Diversification helping truck broker industry expand
Non-asset based companies that manage domestic freight moves are a growing force within the trucking sector as they penetrate segments beyond dry-van truckload and become a go-to resource for smaller shippers, analysts say.
Manufacturers and retailers have outsourced shipments to truck brokers, who are able to find the best rates and routes by optimizing a network of partner motor carriers or finding capacity on the spot market, for a long time. Brokers are especially popular for irregular, random routes because they can stitch together pick up and delivery from a wide range of trucking companies, including owner-operators, beyond those that simply contract long-term transport on dense lanes.
More recently, truck brokerage has become a useful tool for managing less-than-truckload moves as well. Today, about 35 percent to 40 percent of less-than-truckload shipments are brokered compared to about 5 percent of loads a decade ago, John Larkin, managing director of transportation equity research at Stifel Nicolaus, said a few weeks ago at a conference in Indianapolis organized by freight econometrics firm FTR Associates.
Small-and medium-size shippers lack adequate resources to optimize their supply chains, "so they access the brokerage community, which generally has more knowledgeable people, better systems, and access to more carriers," Larkin said. The broker essentially serves as the traffic department for the cargo owner.
Large shippers with sophisticated in-house logistics capabilities can manage a core group of carriers and typically only go outside the company for help in certain instances, such as shipping into new geographic regions or to find extra capacity when demand for their products spikes, experts say.
The increased utilization of brokers by smaller shippers had helped the truck brokerage sector grow in the high-single digits since the early 2000s.
"This outsourcing trend is pretty dramatic and could drive growth in this segment for the next 10 years, easily," Larkin said.
Domestic transportation management is the strongest growth sector within the U.S. third-party logistics market, Evan Armstrong, the president of Armstrong & Associates, said in a webinar for Stifel clients last month. He estimated the sector will grow 9 percent in 2013 from the previous year to $7.2 billion in net revenue. The value of all the transportation transactions made by brokers is estimated to top $49 billion.
The brokerage sector is much larger than people estimate, FTR Senior Consultant Nöel Perry told American Shipper. Quantifying its size is difficult because many pure brokers are small companies that don't report financial information, and big, publicly traded motor carriers don't separate revenue from their brokered moves — either ones they make on behalf of other carriers or ones they outsource to fellow trucking firms — from their overall asset-based revenue. Brokered freight often accounts for 15 percent of revenue for large carriers such as Schneider National, he said.
Overall, trucking industry revenues are about $650 billion.
The dry-van truckload sector is still growing, but its margins are being squeezed by increased competition. Freight brokers such as Echo Global Logistics, Coyote Logistics and FreightQuote have diversified and become very sophisticated at providing refrigerated, flatbed, intermodal and LTL service, Larkin and Armstrong said.
Shippers that tend to use brokers for emergencies at the end of the month or the end of the quarter need to establish a deeper business relationship with brokers like they do with carriers to guarantee capacity, Jim Tucker, president and chief operating officer of Tucker Company, said during a break at the FTR event.