C.H. Robinson Worldwide, Inc. (NASDAQ: CHRW) is the largest freight brokerage firm by revenue in the United States . The company connects shippers (such as manufacturers) with shipping services provided by a fragmented marketplace of small contract carriers. In 2016, 81% of shipments were contracted with carriers who operate less than 100 trucks .
Exhibit 1: C.H. Robinson 2016 shipper and carrier concentration
Source: C.H. Robinson 2016 Annual Report
C.H. Robinson’s value to shippers is its knowledge of the mobile, fragmented, and opaque US long-haul trucking marketplace. Shippers, especially those with complex requirements (e.g., refrigeration) would find it difficult to build relationships with small contract carriers on their own. Similarly, contract carriers would likely have difficulty finding customers. C.H. Robinson facilitates transactions by serving as a “market maker.” In exchange, the company typically receives a 12% commission on the cost of shipping .
The company historically relied on human freight brokers to facilitate transactions . Their rationale was that many shippers had custom needs – such as refrigeration, expiry dates, or light exposure restrictions – which the company needed to accommodate on a case-by-case basis. Today’s digital tools can increasingly handle such complexities, often more efficiently than any human.
The efficiency and cost advantage provided by digitization has proven disruptive in other industries. Uber, a ride-sharing company recently valued at $68 billion, is one of the most visible and successful examples . By automating driver-rider matching and route guidance, Uber realized significant cost and quality advantages over traditional taxicab agencies. It was then able to lower rates for passengers and increase market share.
C.H. Robinson executives recognized the potential for an Uber-like disruption in the freight brokerage industry. In 2012, they launched Navisphere, a technology platform for managing transportation and sourcing activities across the C.H. Robinson network . The platform has experienced modest success, with over 220,000 organizations connected by the end of 2016 .
Uber enters the market
In May 2017, after months of operating in stealth mode, Uber Freight officially launched . The service was initially narrow in scope: Uber Freight only operated in Texas, and was limited to 53-foot dry and refrigerated freight. However, Uber publicly stated its ambitions to grow in the space. As Uber Freight’s director, Bill Dreigart, said: “Uber brings the tech capability and depth of resources and talent that nobody in the space can match .”
Exhibit 2: Current state: NaviSphere and Uber Freight contract carrier interface
C.H. Robinson NaviSphere Uber Freight
In the short term, Uber Freight’s launch posed little risk to C.H. Robinson due to its limited scope and service area. Goldman Sachs wrote: “we do not think that the introduction of disruptive technologies will take significant market share from CHRW in the near term.” However, they said, “it does provide further price transparency to the industry, [which] is likely to pressure margins .” The company continues to invest approximately $25 million per year in growing its online platform, NaviSphere .
In the medium to long term, companies like Uber Freight pose an existential risk to C.H. Robinson’s human-centered business model. The improved information offered by digitization reduces the value of C.H. Robinson’s relationships and market knowledge.
Recognizing this, management invested in several areas that could help in adjusting to the new long-term dynamics of the freight brokerage industry. They formed TMC, a division of C.H. Robinson, in 1999 to provide supply chain technology and consulting services to freight brokerage customers . They also re-positioned the company as a provider of managed third-party logistics (3PL) services, which offer higher margins and improved customer stickiness. However, in 2016, TMC and 3PL solutions comprised just 5.3% of C.H. Robinson’s annual revenue . The vast majority of revenue came from freight brokerage.
C.H. Robinson: A tech company?
“We fundamentally believe that computers are better at logistics than human beings.”
–Kevin Novak, Head of Data Analytics, Uber
Succeeding in the new, increasingly digitized world of freight brokerage will likely require significant changes in C.H. Robinson’s workforce, culture, and processes. Making these changes may not be easy. For example, the company will likely require more IT expertise, but it may prove difficult to hire talented engineers to work at the company’s headquarters in Eden Prairie, Minnesota. These issues are made even more important by the strong network effects present in digital marketplaces, which lead to winner-take-all outcomes . To succeed, C.H. Robinson’s management team must create a feasible plan to ramp up their digital efforts to compete with technically talented, well-capitalized competitors such as Uber while maintaining focus on its core brokerage business.
Strategic direction: reinvest or harvest?
Digitization in the freight brokerage industry seems inevitable. Should C.H. Robinson try to reinvent itself as a company focused on digital logistics platforms? The company is publicly held. Might its investors be better served if the company instead harvested any remaining profits and returned capital to shareholders?
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13 C.H. Robinson Annual Report 2016.