Digital freight forwarders and their latest failures are one of the most read topics in the logistics industry. Well, they aren’t failing in the purse sense, but we see more and more signs that something is wrong there. They started loudly and did some incredible things. Still, more and more characters are pointing out that their technology isn’t growing fast enough, those organizations have overspent received investments, their growth is too slow, and the profitability is low. Moreover, the most recent stories Of the Slync CEO’s overspending, Flexports investments into crypto, layoffs, investments into traditional logistics businesses, and other things which may come up in upcoming years point us to the conclusion that there may be problems with their business model.

Those who follow me know that I’m a big fan of digital solutions and still believe in the digital logistics model and that this model will work one day. But I have doubts that today’s existing companies will be able to achieve this. Most likely, we will see new players that will gain traction, or other market players will acquire existing players, and then we may see a renaissance of so-called digital freight forwarders.

In this week’s edition, I will share my thoughts on why digital freight forwarders are failing and what will happen with them soon.

The main characteristics why I believe they are struggling

#1 They were too loud

Digital freight forwarders were among the best customers of any Logistics industry journal and event. They paid big coins for the advertisement. Loud statements such as We will disrupt the logistics business; the logistics business is run with paper and pencil. We will change this, etc. were introduced.

Such statements have gained a lot of negative traction from traditional freight forwarding companies, and of course, they got attention from shippers, which allowed them to grow faster. But at the end of the day, shippers (and other partners like transportation companies, carriers, etc.) are starting to understand that digital freight forwarders do not provide any real difference and that all proactive traditional logistics companies have the same or even higher level of digitization. Moreover, they have real-life logistics experience, which helps when unexpected things happen.

#2 Too little improvement

Companies that disrupted any other industry have introduced markets with entirely different ways of doing things. Uber introduced much cheaper public transportation and increased the quality of taxi services. Netflix brought the movie theatre home. Apple changed our relationships with phones.

And what did digital freight forwarders do? They have reintroduced us with shipment visibility, better communication between partners, and lesser paperwork (not in all cases). And yes, they offered self-service portals that no one wants to use.

Have they offered some life-changing improvements for shippers? No.

Are those improvements super crucial for the industry? No.

Are they saving the environment? No more than other players.

When I’m thinking about the disruption of the logistics industry, I’m thinking about AI-powered decision-making, tokenization of shipments and logistics assets, and fully automated planning functions. Of course, visibility, communications, or other minor changes, are nice to have functions, but nothing more.

It’s precisely why many of them struggle to grow their revenues and profitability because it’s hard to convince shippers and other market players to switch to providers with minor functionality improvements. So you need to come up with something massive to get the customers. And if digital freight forwarders had made more significant improvements, the growth trajectory would have been much steeper.

I know that some of DFF started marketing sustainability as a differentiator. But here again, I do not see any proof that DFF are more sustainable than traditional freight forwarders.

#3 The solutions they developed become too expensive

The billions poured into the industry seem to be spent not wisely, and the developed solutions become expensive. So there is a big chance that we will see more irrational spending stories and maybe even learn about financial shenanigans in the coming years. Moreover, newcomers (startups) make (visibility, communication, and automation) cheaper and more profound than the existing players.

In other words, those existing companies haven’t created a competitive advantage, as any other player can replicate its solution with lesser investments. And this will become a real pain in the upcoming years.

#4 They have chosen the wrong business model

Digital freight forwarders have chosen to rage war on existing players. And this, I believe, was their fundamental strategical mistake. They haven’t paid attention to the fact that the logistics market is a big industry (with many different means of transportation and services) with different kinds of regulations and that the market was full of strong players that didn’t intend to sit and wait for what will happen. So instead of waiting, they invested heavily in building their digital solutions. And I would say those companies were faster than the digital breed. And as many shippers have much broader needs than DFF can provide, there is little sense in switching entirely to digital companies.

If digital freight forwarders had chosen the strategy of becoming digital partners of existing freight forwarders, they would have gained more importance. Instead of the war, I believe they needed to take the way of becoming Android in the logistics industry. A digital standard that every logistics company uses.

