According to a recent white paper released by research consultancy Transport Intelligence, air and sea freight forwarders, freight forwarders, third party logistics, and express and parcel market players are all under pressure to make a profit!
The Transport Intelligence survey found that the vast majority of respondents (89.9%) said profitability would be under increasing pressure.
In addition, excluding the impact of freight volume and rate fluctuations, 61.8% of freight forwarders believe that margin pressure will intensify over the next 12 months due to increased competition and increased customer negotiations.
Overall, the increasingly competitive landscape in the freight forwarding industry is likely to challenge the traditional bargaining power of freight forwarders and shippers, forcing them to operate on thin margins, the report said.
Pessimistic forecasts of increasing pressure on margins can also be explained by the threat of freight forwarders disappearing from the relationship between shippers and carriers, it added.
"We are talking about gross margin, which is the difference between forwarding revenue received from customers and the cost paid to carriers," said Viki Keckarovskam, co-author of the report.
"Overall, there has been a clear negative correlation between carrier rate growth and freight forwarder gross margin changes for at least the last 10 years. As freight rates go down, freight forwarders' gross margins go up. This is true for both air and sea freight, but the relationship is more pronounced for sea freight."
"As a result, when air and sea freight rates fall, carriers' freight forwarding purchase rates also fall rapidly. However, freight forwarders' sales rate to their customers did not fall as fast, mainly because of the contract structure, and therefore the gross margin rose. Basically, gross margins increase when rates go down because freight forwarders don't immediately pass on lower rates to customers. But any increase in margins will be temporary, as lower rates will eventually be passed on to customers."
Commenting on the comparison of current margins to pre-pandemic levels, Keckarovskam said: "In terms of profitability, DSV, Kuehne + Nagel and Expeditors are generally at a higher level and maintain margins above average. In 2022, DSV and Kuehne + Nagel have the highest profit margins. Margins for air and sea agents have improved by about two percentage points compared to pre-pandemic levels."
"However, the era of booming freight forwarding profits has come to an end in 2022, with several major freight forwarding companies, including Kuehne + Nagel and DSV, reporting a retreat in profits in the first and second quarters of 2023 due to a rapid decline in freight volumes."
She added: "There is a considerable variation in the profitability of freight forwarders. Some companies have operating margins of around 10%, while others have operating margins of between 2% and 4%. Yes, margin pressure will be a particular problem for small and medium-sized freight forwarders."
"But there are other things to consider. For example, management and staff, freight forwarders rely heavily on the ability of employees to buy and sell efficiently; In terms of purchasing power, freight forwarders can buy more favorable prices from shipping companies/airlines, either benefit from lower prices without passing them all on to shippers, or take advantage of these lower prices to increase market share with lower profit margins. As a result, the margin pressure on small and medium-sized freight forwarders will be greater."
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