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Freight brokers play a critical role within the domestic over-the-road supply chain, matching shippers’ demand with trucking capacity. By doing so, freight brokers create efficiencies and drive cost savings while fostering relationships across both sets of constituents. That essential, high-value role, paired with sustained growth of the segment, makes freight brokerage an appealing space for investors. 

The most successful freight brokers are differentiated across several traits: technology, scope of solutions, diversity of relationships, and scale, among others. Here, our Transportation & Logistics Group discusses key industry trends and insights, growth drivers, and company differentiators in more detail, supported by data from a recent survey Harris Williams conducted of leading companies in the freight brokerage space.

Key Takeaways 

• Freight brokers play a critical role within the domestic over-the-road supply chain, creating efficiencies and driving cost savings for shippers and carriers.  

• Attractive growth, steadily increasing adoption, and opportunities across economic cycles make freight brokerage an attractive subsector for investors. 

• While challenges in the current environment remain, brokers remain optimistic about future growth prospects and a near-term recovery. The most successful brokers are differentiated by technology, scope of solutions, diversity of relationships, and scale, among other factors.

An Essential, High-Value Role Across Cycles 

Like the broader economy, the over-the-road freight transportation and freight brokerage markets experience periods of expansion and contraction. In its simplest terms, during periods of economic strength, the demand to move goods will increase, and vice versa. 

"Across these cycles, there is often an imbalance of shipper demand and carrier supply, creating inefficiencies in the market," says Jason Bass. "Freight brokers address these inefficiencies by facilitating open communication lines and matching parties on both sides of the transportation equation."

For example, in stronger economic environments, shippers’ demand to move freight is high, often outpacing the supply of carrier capacity. In these times, shippers will leverage brokers to efficiently locate and secure carrier capacity. This dynamic is even more pronounced when capacity is "unnaturally low," as seen in recent truck and driver shortages during the COVID-19 pandemic. 

Conversely, during weaker economic times when the supply of capacity outweighs demand, carriers turn to brokers to source consistent freight to increase utilization of their equipment, which would otherwise sit idle. 

In exchange for matching supply and demand, brokers profit from the spread between what a shipper pays for transportation and what a carrier charges (often known as net revenue margin). While carrier costs are largely a pass-through from brokers to shippers, there is often a lag between changes in these underlying rates carriers charge brokers and the rates brokers pass along to shippers. For instance, during periods in which carrier capacity outstrips shipper demand, carrier rates decline, as do brokers’ costs to secure that capacity. However, the pricing that brokers have with their customers tends to be stickier than that of carriers, so broker margins benefit as costs decline faster than revenue. 

While these market dynamics can lead to meaningful revenue swings on an absolute dollar basis, brokers have been able to maintain relatively consistent margins across market cycles (Figure 1). 

Figure 1:

Source: Transport Topics, Net Revenue Margins for Top 30 Brokers 

Brokers achieved strong margins in 2022, yet that trend has reversed into 2023. Many have seen margin pressure stemming from the supply of capacity exceeding the demand of shippers due to shifts in consumer spending and retail inventory trends, and this pressure is expected to persist for the balance of the year. According to our May 2023 freight broker survey, approximately 55% of those surveyed expect year-over-year net revenue margin declines in 2023, with 25% expecting declines of at least 250 basis points.  

Brokers are also experiencing challenges on the net revenue generated per shipment or per load. Approximately 95% of survey respondents expect net revenue per load to fall in 2023 relative to 2022 levels.  

However, some brokers have been able to mitigate some of these revenue and margin challenges via volume increases and market share capture, particularly those with more specialized capabilities like less-than-truckload and refrigerated. “Our survey indicates that 50% of respondents expect volumes to be flat to up year over year in 2023, with that figure increasing to 55% for more specialized and diversified providers” notes Frank Mountcastle. "Brokers covering multiple modes and/or providing solutions to more complex freight moves can support more resilient growth given these services can often be done at higher margins with a more consistent demand profile."

As brokers continue to navigate the various shorter-term rate and volume dynamics in the market, the increasing adoption / utilization of brokers among the shipper base continues to position the sector for long-term growth. Increased adoption (or broker penetration) refers to the growing percentage of shipments being run through brokers rather than shippers and carriers coordinating directly. Given the strength of the broker value proposition to both shippers and carriers across cycles, brokerage penetration has increased consistently over time, a trend that will continue in the future (Figure 2).  

Figure 2:

Source: RXO Investor Day Presentation, October 2022​

Greater adoption enables brokers to capture a larger piece of the market on an annual basis, which can offset negative macroeconomic impacts on the broader market. While most freight brokers we surveyed (75%) believe penetration will increase over current levels in the long term, ~60% believe there will be some declines in penetration over the next 12-18 months before returning to growth. This is likely stemming from material dislocation in supply and demand during and immediately following the COVID-19 pandemic, which caused an acceleration of broker penetration. This has been followed by more muted demand and a looser capacity environment, causing deflation in freight rates, volumes, revenue, and temporarily slowing penetration.

Despite these recent challenges, there is a sense of optimism in the market. From those we surveyed, brokers appear to have their eye on the next two to three quarters for the beginnings of a broader recovery as freight rates have likely reached a floor, and capacity continues to exit the market. "Overall, our survey confirms that while freight broker performance has been negatively impacted in 2023, companies are fairly confident in a near-term recovery as retailers seem to have largely worked through existing inventories and begin restocking, and consumers adjust to current economic conditions," concludes Jeff Kidd (Figure 3). (Contact our senior bankers to request the full survey report.)

