GlobalTranz, a logistics service provider, put out a press release on February 23rd where they mentioned that they had achieved 40% growth in revenue, fourth quarter of 2020 compared to the fourth quarter of 2019. GlobalTranz’s main service lines are freight brokerage – less-than-truckload and truckload – and managed transportation services. As such their closest peers who report their earnings are C.H. Robinson and Echo Global Logistics. Echo’s revenues increased 41.9%.
That makes C.H. Robinson’s last quarter earnings in North American Surface Transportation, up 10.8% – which many companies would be delighted with – seem paltry in comparison.
In a Cyclical Market, Brokers/Managed Trans Providers are Winners
But two of the leaders, Echo and GlobalTranz, had revenues that increased by 40% or more! What the heck is going on in this freight brokerage/managed transportation sector?
It might be worth starting by defining terms. A broker is a third party that finds customers a product or service they are looking for and takes a fee for this service. A truck broker helps companies find trucks to carry their freight on lanes they are having difficulty covering.
A managed transportation service provider, “managed trans” for short, uses transportation management software and internal expertise to plan and execute freight moves for their customers. Thus, instead of a shipper using their own planners to plan, tender, and execute truck moves, shippers work with a third party who they believe can do this more effectively than their internal staff.
David Menzel, the President and Chief Operating Officer at Echo, in the earnings call transcript, explained it this way, “strong freight demand combined with tight capacity were the two themes that dominated Q4. This environment triggered a significant increase in spot freight, as routing guides begin to break down due to continued escalation of truck rates… Truckload rates hit another all-time high in the quarter.”
Another company that combines freight brokerage and managed trans is Transplace. Like GlobalTranz, Transplace is private. While Transplace did not report their revenue growth, they did put out a market update report where they wrote about key trends in the freight market:
- Demand remains strong with a continued surge in consumer goods manufacturing, retail shelf restocking, and a strong housing market.
- Drivers continue to be in short supply with 34,000 drivers in the Federal Motor Carrier Safety Administration drug clearinghouse. The drug clearinghouse went into effect in January of last year. This electronic database tracks truck driver’s who have tested positive for prohibited drug or alcohol use. It was designed to keep commercial drivers who have violated federal drug and alcohol rules from lying about those results and getting a job with another motor carrier. Those that have tested positive can drive again, but they first must go through a Department of Transportation return-to-duty process. 78% who tested positive have not started the return to duty process.
- The truckload and less-than-truckload market is cyclical. Most of the time shippers have the upper hand. Many shippers are tough negotiators who work diligently to drive down carrier rates. But every so often the market gets tight and power swings to the carriers. In these times, asset-based carriers become more selective on which lanes to bid and which shippers to work with. Carriers make more money when their trucks are moving. Shippers that are slow to load and unload the trucks find it much more difficult to get trucks.
- “While rates and costs are top of mind, sourcing and capturing capacity is the first priority in many industries.” In short, partners that can help shippers capture capacity have become more “strategic.”
Managed Trans is Strategic
In a press release put out by GlobalTranz, Bob Farrell, Chairman and CEO of GlobalTranz, addressed the increased strategic role GlobalTranz is playing in transportation. “In the last year, the global economy’s reliance on logistics was unmistakable, as awareness of supply chain expanded from the board room into everyday conversations. By working closely with our customers and carriers to solve extraordinary challenges created by the pandemic and changing consumer behavior, GlobalTranz posted a strong finish to 2020, and we are continuing that momentum into 2021.”
What makes a broker strategic? The managed trans business. For GlobalTranz, the company’s managed trans business unit grew its revenue by over 61%. The largest providers of managed trans have all built their own transportation management systems. They all believe differentiation on the basis of technology is key to winning in this segment, and they want to control their own destiny.
ARC’s research shows that a shipper that uses either a transportation management system (TMS) internally or works with an external managed trans supplier with robust technology, will get strong freight savings. For many shippers, these are double digit savings accompanied by improving service levels. Shippers looking for these solutions usually have their directors or vice president of transportation, logistics, or supply chain involved in vendor selection. In a conversation with me on 2/25, Mr. Farrell of GlobalTranz reports that they are increasingly dealing with chief financial officers and even chief executive officers when it comes to managed trans deals.
Savings are great, but if companies that have sharply declining service levels when they can’t find carriers willing to carry their loads, will lose customers and market share. That is strategic.
Three things make broker/MTS suppliers increasingly relevant when capacity is tight. First, in a tight market reliance on small and regional carriers becomes increasingly important. That is the bread and butter of the brokerage business model. Mr. Farrell mentioned to me that not all their revenue growth comes from organic growth. One category of companies they seek to acquire are regional brokers with good relationships with the local carriers in their coverage area.
Second, a large managed trans supplier has hundreds of millions or even billions of dollars in freight under management. FUM is freight these providers are managing on behalf of their customers. The larger the freight under management, which comes from both the broker and managed trans, the greater the visibility that provider has to open capacity.
Finally, the freight under management feeds the ability of the managed trans provider to leverage Big Data in their systems to provide better insights and value to their customers. Mr. Farrell of GlobalTranz talked about how by building scale they are increasing their ability to do price discovery. On many lanes GlobalTranz will have detailed demand and supply data. The data allows them to understand which lanes the carriers really desire to work in, the lanes where the carriers are most profitable. This allows them to better predict what price a carrier will take for a move. They can send an electronic message to the carrier, “will you take $1,200 for this move?” Meanwhile, they know the carrier is likely to see it as a fair price. This speeds the tender process by preventing back and forth negotiation; doing this increases capacity by increasing the proportion of first tender acceptances.
On the broker side of the business, this predictive capability can allow them to bid an unprofitable lane because they know that there is a high probability that they will get a backhaul that is profitable. Similarly, Big Data can make them more valuable to their carriers by providing them the visibility that is necessary to reduce empty miles – the miles trucks move unloaded.
Mr. Farrell acknowledges that this is a favorable market for freight brokers/managed trans providers. But GlobalTranz’s aspiration is to grow organically at close to 20% regardless of the market dynamics. “The freight industry has long operated as a cyclical business, but we’re not relying on historical trends to hold in the post-COVID environment.” The company views itself as a technology company first. But through its’ technology platforms, access to capacity, and creative solutions – based on strong logistics domain expertise – GlobalTranz believes that they can provide unique customer value in the midst of the uncertainty of the current environment” and beyond.