When an industry’s deal-making activity reaches the frenetic levels that freight forwarding witnessed in February 2019, the result is usually consolidation that favors the biggest and most established stakeholders. Yet by the time March 2019 rolled around, it was clear that the legacy freight forwarding business model of the last several decades was dead.
One could be forgiven for missing this profound event amid February’s headlines of massive valuations and superstar acquirers, sellers, and investors. Case in point: Maersk’s acquisition of Vandergrift Forwarding and Platinum Equity’s purchase of Livingston International were largely overshadowed by news of Flexport’s funding round and DSV’s pursuit of Panalpina.
Think you know where this is heading? Are you muttering at your screen about “smoke and mirrors” and a “digital house of cards?” Does this already seem like one more condescending article about technology that creates the same bill of lading you’ve seen for years, only...faster?
If “yes,” then please read on, because this is important.
To be clear, it’s the traditional structure of a freight forwarding business that we are singing dirges for, not freight forwarding as a services business, which continues to remain highly relevant and has been enjoying robust growth in recent years. Let’s take a deeper look at how this ending came about.
The Velocity of Money, Sales, and Goods Combine
Whodunnit? E-commerce retail.
That’s right! The very category of trade that has been driving recent gains in freight forwarding volumes is also the external force that has exposed the structural flaws within the industry.
The trend has been making itself evident for years, as we explained here. Air freight volumes have surged in recent years as cross-border e-commerce sales fueled demand for smaller but more frequent shipments. In ocean container shipping, LCL (Less Than Container Load) services experienced increasing demand compared to FCL (Full Container Load) shipments, and the demand for LCL will continue to grow as shipping volumes increase and technological and competitive dynamics cause unit shipping costs to decrease.
The New Ideal Customer and the Paradigm Shift
Increasing volumes, growing demand, decreasing costs: that all sounds like it’ll help the legacy forwarder, right? Not exactly, and here’s why:
the definition of a high-value freight forwarding customer is changing, and that’s a much more significant disruption to legacy forwarding than any change in logistics technology.
A single 40’ container from a Fortune 500 or Global 2000 shipper -- the typical customer large legacy forwarders were built to serve -- is now of lower value and yield than a consolidated 40’ container with orders from 10 different AliBaba sellers. Those 10 different sellers, by the way, are the customers that the new-era digital forwarders have been chasing for years now.
And for good reason -- the growth potential speaks for itself. Global e-commerce sales grew by 18% in 2018 alone. Contrast that with the 4.7% growth rate of container shipping over the same time frame, and you can start to see how a freight forwarder who shifts focus away from traditional high-value corporate shippers is perfectly situated to ride the growth of e-commerce. Technological investments in customer acquisition and retention make such clients cheaper to service, lose altogether (churn) or win back.
Herein lies the paradigm shift: The ability to grow freight sales is now faster and easier than ever before because the growth is coming from smaller, more frequent volumes of e-commerce shipments and no longer from capturing a market-leading corporate account.
“It is not just about replacing personal relationships with automation to drive costs down,” says Alessandro Pasetti, global head of Loadstar Premium. “At a time when the benefits stemming from a pure asset-light model are increasingly questioned across the industry, to beat your cost of capital the paradigm shift must be embraced and understood.”
How do we know the old freight forwarding model is dead? Follow the money. Late in Q3 2018, media outlets began speculating about a potential $3 billion valuation for Flexport. Almost simultaneously, news also began to spread of a potential $3 billion acquisition of Panalpina by DSV. While Panalpina’s valuation is impressive, Flexport’s valuation is utterly remarkable both in its size and relatively short time frame to realize. Flexport reflects the new investment criterion of the freight business: capital craves growth first, followed by technological capacity and then maybe profits, eventually.
Freight Forwarding: Still Alive (and Growing)
If you’ve gotten up to this point, gritting your teeth over yet another “glory be to digitization,” or worse, another “death of freight forwarding” article, then you’re missing the point!
AliBaba, Amazon, Flexport, Rakuten and many others aren’t entering freight forwarding because it’s a dying business. They’re coming in because it’s a business that is crucial to their growth, perhaps even to their survival.
According to Brian Aoaeh, co-founder of The Worldwide Supply Chain Federation and REFASHIOND Ventures, “What’s happening in freight forwarding reflects the early stages of a supply-side disruption - a change in the way demand is satisfied, leading to a complete shift in the basis of competition among the companies that satisfy that demand. In this case, demand needs to be met using digital channels and digital tools to serve the more frequent, albeit smaller individual volumes of e-commerce freight rather than the less frequent, and larger individual volumes that were the mainstay of incumbent freight forwarders.”
The challenge for incumbent freight forwarders is to embrace the new market dynamics and adjust their approach, not only towards customers but towards the internal processes that have served them well for decades and are now unlikely to be relevant very shortly.
While there is no second-guessing the value of running a business profitably, doing so ought not to come at the expense of growth. In the new age of freight forwarding, growth is the true measure of your forwarding business’s viability.