Digital Freight Matching: A Potentially Massive Market That You Should Be Aware Of

Wednesday, August 21, 2019

Technology analyst Mathew Pfau believes that digital freight matching (DFM) is a potentially massive market that has garnered a lot of attention from venture capital and private equity over the past several years. He estimates that digital freight matching companies have received over $600 million in funding over the past five years. Of the companies Pfau researched, many acquired funding from established and high-profile venture capital firms and investors in the technology industry. So what does this mean for public company investors? First, he expects more start-ups and established companies to try to enter the digital freight matching market or pursue tangential opportunities. Second, he believes there are likely to be acquisitions and/or IPOs in this space over the coming years, so it is beneficial for investors to be aware of the market and the major players.

At a high level, the North American full truckload (FTL) freight market is quite simple. Carriers move FTLs of goods for shippers from point A to point B. Shippers typically have contracted carriers that they move a significant portion of their volume with, and for the remainder they leverage the spot market. The split between contracted and spot varies over time based on a number of market factors. In some cases, a shipper will use a broker (versus directly contacting carriers) to book freight and, based on various estimates, brokers account for about 20% of the total North American freight market. The need for brokers is driven by a few dynamics. First, the North American truck freight market is extremely fragmented; of the roughly 250,000 for-hire FTL North America carriers, roughly 86% own between one and five trucks. This level of fragmentation can make matching supply and demand quite challenging. Besides matching demand with supply, brokers typically also qualify carriers before using them to ensure they have the proper licenses, insurance, and vehicle/trailer, and are reliable. Brokers also monitor the shipment and provide exception management—if a carrier does not show up or a truck breaks down mid-shipment, the broker will find alternative drivers or carriers to complete the shipment. For these services, the brokers' fees are typically about 18% of the cost of the shipment (based on our calculation of publicly traded brokers).

Matching carriers with shippers can be a highly manual process involving many phone calls; brokers call carriers in the morning to find out their availability and then try to match that to shipments. Over time, some of the larger brokers have developed in-house software to help with the freight matching process. There are also third-party tools such as load boards that brokers can use to post available shipments and search for available carriers.

Brokers leverage humans and software to connect shippers and carriers. Digital freight matchers aim to automate the brokerage process with software and eliminate a significant portion of the human involvement. Digital freight matchers heavily leverage a mobile app (since truckers are inherently on the road most of the time), but also usually have a website and can tie into transportation management systems. Many have come to describe the digital freight matchers as Uber or Lyft for the freight market. However, while digital freight matching apps share some characteristics with the ride-share apps, Pfau believes comparing the two really undersells the complexity of the freight market—moving a high dollar value of goods hundreds of miles is much more complex than moving a person five miles across town. There are also many different segments of shipping (such as truckload, less than truckload [LTL], parcel/final mile, drayage, dry van, reefer van, and flatbed) and shipping lanes, all of which create complexities.

The North America trucking market is about $800 billion annually and can be divided into FTL private fleets, FTL for-hire fleets, LTL, and parcel/last mile delivery. The number of brokers has increased over time and in total have accounted for a larger portion of the market (based on various industry sources, brokers are roughly 20% of the total trucking market and closer to 30% of the for-hire market). Pfau believes that digital freight matchers will help expand the portion of the trucking market that is booked through a third party—he does not necessarily believe that digital freight matchers' growth has to come at the expense of freight brokers.

Although Pfau believes it is possible that the percentage of the market booked through a third party will increase, he does not anticipate it will ever reach 100%, as shippers will likely always push a material portion of their shipments through their contracted carriers. Combining this assumption with other market calculations, Pfau puts the North America addressable market at $18 billion to $27 billion on a net revenue basis for digital freight matchers. Pfau notes that regardless of the methodology used to calculate the size, the important point is that the market for digital freight matchers is quite large and growing.


For a copy of the "Digital Freight Matching: A Potentially Massive Market That You Should Be Aware Of" report or for more information on the companies from Matthew Pfau's coverage list, please contact your William Blair sales rep.

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