Digital Freight Forwarders

#5 They started too soon

Digital freight forwarders started too soon. However, the digital business model will make a lot of sense when other supply chain technologies mature, like Micro fulfillment centers, driverless cars and ships, blockchain contracts, and Artificial intelligence’s profound usage.

Considering all the different kinds of regulations between countries etc., we still have many years ahead of us until the above technologies are widely used. So I would say at least 15 years until we see a fully automated and autonomous supply chain. Why do I think so? Because I do not see any fast development in other technologies, except for MFC and Blockchain.

#6 Their technology is evolving too slow

Digital freight forwarders have been in the market for about 10 years. Sadly but we do not see any profound breakthrough in their technology. Look at what Tesla achieved in the 10 years and compare it with digital freight forwarders. Tesla did some remarkable things with their battery technology, and digital freight forwarders are still talking about visbility and paper, and pencil-run freight forwarding business (which is not true). In other words, within 10 years, nothing new was introduced, but billions were consumed.

 #7 Irrational growth

I do not know the customer acquisition costs of digital freight forwarders. But figures should be big considering marketing expenditures, sales bonuses (which were much higher than the market’s average), and other irrationalities. So now we need to ask, will those considerable customer acquisition costs pay off? Of course, as the shipper’s lifetime value Is big, this can pay off. But as the sales were generated with massive marketing and sales development expenditures, and there are no real differentiators of their services, there is a significant considerable chance that a big percentage of generated customers can choose to leave them in the upcoming two years.

Why do I think so? Because DFF created hype with their marketing but not a sustainable business model. And every trend, at some point, loses significance. The pivotal moment was reached this year when digital companies started talking about layoffs, overspending, and management changes. Of course, they have gained momentum with previous marketing and sales activities, but there is a decline in the upcoming years that will change growth in the forthcoming years because they are losing faith.

What will happen with the digital freight forwarders?

 In my opinion, many of them will face problems in the upcoming year or two. Because the cheap money is over, I doubt more VC investments will be made in the existing market players. Bankers will ask for stellar finances and growth. And this will be hard, considering the competitive environment and pace at which other traditional freight forwarders implement digital solutions. The market now can offer many digital tools for traditional businesses. Traditional freight forwarders can become digital freight forwarders without significant investments. And this fact will eliminate the wow point of digital freight forwarders. Moreover, the upcoming recession will not help them to grow faster. Let’s face it the growth cycle is over, and less money will be spent on shiny tech solutions as companies prefer practical things, like cheaper freight, insights, and long-term partnerships during a recession.

Moreover, existing market players are also starting to invest in marketing and advanced business development strategies, so the fight will not be as easy as before.

The two upcoming years will be decisive for DFF. In my opinion, some will be acquired by ocean carriers, who are entering new market niches in the case of ocean digital freight forwarders. This type of acquisition can work out with the added understanding of the logistics market and generated profits of the ocean carriers, which can spend on future developments.

Digital freight forwarders can also be interesting for online retailers. Still, as the e-commerce segment is also facing problems, there is a big chance that they will skip any unnecessary investments shortly.

Maybe Amazon is also considering acquiring Flexport. Perhaps they exported Dave Clark to find out if Flexports solution can add value to Amazon.

Ultimately, I want to say that digital freight forwarders also did some great things for the industry. They showed other market players that digital processes are essential for any organization. They showed the way for other market players. Therefore I can’t entirely agree that the investments made into DFF were a waste. I will look at the future market developments with huge interest. As I said, I do not write of digital players, as digital is the future, although the business model can be completely different.

Thank you for your time.

About the Author:

Thomas Ananjevas is a supply chain professional with 15 years of experience purchasing and selling Logistic’s services and building a supply chain from scratch. He founded a consulting, training, and staffing company that works exclusively with the logistics industry. Tomas is helping logistics companies implement the necessary changes to ensure business growth and continuity. You can arrange a time to talk with Thomas about possible synergies by clicking here.

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