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Article - June 13, 2023


FREIGHT BROKERAGE: GROWTH & RESILIENCE DRIVING INVESTOR INTEREST


 * Market Dynamics
 * 5 Key Factors
 * Opportunities
 * Survey Data
 * Select Activity
 * Contacts
 * Related Insights

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LEARN MORE ABOUT THE HARRIS WILLIAMS PROFESSIONALS FEATURED IN THIS ARTICLE.


Freight brokers play a critical role within the domestic over-the-road supply
chain, matching shippers’ demand with trucking capacity. By doing so, freight
brokers create efficiencies and drive cost savings while fostering relationships
across both sets of constituents. That essential, high-value role, paired with
sustained growth of the segment, makes freight brokerage an appealing space for
investors. 

The most successful freight brokers are differentiated across several traits:
technology, scope of solutions, diversity of relationships, and scale, among
others. Here, our Transportation & Logistics Group discusses key industry trends
and insights, growth drivers, and company differentiators in more detail,
supported by data from a recent survey Harris Williams conducted of leading
companies in the freight brokerage space.



KEY TAKEAWAYS 

 * Freight brokers play a critical role within the domestic over-the-road supply
   chain, creating efficiencies and driving cost savings for shippers and
   carriers.  

 * Attractive growth, steadily increasing adoption, and opportunities across
   economic cycles make freight brokerage an attractive subsector for
   investors. 

 * While challenges in the current environment remain, brokers remain optimistic
   about future growth prospects and a near-term recovery. The most successful
   brokers are differentiated by technology, scope of solutions, diversity of
   relationships, and scale, among other factors.




AN ESSENTIAL, HIGH-VALUE ROLE ACROSS CYCLES 

Like the broader economy, the over-the-road freight transportation and freight
brokerage markets experience periods of expansion and contraction. In its
simplest terms, during periods of economic strength, the demand to move goods
will increase, and vice versa. 

"Across these cycles, there is often an imbalance of shipper demand and carrier
supply, creating inefficiencies in the market," says Jason Bass. "Freight
brokers address these inefficiencies by facilitating open communication lines
and matching parties on both sides of the transportation equation."

For example, in stronger economic environments, shippers’ demand to move freight
is high, often outpacing the supply of carrier capacity. In these times,
shippers will leverage brokers to efficiently locate and secure carrier
capacity. This dynamic is even more pronounced when capacity is "unnaturally
low," as seen in recent truck and driver shortages during the COVID-19
pandemic. 

Conversely, during weaker economic times when the supply of capacity outweighs
demand, carriers turn to brokers to source consistent freight to increase
utilization of their equipment, which would otherwise sit idle. 

In exchange for matching supply and demand, brokers profit from the spread
between what a shipper pays for transportation and what a carrier charges (often
known as net revenue margin). While carrier costs are largely a pass-through
from brokers to shippers, there is often a lag between changes in these
underlying rates carriers charge brokers and the rates brokers pass along to
shippers. For instance, during periods in which carrier capacity outstrips
shipper demand, carrier rates decline, as do brokers’ costs to secure that
capacity. However, the pricing that brokers have with their customers tends to
be stickier than that of carriers, so broker margins benefit as costs decline
faster than revenue. 

While these market dynamics can lead to meaningful revenue swings on an absolute
dollar basis, brokers have been able to maintain relatively consistent margins
across market cycles (Figure 1). 

Figure 1:

SOURCE: TRANSPORT TOPICS, NET REVENUE MARGINS FOR TOP 30 BROKERS 


Brokers achieved strong margins in 2022, yet that trend has reversed into 2023.
Many have seen margin pressure stemming from the supply of capacity exceeding
the demand of shippers due to shifts in consumer spending and retail inventory
trends, and this pressure is expected to persist for the balance of the year.
According to our May 2023 freight broker survey, approximately 55% of those
surveyed expect year-over-year net revenue margin declines in 2023, with 25%
expecting declines of at least 250 basis points.  

