Logistics Management Group News Editor Jeff Berman recently spoke with Doug Waggoner, CEO of Chicago-based Echo Global Logistics about various topics, including: the freight economy, how Peak Season went, and rates and capacity, among others. Their conversation follows below.
Logistics Management (LM): How do you assess the current state of both the macroeconomy and the freight economy as it relates to Echo?
Doug Waggoner: From an Echo perspective, 2022 was a record year for us, in terms of revenue and profitability. It exceeded our wildest expectations, and I think there are similar stories for most transportation companies. 2022 was a good year. We had a tailwind, with prices elevated. In the second half of 2022, we started to see volumes decelerate, which, of course, caused the prices to come down, so I would say, going into 2023. I was pretty bearish, in terms of what I expected for 2023, and I've been fairly public about that.
In the various talks that I've given with our own employees., I've said that 2023 is going to be a tough year. Volume is going to be down. Price is going to be down. And the reason that I had that prediction was due to things like how inflation has had a dramatic impact on consumer pricing and the fact that the Fed is raising interest rates eventually leads to some unemployment, although that that thesis doesn't seem to be proving out, at the moment, unless you're talking about the tech space. There was a lot of casH that has been injected into our economy by the Fed, all the way back to 2008. I just felt like we were in for a tough 2023, and, indeed, the first quarter slowed down, which I think everyone in the industry would also say. We're seeing less volume than we saw a year ago, but I've kind of changed my tune a little bit just in the last couple of weeks.
LM: In what ways?
Waggoner: I think we may be seeing the bottom right now. There is a lot of noise, though, so it is hard to say, for sure, because even if the economy is soft, the freight economy, although correlated, is slightly disconnected in one way, and that is in how the freight economy depends on supply and demand for capacity the general macro economy will affect that obviously, especially as it pertains to demand. Right now, I would say that demand is soft, but I also think capacity is somewhat capped…by the trucking companies themselves. They really have not been adding capacity. There have been carriers going out of business. The truck manufacturers couldn't make enough trucks, and people didn't get their orders filled. And those orders are predominantly for replacing existing truck capacity. So, I think we could be facing a capped supply of capacity and any tick up in demand whatsoever is going change things from a loose market to a tighter market. But in the last couple of weeks, I think we're actually doing better than I thought we would be. I think that leaves the question of, if this is a U-shaped recovery, how wide is the U? We also know that, especially when it comes to retailers, there's a lot of retailers right now, sitting on a lot of inventory, and that obviously affects what they order. It varies by company and even by industry. It's a lot of different stories, and they all kind of blend together to make whatever it is we see in the in the economy. I do know that some retailers have a lot of inventory, and they have the wrong inventory, so it comes down to how they decide to handle that. Some decide to mark it down and get rid of it, and others will hold on to it and save it for next year. Meanwhile, they don’t have warehouse space to bring in new materials. I think Asia-Pacific rim imports right now are pretty soft largely because, for the most part, inventories are somewhat full.
LM: How do you view 2022 Peak Season activity? It seemed very quiet, or muted, for the most part?
Waggoner: I really did not see a true Peak Season. There was no Peak Season, or if there was, it was very select by commodity or vertical. By the end of the third quarter, we were already seeing the deceleration in the economy. We were seeing volumes slow for truckers and brokers, and really for everybody. We continue to perform well at Echo, but we had to do it on declining margins and manage our volumes pretty closely.
LM: Does 2023, to date, feel similar to how 2022 ended?
Waggoner: From about mid-December through the end of February is always the low point of the year so you would sort of expect January and February to be the bottom of seasonal trends. I always say you don’t how the first quarter is going to look until you get about halfway through March, when you start to see the seasonal uptick. And depending on how strong it is, or is not, sort of makes the quarter. I would say right now January and February have behaved much like a typical January or February relative to the fourth quarter 2022.
LM: Are you seeing things within certain verticals your customers are in, with some sectors maybe, doing better than others, as it relates to demand and capacity?
Waggoner: Not that I can put my finger on. We do move a lot of food and beverage, which is somewhat recession-proof so we certainly don’t feel much pain there. I think industrials have slowed a bit, as has retail a little bit.
LM: What do you think about the potential for a recession in 2023?
Waggoner: I have been saying for a couple of quarters now that there would be a recession, and I think we are probably already in it. The technical definition of a recession is two sequential quarters of negative GDP, and that has already come and gone. But I think the argument is yes, but employment has been strong and the consumer has been strong, so is it really a recession? We are in a freight recession, but like I said earlier I consider 2023 one of those years you have to write off and fight through it and live to fight another day. But, in looking at weekly numbers, I am starting to get the feeling that maybe the worst is over and maybe we are going to see a pickup from here. It is impossible to predict the future in this business.
