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CONNECTICUT's
XPO Logistics announced it would be completing
its second major acquisition of the year,
purchasing Con-Way for US$3 billion, recalls
Alex Le Roy of the UK's Transport Intelligence.
Following
the company's takeover of Norbert Dentressangle
in June, this latest purchase means that
XPO will become the second largest provider
of less-than-truckload (LTL) services in
North America, as well as the world's second
largest contract logistics company, said
Mr Le Roy.
Though
these milestones now represent global achievements,
with the company gaining a strong position
in Europe and decent exposure to Asia, the
impact of this latest move will be most
keenly felt in the United States. The chief
reason for this is that it reflects an increasing
push to exploit the North American road
freight market, and in doing so, drive consolidation
in the industry; a hallmark of XPO Logistics
CEO Bradley Jacobs.
Road
freight is typically a low margin business,
particularly when there are few value-added
activities involved in providing the service.
However,
freight brokerage, the sub-segment of the
market that XPO Logistics is targeting for
expansion, represents a high growth area
of opportunity with significant operating
profit margins. For example, the industry
leader, CH Robinson, achieved an EBIT margin
of 5.56 per cent for the 2014 financial
year.
Growth
in this industry is chiefly a product of
two main trends; logistics outsourcing and
technological advancement.
Firstly,
logistics outsourcing shows positive signs
for growth, with demand for logistics providers
remaining high.
This
creates two benefits for freight brokers.
First, the continued increase in demand
for service is in itself a good thing for
business, and second, the ability of brokers
to provide shippers with cost savings is
a strong incentive to choose a broker rather
than opt to go straight to a carrier.
In
essence, this model is based upon bargaining
power; by aggregating customer orders as
a collective, a broker has greater overall
bargaining power than its individual customers,
and is therefore able to negotiate a lower
rate for each individual shipper, by offering
greater volumes to carriers by way of compensation.
This
attraction is typically more relevant to
smaller shippers, however, there are also
benefits for larger customers, as a result
of the second major trend in freight brokerage;
technological advancement.
Advancements
in cloud computing have enabled more rapid
and sophisticated transportation management
systems. Such technology has allowed freight
brokerage to advance by accommodating the
systems necessary to coordinate the activities
of shippers, brokers and contractors, while
also deploying a greater degree of visibility
than has previously been viable. This is
also a trend impacting upon other areas
of logistics with similar characteristics,
such as freight forwarding.
It
is this point regarding visibility, which
has particularly increased the attractiveness
of freight brokerage to larger shippers,
who now see greater service value in the
industry. This is particularly compelling
when the companies involved are well-recognised
players within the industry, such as CH
Robinson.
Information
Technology (IT) is now a major part of the
game, and it is in recognition of this fact
that Bradley Jacobs stated the following
at the 2014 Automotive Logistics Global
Conference: "What are we? We are an
HR company, an IT company that happens to
be servicing transportation companies."
XPO Logistics employs 1,000 IT professionals,
and disclosed that its 2015 IT budget amounted
to $225 million.
At
this point, while cheerleading growth, there
is a looming threat that may halt its expansion,
or at least slow it; the driver shortage.
Essentially,
the issue here is one of supply and demand.
Industry executives and analysts have been
warning about a shortage in the labour market
for truck drivers for some time now, due
to factors such as low pay and a lack of
interest in the job. This scarcity presents
a significant cause for concern among brokers.
The
simple reason for this is that, as asset-light
middlemen in the logistics industry, brokerage
companies make their profits by winning
contracts for freight transportation at
one price, and subcontracting that activity
to small trucking companies or owner-operators
at a lower price.
Ultimately,
the ability to offer this business to subcontractors
at a lower price is predicated on there
being a lot of competition for business
among the subcontractors, and this in turn
is derived from a surplus of labour; ie,
the business model relies on rival subcontractors
competing for the same business, thus attempting
to undercut one another in a race to the
bottom.
This
is only possible however, when there is
a surplus of contractors. When the contractors
are few, each has a greater incentive to
demand a higher price for their services,
as the broker is presented with fewer alternatives
to drive the price down.
At
such times of tight capacity, the broker
is forced to accept this higher rate to
fulfil its customer contracts, though in
doing so, will therefore engender smaller
profits, unless it raises prices.
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