Figure 3:

Source: Harris Williams Freight Brokerage Survey, June 2023

Five Key Factors 

A proven ability to add value across economic cycles long-term, stability on a net revenue margin basis, and increasing penetration of brokerage solutions over time drives investors' interest in the sector. "Factor in the supply chain disruption of the past several years, and it's not surprising that many of the top companies in the space have achieved strong growth in recent years," says Nick Petrick (Figure 4). 

Figure 4:

Source: Transport Topics

While recent market dynamics have put some temporary downward pressure on this revenue growth, opportunities abound for brokerage platforms to differentiate themselves, capture additional market share, and position themselves for the future, creating an attractive opportunity in which investors can generate value. "We view 2023 as a great opportunity for leading platforms to demonstrate their differentiation relative to the market, particularly in a challenging environment for the sector overall," adds Petrick.  

As investors assess freight brokerage firms, five key factors merit consideration. 

Diversity of Services: One such factor is the ability to service multiple kinds of freight, from dry van truckload and less-than-truckload to more specialized freight types such as refrigerated, oversized, and flatbed. Due to the higher value and/or more complex shipping requirements associated with specialized freight, these areas often have more resilient pricing and margins, allowing brokers to better withstand market volatility. Brokers that offer these multiple modes and equipment types can provide more integrated solutions that are increasingly in demand among shippers.  

Complementary, Integrated Solutions: Many brokers are expanding their services to include offerings like managed transportation, including the provision of outsourced transportation planning, execution, and optimization of a company's logistics function via technology and consulting services. Some brokers are offering integrated capacity solutions, such as trailer ownership and trailer pooling services. The ability to offer more services to complement existing brokerage capabilities can create a more holistic, full-service solution while increasing customer stickiness, driving recurring revenue and strengthening margins. 

Breadth of Shipper and Carrier Networks: A broker's reach and depth of relationships across both shipper and carrier networks can drive significant value and market share capture. 

On the shipper side, brokers' ability to service a diverse shipper base—from enterprise-level Fortune-500 to small-to-medium-sized businesses—can enhance performance resilience and growth potential. Tailoring go-to-market strategies, technology, and modal access to each customer leads to longer-lasting, partnership-based relationships as opposed to transactional interactions.  

On the carrier side, the landscape continues to evolve and drive more demand for freight brokers. The U.S. carrier network, particularly on the truckload side, has become more fragmented as a high volume of smaller companies entered the market in 2021 and 2022. In this environment, 99% of carriers operate with less than 100 trucks (Figure 5). 

Figure 5:

Source: JP Morgan RXO Initiating Coverage Report, January 2023. FMCSA data​

"These dynamics support continued demand for brokerage services," says Jon Meredith. "Small carriers often don’t have the time or desire to manage business development or customer relationships, turning to brokers to source customers on their behalf. Brokers that can cultivate networks that include both scaled carriers operating larger fleets of equipment as well as smaller, single-unit fleets enhance their reliability in sourcing capacity for shippers."

Technology Adoption Coupled With Human Touch: Companies that use advanced technology to provide visibility, optimize pricing, improve carrier and route optimization, and automate the matching of freight demand with available capacity will be well positioned to create long-term value. However, technology investments cannot be made in a vacuum, and the use of human intervention to help solve complex challenges (particularly with more specialized modes) and deliver high levels of customer service will drive the best results. This facilitates more sustainable solutions and deeper customer relationships, supporting long-term, profitable growth.  

Scale: Rather than working with a variety of brokers, shippers and carriers are increasingly seeking end-to-end solutions from a smaller network of brokers. Scaled providers can offer this value through technology solutions, more efficient operations, better pricing, and broader geographic coverage, all of which allow them to establish trusted, long-term partnerships. Scaled providers can also better capitalize on a freight brokerage landscape that remains fragmented, featuring a large population of acquisition opportunities capable of driving growth via M&A.

An Opportune Time 

No matter the economic environment, freight brokers solve the complex problem of connecting shippers with carriers and balancing supply and demand. As such, they are essential partners to a vast and fragmented universe of shippers across industries and geographies, as well as the equally large and fragmented pool of carriers.  

In the most challenging supply chain crisis in recent history, adoption of freight brokers by shippers increased dramatically. For many shippers, the value proposition of freight brokers is too strong to return to insourced freight management. It’s not surprising, then, that the freight brokers we surveyed expressed confidence in future growth, margin sustainability, and increased adoption despite recent challenges.  

"It's a great time for freight brokerages to apply the principles we discussed to pull ahead and gain share," says Bass. "We are also entering an interesting and potentially opportune time for investors to put capital to work behind the best of the best in this critical sector of the transportation and logistics landscape."

Freight Brokerage Survey Results

In June 2023, Harris Williams surveyed leaders from approximately 30 freight brokerage firms to gather their perspectives on company and subsector performance. The survey featured a blend of respondents across modes (25% dry van truckload focused, 15% diversified truckload equipment (including reefer, flatbed, heavy haul), 55% diversified modes, and 5% less-than-truckload focused) and target customer base (15% enterprise customer focus, 25% small-to-medium-sized business, and 60% blended).

Contact our senior bankers to request the full survey report.