Brokers’ Margins Decline as Competition Increases

This story appears in the Oct. 21 print edition of Transport Topics.

Freight brokers’ truckload profit margins are under growing pressure, which is helping trucking fleets gain some pricing power, industry officials said.

“We are seeing some gross margin compression, especially on the net revenue side,” said Evan Armstrong, president of Armstrong & Associates, which publishes reports on the third-party logistics sector. “Traditionally, gross margins are about 15%; now we are seeing them in the 12% range.”

Armstrong said brokers are looking to gain market share and build volumes to secure competitively priced carrier capacity.

“In the commoditized dry-van truckload brokerage market, increased competition from rapidly growing newer entrants are pressuring margins,” Armstrong, a former Roadrunner Transportation executive, told Transport Topics, citing companies such as XPO Logistics, Coyote Logistics and TQL, or Total Quality Logistics.

A recent industry report reinforced Armstrong’s message.

“Gross margins have dipped below 14% for only the second time in the past six quarters,” Robert Voltmann, president of the Transportation Intermediaries Association, told TT on Oct. 16.

Average gross margins dropped to 13.6% from 14.3%, a TIA report said.

“Whether this trend holds below 14%, we will have to wait and see as data is received,” Voltmann said. “We do hear from members of all sizes that margins are being squeezed. This is the result of larger companies competing with each other for the business of large shippers.”

Because freight brokers almost exclusively are privately held companies, public evidence of the trend is scarce.

However, C.H. Robinson Worldwide Inc., the largest domestic freight broker, last month addressed the issue at an investor conference.

“When [capacity] is tightening, our margins tend to get contracted, but we have greater volume growth,” Chief Financial Officer Chad Lindbloom said. “There is significant price pressure and an extremely competitive marketplace where we wrestle every day. The net revenue margin is lower than it was. It’s still profitable freight.”

He also said he believes current conditions are a matter of market cycle and not “a sudden change in the competitive landscape.”

J.B. Hunt Transport Services last week said brokerage margin fell 2.4 percentage points.

Domestic freight brokerage is the fastest-growing logistics segment, said David Ross, an analyst at Stifel Nicolaus. It now is about a $50 billion industry, with annual growth rates above 10%, Armstrong said.

At that level, brokerage accounts for 17% of total for-hire truckload revenue as counted by American Trucking Associations.

“Dry-van TL, while still growing, is seeing its margins squeezed,” Ross said in an investor note last week.

Armstrong said that some 3PLs have diversified, such as C.H. Robinson, and others should move into other sectors to counter that profit-margin squeeze.

“Specifically strong within that [brokerage] segment has been intermodal [especially cross-border] and TMS, or transportation management systems,” include arranging freight services and bill payments, Ross said.

The TIA report said less-than-truckload improved 1.4 percentage points in the second quarter and that intermodal was growing faster than all-highway service.

Market conditions aren’t the same nationwide, Voltmann said.

“All members are feeling the squeeze from a tightening truck market, but one that is not tight in all markets,” Voltmann said. “The spottiness of the capacity crunch means that the pressure is not uniformly pushed upstream to the shippers; a slight uptick in the economy could change this quickly.”

Armstrong said growth in the 3PL industry continues at three times the rate of U.S. gross domestic product growth, indicating continued market acceptance of those services.

He also said the dedicated contract carriage sector is showing some pressure on margins but not to the extent seen in dry-van truckload. The reason, in part, for the lower pressure on dedicated margins is because that sector is mature, he said.

Ross said “there is a lot of potential for [mergers and acquisition] activity,” as some smaller companies feel margin pressure more than their larger counterparts.

Voltmann said TIA is seeing pressure on smaller companies in the form of margins and finding capacity. He also said well-managed smaller brokers can thrive with gross revenue of as little as $1.5 million annually.

Domestic brokerage is larger than any of the other segments tracked in Armstrong’s report, which gauged global third-party logistics revenue at $147.2 billion this year, including $48.7 billion in international freight brokerage and $12.1 billion for dedicated contract carriage.