Mention “logistics” and it may bring to mind shiny FedEx or UPS vans with their neatly uniformed drivers. However, the business of shifting cargo by road, especially larger loads, is far more fragmented and inefficient than the image of its best-known brands would suggest.
Even the world-famous names in parcel delivery compete with many lesser firms. Likewise, “third-party logistics” — the outsourcing of a business’s transport needs, including running fleets of lorries and vans on its behalf — also has some big firms but lots of smaller ones. There is even more fragmentation in what Americans call the “truckload” part of the industry — one-off deliveries of entire lorry trailers — and in the “less-than-truckload” business — the carriage of a pallet or two of goods. Whereas America’s top five airlines earn around 90% of their industry’s domestic revenues, the equivalent figure for the top five logistics firms is just 20%, reckons Armstrong & Associates, a consulting firm. Official figures show that one in nine American truckers is an independent owner-operator rather than an employee.
The entire industry is a juicy target, ripe for disruption. Together, road haulage of all kinds is worth around $700 billion a year in America and more than €310 billion ($335 billion) in Europe. The rise of internet shopping and other factors will help the industry to keep growing, by around 3% a year worldwide for the next decade, according to Deloitte, another consulting firm. But it is a wasteful business. Every year American lorries travel empty for 50 billion miles (80 billion km) — 28% of their total mileage. In Europe, a quarter of the containers on the road are empty, reckons InlandLinks, a container-tracking service.
Some moves have been made towards consolidation. Low fuel prices, cheap finance, and recovering rich-world economies have given larger companies the means and the motive to buy rivals. Last year FedEx bought TNT, a European parcel-delivery counterpart, for $4.8 billion. XPO Logistics of America, a broker in the truckload and less-than-truckload businesses, bought a French firm, Norbert Dentressangle, for $3.5 billion; and then a domestic rival, Con-way, for $3 billion. European firms have joined in too: SNCF Geodis, a French state-owned logistics outfit, recently bought OHL for $800m, to establish a foothold in America.
However, there seems little prospect so far of consolidating the multitude of freelance truckers into employees of a handful of big firms. This is because of the comparatively low barriers to entry in their business, says Jack Semple of the Road Haulage Association, a British trade body. The average cost of a lorry-driving course in Britain is less than £1,000 ($1,400). In California it can be as little as $1,100. Lorries can be leased, or bought on cheap credit provided by their makers. Britain nationalized and merged its biggest haulers in the 1940s, but a state behemoth was outrun by one-man outfits and the business was privatized again in the 1980s.
The best prospects for efficiency and rationalization, then, are in improving the creaky system by which large numbers of freight-brokers haggle with even larger numbers of truckers. Deals can take days of telephone calls to organize. And for their efforts, brokers charge hefty commissions — of as much as 45% of the delivery cost per load for short-haul trips. Brokers have an incentive to choose the priciest options for their clients to extract as high a fee as possible.
Inevitably, a bunch of startups are now seeking to make the business cheaper, quicker and more transparent by replacing the brokers with mobile-app platforms that match shippers’ loads with available trucks and truckers. Cargomatic, based in Los Angeles, lets shippers list local jobs on its app, which are pinged to the smartphones of nearby drivers. When one of them takes on a job, the shipper can track his journey in real time. Trucker Path, already a popular social app that helps around 450,000 registered American drivers find rest-stops and poker partners, is currently testing its Truckloads app, which does something similar to Cargomatic for the long-haul market.
Other systems automatically match drivers to loads, much as Uber does for taxis and passengers. Transfix, developed by a New York startup, not only scans for nearby lorries, but also rates each driver based on how many miles he would have to drive his lorry empty, how soon he will be available and his past performance. The best match is offered the job first. The whole process takes minutes, says Drew McElroy, a founder of Transfix. And the commission is just 10%, a fraction of what some brokers charge.
