UPS’s plan to seek ‘strategic alternatives’ for Coyote is the latest reminder of a challenging truckload brokerage market

While this week’s fourth quarter earnings call, for Atlanta-based global freight transportation and logistics services provider UPS, was replete with interesting information and data, including nearly 8% revenue decline and 12,000 layoffs, another interesting takeaway was related to its truckload brokerage business, Coyote, which it acquired in 2015.

On the earnings call,  Carol Tomé, UPS CEO, said that it plans to “explore strategic alternatives” for Coyote, which is part of the company’s Supply Chain Solutions (SCS) business. Tomé said that Coyote is business that is highly cyclical with what she described as considerable earnings volatility.

The top UPS executive said that when UPS acquired Coyote, the strategic rationale, for the deal, was really about expanding the UPS portfolio. But that was to come with a caveat, something which was unknown at that time.

That caveat, she explained, was that UPS may not have fully understood, at that time, just how cyclical the truckload brokerage business is.

“When we acquired Coyote in 2015, the revenue in the previous year for Coyote was $2.1 billion,” she said. “During COVID, Coyote peaked up to over $4 billion in revenue. Well, it's gone way down since then. In fact, if you look at our Supply Chain Solutions business, it was down $3 billion year-on-year, which is a third of the overall company decline. Within that $3 billion, Coyote made up 38% of the decline for the year and 48% of the decline for the fourth quarter. So, you can see the volatility in the revenue line, and then we've got a business that has a very low margin. If you've got that kind of volatility on the revenue line, you're going to have even more volatility on the earnings line.”

In turn, Tomé explained that the steep decline led UPS to ponder alternatives to provide the same service, minus the high overhead, or consider that the Coyote business may be worth more to another entity than it is to UPS. That really is the big question here and one that really that cannot be answered until there is some visible traction on the next steps, in terms of UPS seeking strategic alternatives for Coyote.

When UPS acquired Coyote for $1.8 billion in July 2015, the deal was viewed as significant in myriad ways, most notably in how it equipped UPS as a major player in what was viewed as an increasingly crowded truckload brokerage space. Then-UPS CEO David Abney said at the time that the acquisition would significantly increase UPS’s full-truckload scale, adding that UPS was uniquely positioned to take advantage of exciting new revenue growth and synergy opportunities, with UPS, at that time, well positioned to realize a run-rate of $100 million to $150 million of annual operating synergies through this deal, from backhaul utilization, purchased transportation and cross-selling opportunities.

What’s more, around the time of this acquisition, there was a fair amount of M&A activity in the truckload brokerage space. Some other examples included C.H. Robinson Worldwide acquiring Freightquote.com earlier in 2015 for $365 million, and Echo Global Logistics buying Command Transportation in June 2015 for $420 million.

But fast-forward nearly eight years later, through various economic conditions and a pandemic, and it really is a different environment, in the truckload brokerage market, to put it mildly. That was evident with declining, or fluctuating, truckload volumes over the past year, as well as a narrow gap between truckload contract and spot market rates, too. A clear sign that the truckload brokerage market was in a very challenging environment came last October, when Seattle-based digital freight broker Convoy exited the market.

Ben Gordon, founder and managing partner of Palm Beach, Florida-based Cambridge Capital, and managing partner of Ben Gordon Strategic Advisors (BGSA), explained that this development is notable on a few different fronts.

One, he said, is that it signals what he called a back-to-basics strategy.

“You could see this pattern elsewhere,” he said. “Like with Forward Air, for instance, divesting the last-mile business that it sold to Hub Group as an illustration of that. You can see this in the potential spin-off of the U.S. truckload division of TransForce, and I think this is a third illustration of the same theme. I think a second part is we all realized that truck brokerage was cyclical in the last three years, which a lot of people didn't realize prior to this. For example, back in in 1990 through 2018, freight brokerage went up just about every year. And, finally, it got to the point where freight brokerage as a percentage of total logistics just takes got to be so large that the high penetration meant that freight brokerage was indeed cyclical after thinking it was just a continuous growth market.”

The reason for that, according to Gordon, is because back in 1990, penetration of brokerages as a percentage of the total market was less than 5%, whereas now it's over 25%. And he added that this cyclicality has caused a lot of pain for the freight brokerage market in the downturn over the last two years. He also noted that UPS is a company with some unique challenges, because of the union, as well as the 12,000 layoffs it announced earlier this week on its fourth quarter earnings call.

“UPS is limited in what they can do by virtue of the fact that UPS has this union contract that requires them to increase their labor spend, not decrease it, despite the fact that we're in this freight recession,” he said. “So, I think, in that realm, it's highlighted that UPS is trying to resolve the financial pressures generated by a combination of a slowing economy, freight recession, and punitive union contracts. Those are the three big factors that stand up.”

Gordon makes some great points, to be sure. When looking back now, Convoy’s exit—and subsequent freight brokerage-related developments—should not be seen as surprising as they were to some at that time, given the current state of the trucking market then and now, too, with talk of a freight recession, which was being driven by various factors, including: high interest rates; high balances on credit cards; inflation; lower consumer demand; and high gasoline prices, among others. Morgan Stanley analyst Ravi Shanker observed in a research note that Uber Freight and Flexport—while not exiting the market—also reduced staff levels, which he noted “signals tough market conditions (potentially strategically) for other brokers.”

And that is really why UPS’s seeking strategic alternatives for Coyote really should not come as too big of a surprise, at the end of the day.