Digital Freight Forwarding: Getting There
An overview with a focus on India
Summary:
A wave of digitisation in consumer goods, services and content is triggering a re-orientation of supply chains to make them more agile, transparent, and flexible.
Digital freight forwarding is poised to become synonymous with freight forwarding with several aspects already table stakes in the West.
As India continues down the path to become a manufacturing and export powerhouse (even in erstwhile sleepy, non-competitive categories), freight forwarders will be the first order beneficiaries — Multiple players will scale and win parts of the market.
Digital freight forwarders are currently offering/ building a seamless export and import experience for SMEs — who have traditionally been underserved by a fragmented industry.
However, the gold standard and margins will lie with players who offer a “full stack” solution — Freight forwarding, real time visibility, flexibility, leveraging data to create bespoke financing products
In this note, we seek to:
- Introduce freight forwarding (market size, fragmentation, player landscape, unit economics)
- Understand drivers for digitization
- Discuss how margins play out at scale
- Consider how financing could be the next frontier for freight forwarders
- Reflect on our learnings so far
Introduction:
Ever wondered
- Who oils the chains of the massive machine that ensures goods reach you on time, in good condition, from all over the world?
- Which magician conjures up the spells that get a dress (a banana or a tonne of wheat) from Mumbai to Antwerp?
- Who helps make sending 10 tonnes of machinery to the other side of the world as easy as booking a flight ticket?
As always, unseen hands ensure the world works well enough for lives to go on unhindered: Doing the scrappy, hard work, the small things, the “execution.”
These hands are those of Freight Forwarders (“FF”), the “container travel agents”.
And like everything else, this is going digital too.
Let us begin at the beginning:
So, who is a freight forwarder?
- Think of them as a travel agent for cross-border freight — booking cargo space for their customers on ships, planes, and trucks; getting it through customs; managing any delays
Well, can you not do this yourself? What is so tricky about booking space?
- The global supply chain is an intricate network — multiple deliveries and receipt points, modes of transport, and warehouses.
— As many as 20 companies might be involved in a single shipment, and a delay at one node can delay the entire shipment (and maybe several others) - Several of these systems have regional nuances (are customised to weather, timings, geography, and expertise)
- A freight forwarder is the standard connector linking all these nodes — and getting the goods from Point A to B
Alright! It must be quite a large market then…
For an important cog in taking Indian goods to the world, the traditional freight forwarding space is quite fragmented
Fragmented Industry:
By some estimates, ~30,000–70,000 freight forwarders exist in India. This is also true of the global landscape: Kuehne Nagel, the largest freight forwarder in the world, has only ~5% market share
Why such fragmentation?
They primary job of a freight forwarder is to ensure that goods going to a particular destination can procure space on the right vessel, departing on a particular date and time — “Finding a container/ space”
For Sea and air freight carriers, % of filled cargo space is the critical determinant of route and vessel profitability. Freight forwarders play a critical role in selling this space forward and making sure as much of the cargo space is filled as possible.
These freight forwarders rely on their long-standing client base to fill up inventory on these vessels. Years-long relationships with customers and knowledge of the nuances of certain trade routes help sustain a business. Customers rely on their experience and trust them to deliver goods on time to the other side of the world.
Each freight forwarder would have a “supply catchment area” (Say an industrial cluster near Aurangabad) or an expertise in handling certain kinds of goods (say fruits/ vegetables that require refrigerated transport, or chemicals). They aggregate demand from small businesses with low cargo volumes that the large global forwarders or shipping lines/ airlines do not deal with directly.
This is a manual job executed over multiple phone calls, emails (and now WhatsApp). Pricing is not dynamic, and the best rates are not made available (due to lack of volume)
These freight forwarders are family-owned companies with limited ability to invest in technology or working capital resulting in poor/ no ability to scale.
What this has led to:
A patchwork of small freight forwarders operating in certain geographies/ industry segments or for particular trade routes.
The system works, but can it be done better?
“Yes”, said the slow, but inevitable creep of technology
Enter — The Digital Freight Forwarder
Why Digital now?
Digital Freight Forwarders offer a more efficient, wider suite of services vs. traditional freight forwarders.
With a “digital-first” approach, they provide shippers a “single platform view”
What is on the manifest?
Comparing the offerings of Digital (DFF) and Traditional Freight Forwarders (TFF)
The way forward: Traditional freight forwarders digitizing
The growth of digital freight forwarders has not gone unnoticed — Large, global freight forwarders have taken steps to digitise their offerings
However, such digital platforms might be a “feature” vs. a ground-up digital-first approach
The Freight Forwarding Landscape
- Wiz is the largest Indian digital freight forwarder
- Flexport is the largest global digital freight forwarder: Now evolving into a holistic supply chain management and real-time visibility platform
How much money does this business make?