Brokers are also experiencing challenges on the net revenue generated per
shipment or per load. Approximately 95% of survey respondents expect net revenue
per load to fall in 2023 relative to 2022 levels.  

However, some brokers have been able to mitigate some of these revenue and
margin challenges via volume increases and market share capture, particularly
those with more specialized capabilities like less-than-truckload and
refrigerated. “Our survey indicates that 50% of respondents expect volumes to be
flat to up year over year in 2023, with that figure increasing to 55% for more
specialized and diversified providers” notes Frank Mountcastle. "Brokers
covering multiple modes and/or providing solutions to more complex freight moves
can support more resilient growth given these services can often be done at
higher margins with a more consistent demand profile."

As brokers continue to navigate the various shorter-term rate and volume
dynamics in the market, the increasing adoption / utilization of brokers among
the shipper base continues to position the sector for long-term growth.
Increased adoption (or broker penetration) refers to the growing percentage of
shipments being run through brokers rather than shippers and carriers
coordinating directly. Given the strength of the broker value proposition to
both shippers and carriers across cycles, brokerage penetration has increased
consistently over time, a trend that will continue in the future (Figure 2).  

Figure 2:

SOURCE: RXO INVESTOR DAY PRESENTATION, OCTOBER 2022



Greater adoption enables brokers to capture a larger piece of the market on an
annual basis, which can offset negative macroeconomic impacts on the broader
market. While most freight brokers we surveyed (75%) believe penetration will
increase over current levels in the long term, ~60% believe there will be some
declines in penetration over the next 12-18 months before returning to growth.
This is likely stemming from material dislocation in supply and demand during
and immediately following the COVID-19 pandemic, which caused an acceleration of
broker penetration. This has been followed by more muted demand and a looser
capacity environment, causing deflation in freight rates, volumes, revenue, and
temporarily slowing penetration.

Despite these recent challenges, there is a sense of optimism in the market.
From those we surveyed, brokers appear to have their eye on the next two to
three quarters for the beginnings of a broader recovery as freight rates have
likely reached a floor, and capacity continues to exit the market. "Overall, our
survey confirms that while freight broker performance has been negatively
impacted in 2023, companies are fairly confident in a near-term recovery as
retailers seem to have largely worked through existing inventories and begin
restocking, and consumers adjust to current economic conditions," concludes Jeff
Kidd (Figure 3). (Contact our senior bankers to request the full survey report.)


Figure 3:

SOURCE: HARRIS WILLIAMS FREIGHT BROKERAGE SURVEY, JUNE 2023




FIVE KEY FACTORS 

A proven ability to add value across economic cycles long-term, stability on a
net revenue margin basis, and increasing penetration of brokerage solutions over
time drives investors' interest in the sector. "Factor in the supply chain
disruption of the past several years, and it's not surprising that many of the
top companies in the space have achieved strong growth in recent years," says
Nick Petrick (Figure 4). 

Figure 4:

SOURCE: TRANSPORT TOPICS

While recent market dynamics have put some temporary downward pressure on this
revenue growth, opportunities abound for brokerage platforms to differentiate
themselves, capture additional market share, and position themselves for the
future, creating an attractive opportunity in which investors can generate
value. "We view 2023 as a great opportunity for leading platforms to demonstrate
their differentiation relative to the market, particularly in a challenging
environment for the sector overall," adds Petrick.  

As investors assess freight brokerage firms, five key factors merit
consideration. 

Diversity of Services: One such factor is the ability to service multiple kinds
of freight, from dry van truckload and less-than-truckload to more specialized
freight types such as refrigerated, oversized, and flatbed. Due to the higher
value and/or more complex shipping requirements associated with specialized
freight, these areas often have more resilient pricing and margins, allowing
brokers to better withstand market volatility. Brokers that offer these multiple
modes and equipment types can provide more integrated solutions that are
increasingly in demand among shippers.  

Complementary, Integrated Solutions: Many brokers are expanding their services
to include offerings like managed transportation, including the provision of
outsourced transportation planning, execution, and optimization of a company's
logistics function via technology and consulting services. Some brokers are
offering integrated capacity solutions, such as trailer ownership and trailer
pooling services. The ability to offer more services to complement existing
brokerage capabilities can create a more holistic, full-service solution while
increasing customer stickiness, driving recurring revenue and strengthening
margins. 

