Making Money in Forwarding

By Henrik Holm and Lars Henningsson

Making Money in Forwarding provides a road map for how to be a successful forwarder, and make a great career in forwarding and logistics. It covers all aspects of what a freight planner must know, and do, in order to be successful. 
Readers will learn how to avoid common industry pitfalls and how to focus on profit, cost control, negotiation skills and building customer rapport. The book also shows just how profitable a company in this somewhat unglamorous industry can be, if it is led the right way, thus creating potential for enormous amounts of wealth for investors and employees alike. 
Written by two industry insiders; having a unique mix of hands-on daily practical experience, and the perspective from the Chief Executive Office, they share all of their insights in a way that concepts and actions can easily be applied and taken advantage of.

• Language: English
• Publisher: Troubador Publishing Ltd
• Release date: Jan 28, 2021
• ISBN: 9781800468856

Henrik Holm

Henrik Holm has almost forty years of experience in leading Nordic/Global transportation and logistics companies, including thirty years as CEO for Pakke-Trans/GLS, Nor-Cargo/Bring, DSV, Consignor, Postnord and GDL. Henrik can document high growth and result improvements in all the companies that he led.

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Copyright © 2021 Henrik Holm & Lars Henningsson

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Contents

Introduction

The objective of this book is to help make you a very successful forwarder. Some people say you’ve either got it or you do not. That is just too black and white. While it helps if you have some passion for transports and logistics, know a bit of mathematics, and can see things in 3 dimensions, we can all learn and improve in so many ways.

Forwarding is about planning, but also about being active in the market, to price and to sell. It is about finding creative transport solutions that others do not see, to start up new clients, respond to client demands and start new round-trip traffics. It is about negotiation with suppliers, and not least about making the right decisions, often with limited information.

This book gives you a roadmap to success. And much of the insights come from studying some of the most successful actors in this industry. All of them are now very wealthy men, and almost all started at the rather Spartan forwarding desk, not so long ago. And quite a few of them have been our students and reports.

Making Money in Forwarding is focused on road transport that is perhaps the most complex transport mode; however, many of the learnings in this book can be equally applied to other modes like air, sea and rail.

Key areas

This book covers the 15 key areas that we think the successful forwarder should master:

•Freight market characteristics: fierce competitive pressures

•Business model: the best set-up for a forwarding business

•Legal framework: what are the rules of the game

•Manage suppliers: why managing suppliers is critical for the result

•Keep a tight purse: the importance of cost control

•Raise prices: why raising prices is key in a low-margin business

•Pricing and fees: the importance of pricing discipline and fees

•Plan the trucks: the secrets of successful planning

•The forwarding process: what needs to go right and why

•Cash is king: cash flow is key to keep independence and invest

•Keep your clients: deliver on the basics, or clients will leave

•Environment and CSR: why clients care

•Winning tenders: you need to be good at tenders to grow

•Monitor the pipeline: be prepared to implement new contracts

•Management: unashamed relentless profit focus makes the difference

1.

The European Freight Market

1.1. Contribution to the Overall Economy

Freight and transportation is one of Europe’s major industries. Freight forwarding is a significant part of this, and it is also an industry where many European companies are prominent in a global context. Overall, the transport industry directly employs around 10 million people and accounts for about 5% of the gross domestic product (GDP) in the EU. On a global scale the wider logistics industry has been estimated to have revenues of a mind-blowing US $4.6 trillion.

1.2 The Market Size and Growth Rate

The European road freight transport market has been estimated to 355bn euro in 2019. That is a huge pile of money, and the main purpose of this book is to prepare you for grabbing a nice chunk of it.

This is not exactly a fast-growing industry, basically reflecting the relatively sluggish European overall economic growth. The correlation between GDP growth and the freight market growth is strong, and even more so the correlation with manufacturing output.

International freight grows faster than domestic, mainly reflecting 2 of the EU’s 4 freedoms: free flow of goods and capital between the member countries. There is, therefore, much more inter-European trade today, compared to just a couple of decades ago, as remote corners of Europe get integrated into the wider world economy. Much contributing to the increased trade has been the relocation of labour-intensive manufacturing industries to lower-cost sites, for example in Slovakia, the Czech Republic, Romania, Hungary and Poland. This trend of course favours the largest players that can manage the complexities of the inbound logistics to just-in-time facilities as well as time-critical deliveries all over Europe.

The more dynamic part of the market is international traffics, where growth some years has been quite spectacular, also in real terms. There are big differences between countries, with some of the more focused East and Central European countries having much higher growth than, for example, France and the Netherlands.

Transport Intelligence has the international road freight market at just above 100bn euro.

1.3 An Industry That Is Still Consolidating

Based on industry data and estimates, the major forwarders only sit on about 10% of the total freight market. Some client companies still have their own trucks for distribution, and there are more than half a million hauliers and quite a few niche forwarders with ambition to grow. As the entry barriers are very low, this is likely to continue being a fragmented industry. That said, client demands for equal service across the globe, rapid e-commerce growth, increased demand for part-loads, benefits of scale and one-stop shopping, together with the enormous competitive pressure on profitability, are driving industry consolidation – a process that is far from complete.

The below picture illustrates how a small part of the total freight market has been grabbed by the 10 largest forwarders.

Even if expanding the list to include the top-20 players, these companies together cover less than 13% of the total freight market. No other industry comes to mind where the market concentration is so low. Sure, some types of freight may not be suitable for forwarding, and there could be some double counting, but even when eliminating these, the market remains fragmented.

1.4 Top European Forwarders

The European industry leader is DB Schenker, mainly due to its dominance in Germany. DHL is the second largest player, closely followed by FedEx/TNT, DSV and DACHSER.