Average margins for sea and air freight forwarding lie in the range of 8–15%
- Margins for pure FCL freight forwarding lie in the 5–10% range
Drivers for Margin Expansion:
- LCL (less than container load), which involves value addition in terms of aggregation, warehousing, etc., can drive higher margins.
- Catering to specific industry segments (e.g.: Pharma, chemicals) is also more profitable because of the cargo’s high value, time-bound nature
- Scale: Carriers seek to offload space on the ship/ airplane to improve utilisation and hence tend to offer significant volume discounts
— By some estimates, 30–40% discounts could be available to freight forwarders who can buy upwards of 100 TEUs a month.
— On a low-margin basis, such discounts expand margins meaningfully - Global leaders (DSV/ Kuehne Nagel) offer an end-to-end solution (Warehousing, Road, Air, and Ocean) to expand margins
Example: Kuehne Nagel Segment wise GP mix
However, on an EBITDA level, a “multi-modal” offering is more profitable than a “sea/ air freight forwarding only” business.
Another case in point is CH Robinson, USA’s largest freight forwarder, 70% of whose revenue comes from road freight broking: the gross profit is low at 7–8%, and despite a 65% conversion to EBITDA, EBITDA margins are in the 4–5% range.
5. “Platform Offering”: DFF leader Flexport offers a suite of products to capture as much of the supply chain as possible — Provide shippers a single window management of their cross-border supply chain
Financing Exports: Digital Freight Forwarding’s Next Frontier
Digital freight forwarders can provide a conducive platform to bring export finance to SMEs. Exporters receive payment for exported goods 30–60 days post shipping — the right product can help free up capital for additional purchases and servicing new orders.
The opportunity is massive and underpenetrated:
- Indian SMEs account for ~50% of Indian export value, but only 5% of the bank loan books (Banks provide LC-based trade finance services only to large corporates)
- Export data (invoices, shipping schedules, etc.) can become a very effective underwriting tool
Drip Capital has proven the viability of such an export financing model. The proposition is even more enticing for DFFs having real-time shipping data visibility and history
Freight forwarders, both traditional and digital have started offering finance products:
- Flexport: Flexport Capital already has financed more than $1 billion in invoices for 500+ importers and exporters across more than 20 countries. In Oct 2022, KKR extended a $200 mn credit facility to Flexport Capital for supply chain financing.
Products offered:
— Inventory Finance
— Logistics Finance - DP World: CARGOES platform (Powered by DRIP Capital).
- Olea: JV between StanC and Linklogis; partnered with Vayana for Indian market.
- Nuvocargo: Financing for carriers
— Payment service for carriers that allows receipt of payments in less than 48 hours for a fee of 3% of the value of the invoice. - Nowports: As part of Series C by Softbank in May 2022, one of Nowport’s bets is to expand the credit offer for customers. $100 million+ will be allocated to financing inventories on its new platform.
- Beacon: Offers a revolving credit facility for importers — to pay suppliers in advance and free up capital.
- UPS Capital: Extensive portfolio of financial instruments for finance and cargo protection.
Key Observations/ Takeaways:
- Digitisation key lever in optimising India’s logistics cost: Driving down logistics costs as a % of Indian GDP from 15–16% currently to the global average of ~8% is a key focus area for the government.
— Digitisation of stakeholders is a crucial lever to accomplish this. - As stakeholders digitise (Ports/ Customs/ SMEs/ Carriers), digital adoption will become table stakes for freight forwarders who operate in a fragmented $20 bn Indian freight forwarding market.
— Case in point: All major traditional freight forwarders have a digital platform now - Most Indian digital freight forwarders are targeting the SME segment (INR 50–250 Cr in annual revenue).
— This segment suffers from opaque pricing and poor digital adoption. - Scaling revenue is relatively easier than margin expansion
— Revenue can be scaled by aggregating and selling FCL/ LCL space with minimal value addition. - Creating a platform with value added services will be the key to expanding margins.
- While a digital platform is critical, client servicing is even more so: Expected to become the differentiator as platform quality normalises across players.
- Potential for prominent verticalized players to emerge: Trade route/ Channel (import/export/ ocean/air)/ Product Segment (Perishables/ non-perishables).
- Large supply chain financing plays could be built on top of EXIM data.
— SME exporters account for 50% of Indian exports but do not have adequate access to bank trade finance.
— DFFs placed well to extend supply chain credit on the back of EXIM, shipping data-based models.
— In Oct 2022, KKR invested $200 mn in Flexport’s supply chain financing business — which has built a $1 bn supply chain finance book.
Overall sources: Pravega research, founder interviews, web research, news articles
