Echo Global Logistics CEO Waggoner addresses key market trends and themes

Logistics Management Group News Editor Jeff Berman recently caught up with Doug Waggoner, CEO of Chicago-based 3PL Echo Global Logistics. Waggoner offered up insights on a whole host of topics, including: inflation; rates and capacity; and M&A, among others. Their conversation follows below. 

Logistics Management (LM): How would you assess the current state of the freight economy?

Doug Waggoner: I think we hit a peak in the first quarter, in terms of both price and volume. There was a little deceleration in the second half of the quarter, in terms of volume, which caused capacity to loosen up a little bit and prices to start coming down. However, I think there has been a little bit of an overreaction to that, and everybody is predicting that the cycle is over.

LM: Do you think that is the case?

Waggoner: I am not there yet. I think we went from a red-hot market to a hot market. And I think the other shoe is going to drop, because now we are coming into produce season, and it is right about now when we see a steady climb over the next 100 days in the freight industry. The other thing is going to be when the boats start coming over from China again, I am pretty sure we are going to see the same thing we saw around this time in 2020, which is a huge backlog at the ports and not enough trucks on the West Coast to move all the freight and getting those trucks there will disrupt the national network and cause shortages elsewhere…and we will be right back in the situation that we have been in for the last couple of years.

LM: In your opinion, is the market current in, or was in, a freight recession? There seem to be some mixed messages out there?

Waggoner: There are a lot of people using this tender rejection rate are a surrogate for whether the market is tight or loose. One of the things we saw happen in the first quarter is that the amount of spot freight went way down. But that is simply because everybody was accepting the loads that were tendered to them, because the rates were so good. I think nominally there was a little bit less freight, but it also shows you how much elasticity there is in the truckload capacity market. When demand or supply changes a little bit, it has an impact on price.

LM: Shifting gears, inflation remains at 40-year highs. What do you make of it, as it relates to things like rising gasoline prices and the market in general?

Waggoner: The economy is still strong, but I do think these inflation rates could drive us into a recession. When you combine fuel prices, transportation prices, and raw materials prices, coupled with the fact that everything is going up, at a much greater rate than income, people are going to start spending less money. One of the things we saw during Covid was the fact that people were buying more stuff, because they were not buying services. If we get into high inflationary times, people are going to buy less stuff. I think they are buying less now, because the economy has opened back up, and people are going on vacations and to the movies and games. But inflation is a problem for our economy.

LM: What about the recent move by the Federal Reserve to increase interest rates, in an effort to cool down the economy, with the goal of lowering inflation?

Waggoner: I think that the only way the Fed can solve inflation is to put us into a recession. There will likely be more rate increases ahead, and the markets and mortgage payers, with variable mortgage rates, are not going to like that, the same goes for companies with a lot of debt. Continuing to raise interest rates will dampen the economy, and I think that is the only tool the Fed has in its tool bag now.

LM: Looking at the situation in China, when things eventually get moving again, you noted there will be even more port congestion, leading to difficulties for shippers in securing capacity out of the West Coast. That comes with challenges, especially in the form of a real timing issue over the second half of the year, due to Peak Season. Are you working with your customers to hedge against that or seeing what happens, in terms of how soon things get going in China again?

Waggoner: I will take a step back to tie it together. In Covid, inventories were drawn down, and there was this double-whammy of companies having to restock their inventories and those that were coming from China were stuck in San Pedro Bay. Since then, inventories have been built back up again, but with no freight coming into the West Coast, you can assume that those inventories are getting burned off. We are really kind of replaying 2020, I believe. We are not working with shippers on that, for the most part, because I don’t think everyone necessarily shares my opinion or it is not in plain sight yet. I think what we are seeing a lot of is shippers are seeing falling rates, and they are trying to take advantage of that and lock in new contract rates. But the problem is they are locking in lower contract rates, but then if rates shoot back up again, they are going to have a lot of tender rejections.

LM: Do you think that situation, in any way, leads to more shippers increasing their usage, or adoption, or dedicated or private fleet operations?

Waggoner: Yes, I do, for people that can sign up for those commitments and find partners, there will be more of that. Even as a broker, Echo does a lot of it. We have a lot of customers, and we arrange what looks like dedicated, even though we use other peoples’ trucks, and we also use a lot of private fleet capacity to move our clients’ freight.

LM: In Washington, there has been a fair amount of criticism regarding the current state of freight railroad service levels. What is your take on it, given that Echo has some intermodal presence?

Waggoner: Intermodal is really not a big piece of our pie. But if service is bad, people simply won’t use it and will shift to truck. I think we have seen some of that in our numbers, with people just opting not to go intermodal.

LM: Is that surprising, given the current run-up in fuel prices?

Waggoner: Railroads try to tend to mirror truckload rates. So, if you think about the fact that they have essentially fixed costs that are much higher than a trucking company…and when truck rates go up, they take advantage of that by raising the intermodal rates. But if they don’t have the service to go with it, they are not making intermodal the more attractive option to truckload. If the rates are relatively the same and the service is bad, people will use truckload.

LM: How much of a concern are the gains in services-based economic activities, in that it takes away from more freight-focused things that move via freight transportation, coupled with people maybe spending less, due to inflation?

Waggoner: The Covid effect has already been changing. I think the shift we saw towards consumer spending we saw in 2020 and 2021 has somewhat evaporated, but that could be exacerbated by interest rates.

LM: The current situation in China, in a sense, has renewed talks of companies taking a longer look at nearshoring. How are you seeing that situation?

Waggoner: It is the type of thing in which people are talking about it, but nobody is doing it really. It seems like the rhetoric has been elevated, but it is no small task to do that, when you have invested a lot of capital in factories and partnerships and those sorts of things. It is hard to just switch your supply chains overnight. That said, there has been a pickup in the maquiladora business in Mexico, for the last few years, and there has been a shift to places like Vietnam and the Philippines, where people can do it, but I don’t see a wholesale shift.

LM: Looking at the e-commerce supply chain, it was thriving during the early stages of the pandemic. Are we now past the peak, at this point?

Waggoner: Well, the Covid effect is over, but I think there continues to be a shift towards e-commerce, because it is just so convenient for consumers at the end of the day.

LM: In a past interview, not long after Echo went private, you noted that Echo would have a bit more flexibility to grow through acquisition. That appears to be happening with Echo’s recent acquisition of Roadtex. What drove the need for that deal?

Waggoner: We have been following Roadtex for a while, and we like the business. We think it is a very attractive niche. There are several things it does, which we like. It has a temperature-controlled business, which includes warehousing and 30 locations, as well as LTL transportation. As you know, there are not a lot of temperature-controlled LTL options out there, so we think this is very interesting and a very good niche. We have a lot of Echo customers that could benefit from this. The temperature range it protects from, they call it protect from freezing and protect from melt, so no colder than 45 degrees and no warmer than 70 degrees. The ideal commodities for that business are confectionary, chocolate, sports [nutrition] bars, and things like that can’t get too hot and can’t get too cold. And one of the things it does that we really like is a lot of consolidation for big box retailers.

LM: How does that work?

Waggoner: A lot of its clients will ship truckloads into warehouses and then move via LTL to all the distribution centers of a big box retailer. We have always liked that business, and we think it is a natural addition to what Echo does, as Echo has great truckload and LTL capabilities. Being able to do retail consolidation is an importation capability and it broadens our portfolio.

LM: Are you looking to make more acquisitions going forward?

Waggoner: Now that we are privately held, we have access to capital and not directly dealing with Wall Street. We are very active in M&A and we have a very strong pipeline of deals we are working on and looking at, too. I would say we fully anticipate doing additional deals in 2022.