, by allowing existing brokers to increase their per-head productivity through automation. The full impact of digital platforms will become visible long-term once platforms have real predictive capabilities and can unlock additional value beyond pure freight matching.
About the authors: Dr Walter Rentzsch is a Principal and Dr. Wilfried G. Aulbur is a Senior Partner and Member Supervisory Board at Roland Berger