LM: How do you view the current state of pricing and rates? Are things where you would expect them to be, in terms of seasonality?
Waggoner: What is notable to me is that prices have been coming down for six months, and when that happens contractual shippers want to rebid their routing guides and get lower rates. I have seen two things from shippers. One is there is a move towards shorter contract lengths and that is to basically manage the volatility. Like I said, it is hard to manage the future, and they don’t want to be stuck with high rates and they don’t want to be stuck with low rates that their carriers and brokers can’t fulfill. There has been a move by shippers to go from one-year contracts to, in some cases, six-month contracts or even three-month contracts. It depends on their strategy and how much work it is for them to run an RFP. The other thing I think is notable is that shippers are being very reasonable, because normally when the prices fall, that is their chance to beat you up and get lower rates. What I am saying is that they have learned their lesson from the volatility in the past few years. And they know the rates go up and the rates go down. What they really want is capacity they can depend on. If they beat the rate up too much, and the market does tighten…the capacity won’t be there. I think it has become a lot more reasonable on the part of shippers, and that is good for everybody. It is good for them and it is good for us.
LM: Do you think shippers are sort of thinking more about spreading out their carrier base and maybe maybe spreading out their freight to a larger number of carriers than just a few compared to the past?
Waggoner: Normally when the rates start falling and there is excess capacity, what we hear from shippers is they want fewer carriers. Sometimes we also hear that they want to move some of their capacity from brokers to directly to carriers. That changes quickly when the market tightens up, because they need capacity and brokers are the best ones to help them find capacity. There is quite a variation on the strategies, but I would say, in general, that shippers want fewer carriers and not more.
LM: Are you looking at the West Coast port labor and UPS-Teamsters situations, as it relates to the need for a contingency plan, of sorts, to work off of with your shipper customers?
Waggoner: That is the beauty of our business. We have 50,000 carriers so we have lots of optionality, and…our carriers are largely non-union. When you talk about port or rail labor that can affect intermodal, if there is a labor disruption, it is going to move more freight out to the highways, which would benefit us. There is really nothing we have to prep for. In my past life as an LTL trucker and having to deal with labor, I know it is unpredictable and pretty much impossible to predict how the outcome is going to be.
LM: How do you view Echo’s growth prospects for 2023?
Waggoner: I am pretty bullish for Echo. We have made two nice acquisitions over the last six months. That brings revenue synergy and opportunities to cross-sell and invest further into those businesses with some new adjacent capabilities. We have brought in some new leadership to help with that. I think, that Echo's been probably outperforming most of the people in our space just to growth and profitability. I think we're on a really good trend, and even our results will probably be a little bit less than they were last year, which will be the case, I would imagine for everybody out there, we still think they are going to be pretty strong.
LM: What about the industry’s growth prospects for 2023?
Waggoner: For brokers, it really depends on where they are in the maturity curve. I think if you are a more mature broker with scale and you have the right balance of spot and contract freight, you can weather these times very well. If you are a younger broker and mainly have spot freight, there is not much spot freight out there right now. A larger broker with scale like us can sort of ride the capacity cycle by how much we focus on contract and how much we focus on spot. If you don’t have those two levers, it makes it tough to weather the cycle.
LM: Is Echo looking at making more acquisitions in 2023?
Waggoner: Since we have gone private, it is a lot easier to do M&A. We did two in our first year of being private, and I am sure we will do more. The debt markets are a little bit tough right now, so that is the bad news. The good news is that they change quickly. You are not seeing IPOs right now in the financial community and big M&A that uses debt. We are pretty active and are taking meetings. The other problem right now is how do you value a business because everybody wants to get value on their 2022 results. And we all know that they are not going to have those kinds of numbers in 2023, at least probably not. The multiples are probably coming down. You look at that valuation compression, and it oftentimes creates an impasse between the buyer and the seller.
LM: What are you currently hearing from your shipper customers, in terms of the problems they are looking to you, to help them solve?
Waggoner: They want reliable access to capacity, first and foremost. And depending on who the customer is, they may or may not want tech and automation. In other cases, they want a person they can depend on, so the relationship matters. They want visibility, shipment visibility is a factor. All of those things really come together into our sweet spot. Our company motto is “Technology at your fingertips and experts by your side.” That really is to tell the story that we have technology for the sophisticated people that want it but for the less sophisticated people that want to rely on a person, we have that, too. We will meet our customers wherever they are.