Other apps are attempting to do the same for containers whose journeys do not just involve the roads. Kontainers, based in Britain, aims to be a one-stop-shop for businesses that want their goods moved across the oceans. Now, to shift a load from a shipper in Britain to a customer in Australia typically requires two days, 20 phone calls and 40 e-mails to reach an agreement, says Graham Parker, one of Kontainers’ founders. He wants to make booking a container shipment as easy as buying a plane ticket. Its website does this by dealing directly with truckers and shipping lines, which provide real-time tracking throughout the journey. Parker says one of his clients discovered though Kontainers that shipping from Britain to Australia could be done in 38 days rather than the 55 his broker had always told him.
Previously Nam Nguyen, of Skyline Steel in Seattle, would call five or six haulage companies whenever he needed to move a load from the company’s yard to a customer. For local jobs he says he now uses the Convoy app, created by another firm in Seattle, which went live in September. The main gains, he says, have been the “huge time savings” and reliability of delivery. Although it was at first assumed that only small businesses would be interested in such apps, big companies have also started to use them too. Barnes & Noble, an American bookshop chain, was one of Transfix’s first clients; Bosch, a German industrial giant, is now one of Kontainers’ best.
Drivers’ hours are restricted by law, so anything that helps them cut the time spent behind the wheel with no load (and thus no pay) is a bonus. Apps can help with this, and in generally helping them find more jobs. Mr McElroy says some of his drivers now average five weekly one-way trips between Indianapolis, where several publishers are based, and Barnes & Noble’s warehouse in New Jersey, instead of four. So they earn 25% more, with less waiting around.
The apps also arrange payments much more quickly than brokers typically do, another important benefit for drivers. Some platforms, such as Transfix, guarantee payment within 24 hours of a delivery. Others, such as Truckloads, allow drivers to filter for shippers’ credit ratings and thus the likelihood of getting paid.
Investors have concluded that such platforms have proved their worth, and are ready to take off. Last year $63 million was raised for seven of these companies, including $12 million for Transfix and $20 million for Truckloads. Such sums are small change compared with the huge sums that taxi-app firms like Uber and Didi Kuaidi are raising, but it is in the haulage apps’ favor that they can achieve scale with such relatively modest sums. And they do not need to attract millions of users to turn profitable. Kontainers says it already has more than 100 businesses as customers in Britain, a number which many offline brokers would be more than happy with.
So far, the big names of road logistics have largely stood back and left the business of “Uberizing” the haulage business to the startups. Dan Lewis of Convoy argues that newcomers such as his have an edge, because incumbents would need to integrate new technology into their legacy systems, and “retrofit solutions rarely outperform something built from the ground up.” As for the established brokers, they have an incentive to maintain the status quo and keep the market offline, argues Parker of Kontainers. This will change if the apps begin to eat into brokers’ business and divert a significant share of work from the big parcels and haulage firms towards freelance drivers.
Brett Parker, a founder of Cargomatic, sees large, asset-heavy logistics firms like UPS and FedEx not as competitors but as future partners, and says many such incumbents are seeking alliances with on-demand-economy firms like his. Others think the incumbents will eventually buy the most successful haulage-broker apps.
Two other, deep-pocketed names are also casting an eye over the delivery business. Uber itself is testing a service in some cities in which its freelance taxi drivers also collect and drop off parcels; and Amazon is developing an app, “On My Way,” which allows any member of the public to get paid for delivering packages. If these two giants eventually adapted their services to cover larger loads — not much of a technological challenge — then the scale of their resources and expertise would be hard to compete with.
By then, another wave of upheaval may be in prospect — including for today’s app-based disrupters — as driverless lorries begin taking to the roads. It seems likely that they will be phased in over a number of years, starting perhaps with bigger, longer-distance loads. An industry that has less need for drivers ought to tip the scales away from freelancers and towards large fleet owners. But the advantages of being able to book a shipment quickly and cheaply by app will remain.
©The Economist Newspaper Limited, London (March 5, 2016)