Our Services
My Traderoom
Mobile 
QR Code 
Cart(0)
You are now at: Home » News » Logistics News » Text

Freight Brokers Poised to See Gross-Margin Expansion

Enlarged font  Narrow font Release date:2022-09-12   Browse number:3
Note: A survey released Aug. 31 by Truckstop.com and Bloomberg Intelligence found 52% of brokers expect spot rates to remain f
 Truckstop.com building
A survey released Aug. 31 by Truckstop.com and Bloomberg Intelligence found 52% of brokers expect spot rates to remain flat or move down over the next six months. (Truckstop.com)

[Stay on top of transportation news: Get TTNews in your inbox.]

Stable spot rates coupled with rising contractual rates could help drive gross-margin expansion for freight brokers, according to experts.

The spot market has been going through a process of normalization this year. The high demand and rates brought on by the coronavirus pandemic have been declining, thus creating a more stable environment.

 

 
 

“When there’s a normal amount of freight in the market and the rates have come down, they do that because the load postings have dropped, the capacity becomes not as tight,” Brent Hutto, chief relationship officer at Truckstop.com, said. “What that means is the negotiation between the broker and the carrier doesn’t favor one or the other. It was favoring the carrier to a high extent for a long time. Now it’s come back down to balance.”

Brent Hutto

Hutto

Truckstop.com and Bloomberg Intelligence released a survey Aug. 31 that found 52% of brokers expect spot rates to remain flat or move down over the next six months. But about 36% of brokers expect to see contract rates go up. The survey also found 54% of brokers expect a widening in gross margins over the next six months.

“Their gross margin should expand because if the carrier doesn’t have an advantage negotiating what the rate amount is going to be, then the rate is going to be lower than it would’ve been,” Hutto said. “But the broker’s rep margin should increase because they’re not having to give part of their margin away to the carrier.”

Truckstop.com data shows that spot rates have been precipitously dropping since starting the year at an all-in average of $3.13. That compared with a five-year average of $2.20. But that decline started to plateau at around $2.60 over the past four weeks. The current spot rate now is $2.64 on average, but that includes the broker fee and high fuel costs.

“The contract rates are presently at about 33 cents above the spot rate,” Hutto said. “That’s not wide enough for one market to dominate the other; so contracted to dominate spot yet or for spot to dominate contract. And so, what you’ll see is the broker will be able to play that middle a lot more to get more for their movement.

“More freight is moving back to the contract marketplace because the shipper is more comfortable with the pricing that they’re getting presently.”

Hutto doesn’t expect that dynamic to last long, however. He noted that when bid season arrives, shippers will begin to push back on the carrier for lower rates with capacity not being as tight. He noted that goods purchasing is continuing to drop so there is not as much overage freight.

Ashley McMillan

McMillan

“Although spot rates are staying flat and contracted rates are rising, shipment volume is on a downward slope,” Ashley McMillan, senior sales manager at Axle, said. “The flood of shipments from retailers and manufacturers has evened out, and demand continues to decline in certain markets due to high inflation and shifting consumer buying patterns. From my perspective, this softer market will equate to greater margins for established freight brokerages.”

McMillan added the demand for new brokers will not increase until freight volumes rise. She also sees the increase in margins as being temporary as the market starts to stabilize and capacity levels off. She noted that whenever an unexpected surge in consumer demand takes place, the market begins to flood with new motor carrier authorities.

“Owner-operators buy tractors and take advantage of the high spot rates, but with increased capacity, demand begins to stabilize because of the number of carriers entering the market,” McMillan said. “Eventually, capacity will outweigh consumer demand. This is what we’re seeing today and what we saw during the COVID-19 pandemic.”

McMillan noted high diesel prices, insurance prices and bottoming out of spot rates will cause major issues for these new, one-truck owner-operators. She added that capacity will tighten again, and in turn, rates will increase.

David Spencer

Spencer

“We believe this data tells a different story,” David Spencer, director of business intelligence at Arrive Logistics, said. “Brokers did see higher contract freight margins in the first half of 2022 because rates were elevated far above spot rates at the time they were locked in,” he said. “Today, however, brokers are already seeing declining contract rates. We expect this trend will continue and ultimately start closing the gap between contract and spot rates, leading to margin compression for brokers, not margin expansion.”

Arrive Logistics proprietary data shows that this margin compression is underway on spot and contract business. DAT Freight & Analytics data also shows a decline in rate per mile, excluding fuel costs, for contract since February. It went from $2.63 to a current cost of $2.36. Spot rates per mile started declining in January, going from $2.70 to $1.81.

 
Fee Award
 
 

 
Featured
RecommendedNews
Ranking
top