Top 25 Freight Forwarders: Fast forward toward recovery

The old version of the freight forwarder is one who would speak directly with clients and warehouses around the world to arrange the movement and storage of freight. Today, the description of a forwarder has become far more complex.

They now take this information and pass it along to the appropriate party whether that be the carriers, third-party service providers, Custom agents, or the shippers themselves. Along with making certain that the freight gains entry into the country, a forwarder must now arrange for cargo to be picked up and delivered to the final consignee’s place of business. This requires contacting trucking companies, rail lines, or even sometimes exporting the goods to a different country for final delivery.

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This complexity has created new opportunities for some of the world’s leading freight forwarders to upgrade their services and IT capabilities in order to keep up with growing demand. And while industry analysts differ somewhat on just who belongs on the “Top 25” list this year, all agree that the same players are only going to get bigger, smarter, and stronger as the global marketplace spreads into new regions.

Who’s at the top?
Research by Transport Intelligence (Ti), contained within its latest report Global Freight Forwarding 2011, finds Swiss-based Kuehne + Nagel (K+N) topping the ranking of the world’s largest forwarders in 2010 in terms of combined air and sea freight revenues. According to Ti, DHL came in second place.

The leading 10 freight forwarders make up 44 percent of the total market. This share has been gradually increasing—from 40 percent in 2006—as the largest players crowd out smaller competitors. However, the market is still highly fragmented with K+N holding just under one tenth of the total.

Largest, however, does not necessarily mean the most profitable, says Ti analysts. Expeditors enjoys margins of over 9 percent compared with most of the largest companies, which operate at margins between 2 percent to 4 percent.

According to Ti CEO John Manners-Bell, the market will enjoy another successful year in 2011. “Forwarders are enjoying somewhat of a golden period,” he says. “Air and sea volumes are still growing albeit not as rapidly as last year. In addition to this, extra capacity brought on by shipping and air carriers has meant that rates have softened, meaning that forwarders’ gross margins will expand.”

Dick Armstrong, chairman of supply chain consultancy Armstrong & Associates, says that his research came to many of the same conclusions. “We had DHL ahead of K+N in our net-earnings picture, but the leading providers are really in very heated race at the top,” says Armstrong.

He adds that there’s a certain paradox when considering that most of the strongest performing companies are from Europe when most of the actual business is generated in the Asia Pacific arena. “And don’t expect to see any startups get into this picture,” he says with a laugh. “The barriers to entry are incredibly high, and it would take vast amounts of money and other resources to penetrate this market. The capital outlay for technology alone is overwhelming, and finding the right people to create the network would also be a daunting task.”

According to Armstrong, the top forwarders are simply an extension of global third-party logistics providers (3PLs). Given the huge scale of these operations, it should come as no surprise that they would have the leverage to compete for market dominance.

“And that includes human resources as well,” says Armstrong. “Expeditors, for example, lost a number of high-earning sales executives in the past couple of years. To the company’s credit, they kept faith with their staff by not having lay-offs during the recession. However, by reducing the commissions paid to top performers, they effectively got closer to other dynamic competitors like UPS.”

These “top performers,” says Armstrong, are selling complete supply chain packages in their sales pitch. This includes value-added warehousing and transportation management. “The leading forwarders are going to replace old fashioned sales activity with incentive based pay structures,” he says. “And this, in turn, will reward innovation.”

Is it a “closed” market?
Brandon Fried, executive director of The Airforwarders Association, agrees with most of Armstrong’s conclusions, but takes issue with the “closed” market theory. He contends that “the barrier to entry” into the freight forwarding business is not insurmountable, noting that for those forwarders with a defined business plan focused on specific niche marketing, there’s still room at the top.

“The days of opening a generalized freight transportation business by the small guy may be over in favor of a more focused and specific transportation approach,” says Fried. “Of course, this includes offering additional services that complement the transportation of the box itself. These may include warehousing, local distribution, pick and pack, or some form of commodity assembly before shipping. However, the sensitive, personal touch is always in demand and appreciated by customers who are not willing to be an anonymous entity with their freight company.”

Fried says that while each of the “giant” forwarders do interesting work, K+N tends to receive lots of coverage for its creative shipment fulfillment solutions before or after the transportation cycle occurs. “However, we cannot fail to mention companies like Expeditors,” he says. “This is an outfit that is highly regarded by their customers and continues to receive accolades—not only from clients but Wall Street as well. The firm is highly profitable in a very competitive, asset-free environment.”

Faster future?
While many of the analysts have reported fairly rosy times over the past year, many of the leading forwarders are still cautiously optimistic about their prospects for the remainder of 2011 and into 2012.

“I am pleased with the high organic gross profit growth in our reporting regions of North and Latin America, as well as the Asia Pacific,” says Panalpina’s CEO Monika Ribar. “This year has taken its toll on the volume development, however.”

She adds that after Panalpina terminated certain high-volume, low-margin contracts, the company was not able to compensate for these volumes fast enough with new business. “The market slowdown in the second quarter of 2011 did not help in this regard,” says Ribar.

UPS, a company that Armstrong calls “the 800-pound gorilla of supply chain services,” is equally circumspect. “Despite softening economic conditions, UPS delivered its highest ever second quarter earnings per share,” says Kurt Kuehn, UPS’s chief financial officer. “These results were driven by the quality of revenue in U.S. domestic, superior export volume growth in international, and record supply chain services and freight results.”

CEVA’s CEO, John Pattullo, notes that the company’s performance in the second quarter demonstrates a solid continuation of positive trends over the past year. “Despite the industry-wide softening of freight volumes, we have increased freight management business with our global customers, and we have experienced growth in our contract logistics business in all regions,” he says. “Our new business performance in the period has been excellent with significant wins and contract extensions.”

According to Armstrong, CEVA’s reliance on heavy machinery has been a plus, particularly while it continues to expand into other markets. The company is hardly alone in this regard, however.

“We’re continuing to grow and have kept the positive momentum of the last quarters,” says Frank Appel, CEO of Deutsche Post DHL. “The second quarter once more proves the quality and sustainable nature of the efficiency gains we have achieved over recent years.”

According to Appel, all DHL divisions continued to benefit from the ongoing, albeit slow global economic growth, as well as its market position in the world’s fast growing regions—particularly in Asia.