Breadth of Shipper and Carrier Networks: A broker's reach and depth of
relationships across both shipper and carrier networks can drive significant
value and market share capture. 

On the shipper side, brokers' ability to service a diverse shipper base—from
enterprise-level Fortune-500 to small-to-medium-sized businesses—can enhance
performance resilience and growth potential. Tailoring go-to-market strategies,
technology, and modal access to each customer leads to longer-lasting,
partnership-based relationships as opposed to transactional interactions.  

On the carrier side, the landscape continues to evolve and drive more demand for
freight brokers. The U.S. carrier network, particularly on the truckload side,
has become more fragmented as a high volume of smaller companies entered the
market in 2021 and 2022. In this environment, 99% of carriers operate with less
than 100 trucks (Figure 5). 

Figure 5:

SOURCE: JP MORGAN RXO INITIATING COVERAGE REPORT, JANUARY 2023. FMCSA DATA

"These dynamics support continued demand for brokerage services," says Jon
Meredith. "Small carriers often don’t have the time or desire to manage business
development or customer relationships, turning to brokers to source customers on
their behalf. Brokers that can cultivate networks that include both scaled
carriers operating larger fleets of equipment as well as smaller, single-unit
fleets enhance their reliability in sourcing capacity for shippers."

Technology Adoption Coupled With Human Touch: Companies that use advanced
technology to provide visibility, optimize pricing, improve carrier and route
optimization, and automate the matching of freight demand with available
capacity will be well positioned to create long-term value. However, technology
investments cannot be made in a vacuum, and the use of human intervention to
help solve complex challenges (particularly with more specialized modes) and
deliver high levels of customer service will drive the best results. This
facilitates more sustainable solutions and deeper customer relationships,
supporting long-term, profitable growth.  

Scale: Rather than working with a variety of brokers, shippers and carriers are
increasingly seeking end-to-end solutions from a smaller network of brokers.
Scaled providers can offer this value through technology solutions, more
efficient operations, better pricing, and broader geographic coverage, all of
which allow them to establish trusted, long-term partnerships. Scaled providers
can also better capitalize on a freight brokerage landscape that remains
fragmented, featuring a large population of acquisition opportunities capable of
driving growth via M&A.


AN OPPORTUNE TIME 

No matter the economic environment, freight brokers solve the complex problem of
connecting shippers with carriers and balancing supply and demand. As such, they
are essential partners to a vast and fragmented universe of shippers across
industries and geographies, as well as the equally large and fragmented pool of
carriers.  

In the most challenging supply chain crisis in recent history, adoption of
freight brokers by shippers increased dramatically. For many shippers, the value
proposition of freight brokers is too strong to return to insourced freight
management. It’s not surprising, then, that the freight brokers we surveyed
expressed confidence in future growth, margin sustainability, and increased
adoption despite recent challenges.  

"It's a great time for freight brokerages to apply the principles we discussed
to pull ahead and gain share," says Bass. "We are also entering an interesting
and potentially opportune time for investors to put capital to work behind the
best of the best in this critical sector of the transportation and logistics
landscape."


FREIGHT BROKERAGE SURVEY RESULTS

In June 2023, Harris Williams surveyed leaders from approximately 30 freight
brokerage firms to gather their perspectives on company and subsector
performance. The survey featured a blend of respondents across modes (25% dry
van truckload focused, 15% diversified truckload equipment (including reefer,
flatbed, heavy haul), 55% diversified modes, and 5% less-than-truckload focused)
and target customer base (15% enterprise customer focus, 25%
small-to-medium-sized business, and 60% blended).

Contact our senior bankers to request the full survey report.


SELECT ACTIVITY


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CONTACTS

Jason Bass

Managing Director



Jeff Kidd

Managing Director



Frank Mountcastle

Managing Director



Jon Meredith

Director



Nick Petrick

Director




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