Is disruption finally underway in the freight brokerage industry?

Note: A version of this story was first published on May 10, 2019, at FreightWaves.

On April 25, Amazon announced that it was making an investment of $800 million to reduce delivery times, from two days to one, for members of Amazon Prime. The next day FreightWaves was first to report that, without any fanfare, Amazon had also launched a digital freight brokerage website at freight.amazon.com. Before that, on February 5, Convoy, a startup in Seattle that operates a digital freight marketplace, announced that it can now automatically match 100% of loads to carriers, without human intervention.

These announcements have pushed us farther along a curve tracing the evolution of the freight brokerage market, one that has historically operated on the basis of personal relationships, trust, and phone calls.

What is a market disruption?

A market disruption occurs when new entrants into a market supplant incumbent companies within that market in terms of market share and market power, leading to financial distress for some incumbents.

In his book, The Disruption Dilemma, author Joshua Gans distils what we know about disruption into two major categories;

  • The Demand-Side Theory of Disruption (Demand-Side Disruption) is the more popular and widely known version of disruption because it is the process described and explained in Clayton Christensen’s book The Innovator’s Dilemma. A Demand-Side Disruption is driven by changing customer demands and expectations.
  • The Supply-Side Theory of Disruption (Supply-Side Disruption) is much less well known, and results from research by Rebecca Henderson and Kim Clark. A Supply-Side Disruption is driven by a change in the architectural knowledge that forms the basis by which suppliers satisfy market demand for a service or product.

The freight brokerage market is being attacked on two fronts

Amazon’s entry into the freight brokerage business threatens to shift the basis on which the services of a freight broker are delivered to the market from one reliant on personal relationships, trust, and telephone calls to one that relies on a combination of software, cloud computing, connected devices, stochastic optimization, and automation. These platforms will automatically match carriers to only the most profitable loads, and they will minimize operating costs by automatically optimizing delivery routes. A relatively small number of people trained and licensed as freight brokers would be required to handle complex, unusual, and exceptional situations on an ongoing basis. Such a platform would be tightly integrated through application programming interfaces with all the other supply chain management software that customers rely on, as well as other external sources of relevant data. These platforms will eventually surpass the performance thresholds achievable by the best human freight brokers, and they are already being tested by some of the world’s largest companies. If they pass the preliminary tests and become widely adopted by shippers and carriers, they will represent a supply-side disruption.

Simultaneously, there is already a sizeable population of startups building on-demand digital freight marketplaces with the goal of cutting freight brokers out of the picture. For now, these marketplaces mainly fulfill the function of automatically matching loads to carriers, and they typically target the 10% of the carrier market that is made up of owner-operators. Given the razor-thin profit margins that characterize the trucking market, and the reality that brokers can command fees as high as 40% or more of each transaction, it is not difficult to understand why such marketplaces could potentially win market share from some incumbent freight brokerage businesses as time progresses. These marketplaces also compete directly with load boards. If these digital freight marketplaces succeed, they will represent a demand-side disruption.

There are two wildcards

There are two conditions that have to be met before freight brokerage confronts disruption;

  • First, new entrants have to solve the trust problem. Shippers interests are aligned with those of their freight brokers, and freight brokers act as arbiters of trust between shippers and carriers. Conventional wisdom among industry professionals is that this trust relationship cannot be replicated with software.
  • Second, new entrants have to overcome the cognitive and psychological switching costs that keep carriers and shippers firmly locked into the old way of doing things.

Even just a few years ago it might have been difficult to see how these problems could be solved systematically and satisfactorily with a software-centric approach. Conventional wisdom among industry professionals is that the trust relationship between shippers, carriers, and brokers cannot be replicated through software. I am not so certain. Carriers and shippers have the fundamental need to increase throughput, increase efficiency, and improve profit margins. The new entrants can gain market share by proving that they can satisfy those fundamental needs better than their incumbent counterparts on an ongoing basis.

To be clear, none of the innovations I am describing is a perfect replacement for the best freight brokers. Not yet. That said, venture capitalists have already invested $1.6 billion in FreightTech during the first quarter of 2019. This exceeds the $1.3 billion that was deployed in 2017 and is already 55% of the $2.9 billion invested over the course of 2018. Moreover, REFASHIOND Ventures’ analysis showed that Amazon had $31 billion of cash and marketable securities on its balance sheet as of August 26, 2018. That is more than enough capital to fund a sustained push to redefine the basis of competition in freight brokerage — the $800 million investment it announced is just a beginning.

No industry can escape turmoil if a supply-side disruption occurs within the same period as a demand-side disruption. Fasten your seat belts. We’re embarking on a long and bumpy ride.

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