DC Velocity - February 2017

newsworthy

WILL THE MEATY PROFIT MARGINS LONG enjoyed by traditional freight brokers eventually become the meat in an Uber-Amazon sandwich?

Much interest was generated by a recent report by 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.

DC VELOCITY had already 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 the kind of 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 enormous 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 source, Uber will strive for maximum
market share so it can feed volumes to a network that will
be designed around Otto, the autonomous vehicle compa-
ny acquired by Uber in August for $680 million.

NEWCOMERS WILL LEAVE THEIR MARK

It has become clear that technology will trigger significant change in a segment that is immensely profitable by effectively arbitraging 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 still being profitable. Many of the newbies will fall by the wayside, driven out by intense competition, weak margins, and a refusal of private equity and venture capital to continue funding them. 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. Jacobs said margin concerns were not a key factor in how XPO’s strategy evolved.