As the forwarding companies have a bit of a different organisational set-up, the numbers may not be 100% comparable, but Transport Intelligence is the most well-informed source available, hence why we have used their numbers here.

Behind the top 10, few, if any, have truly pan-European coverage.

1.5 Growth

One should not draw too strong conclusions from just one year, so the below chart is more like a snapshot, but K+N is in a clear growth trend, and XPO is not far behind. Likewise, Dachser has for years had a good turnover development.

The dotted line indicates the nominal growth in international transport. Only 2 of the top-10 industry players are ahead.

DSV Road and DHL appear to be the growth laggards.

1.6 Profitability

As mentioned above, the top industry players are difficult to compare, as they have different organisational set-ups, and some of the privately held ones do not publish profitability numbers.

Of the large traditional forwarders, Danish DSV Road has the highest profitability, reflecting a relentless profit focus, though FedEx, based on their global numbers, is in a class of its own. DHL, that for years has struggled to get above the 2% level, improved profitability in 2018 compared to previous years.

It is worth noticing that it is not necessarily the large traditional forwarders that have the highest EBIT margin. As the below numbers show, some mid-sized owner-operated forwarders are way ahead in terms of squeezing more money out of the business. Size-wise they are in the 200–300m euro range.

The higher profitability is impressive and indicates that the major large road forwarders are far from as effective as they could be. Looking at HCS and Frode Laursen, the profitability is about double that of the most profitable of the larger forwarders. These companies are thus playing in a different league. Is there a disadvantage of scale? Or have these smaller operators just found a way to better utilise their people and equipment?

The rest of the market is covered by hauliers and by specialised niche forwarders. Europe is believed to have more than 500,000 trucking companies, together having about 6m trucks. Some of these are suppliers to the larger forwarders, some serve local markets, some work in regional cooperatives, and yet some act as preferred and trusted hauliers for smaller or mid-sized clients, councils and city governments.

1.7 Porter-Analysis of the Industry

Applying Michael Porter’s framework to the industry shows the immense competitive forces at play.

On the positive side, there are many suppliers, meaning the forwarder’s negotiation position in general will be strong. The entrance barriers are low, however, meaning that a few really good guys in a garage can take a significant chunk of business if they have the right contacts. There are many substitutes, and that weakens the forwarder’s position. In the industry itself there is at least a dozen players with a similar product portfolio chasing the same deals. In addition, there are niche specialists for each market. Luckily there are many buyers with hugely different needs, which is why there is still space for unique solutions.

This is not an industry for the weak-hearted. The market is a bit like the red ocean discussed by W. Chan Kim and Renée Mauborgne in their influential strategy book Blue Ocean Strategy. But there are exceptions. There are some industry niches where the competition is less fierce, and where client requirements are much more demanding than in general forwarding.

1.8 Industry Analysis

Porter would predict high competition and low profitability. He would also foresee some major players considering exiting the industry to get better returns elsewhere. He would predict that an aggressive player with deep pockets could attempt to consolidate the industry. And, in fact, at least some of this is what is happening as we are writing.

Looking at road freight forwarding specific to Europe, the 2 major industry players, DB Schenker and DHL, have both struggled to make their businesses profitable and have at times expressed strategic interest in divesting their road freight operations. Despite having dominated the market for years after aggressively buying up successful country-based forwarders like Bilspedition and ASG, these companies have struggled to convert their advantage of scale into profitability. At the same time DSV and XPO circle around potential targets as hungry sharks, though both, for different reasons, seem to struggle to carry through major road-focused takeovers at this particular time.

Be good at what you are doing, and snap up the non-profitable legacy companies, and the growth potential in this fragmented industry is just enormous. One company that has recognised this is XPO, that has a clear ambition to consolidate the industry and is thus a contender to be a future winner as the industry’s consolidation process continues. For that to happen, however, it must first get its own house in order.

Classic Porter says that cost leadership and differentiation are the only strategies available. As we will see later, cost leadership is important, while it is hard to see any real differentiation. Trucks are the same, terminals are identical and other assets are the same. Booking platforms are similar. The differentiation has thus to be created by the capability and attitude of the people, and by the management culture. Clearly the underlying information systems are important, particularly if offering real-time information and supply chain transparency, but it is hard to see any actor with a lasting advantage in this area. A strong sales machine will, however, be an asset in this kind of industry, where the objective services and products offered are more or less identical, when comparing the major competitors.

The perhaps largest change to the industry is the growth of e-commerce, estimated to increase by almost 50% until 2023. Wherever Amazon enters a market, traditional retail changes dramatically. Expectations on service levels to consumers are increasing. In major cities the future benchmark is for a customer to get the delivery of an item ordered within one hour.

Transport Intelligence is highlighting substantial growth in the less-than-truckload (LTL) market reflecting changing customer preferences. Though little data is available confirming this, such a trend will benefit the largest forwarders that are able to handle a high frequency of direct deliveries to many different destinations.

1.9 Forwarding Is a Low-Margin Business

Like in all low-margin business, cost control is critical for success. Depending on product and complexity, the gross profit margin is typically in the 6–20% span for road transports, and a decent profit can quickly become a loss if anything goes wrong. The margins are small, and a well-informed guess is that the industry average is about 2–4 euro in operational profit per shipment. One does not have to be Einstein to figure out that any extra cost for that shipment quickly brings red figures in the result.

Example: Operating Profit From a Shipment Charged at €100

In this case, one euro saved improves the operating profit by 33%. And a price increase of just 1% likewise improves the result by 33%. These are the fundamentals of