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C.H. Robinson: a Durable Company in the Competitive Freight Brokerage Industry

In business since 1905, C.H. Robinson (CHRW) is one of the largest third-party logistics companies in the world. The firm acts as a middleman in the transportation industry, helping connect companies that need to ship goods with cost-effective transportation providers that have capacity available via trucks, railroads, airlines, and ships.

C.H. Robinson doesn’t own hard transportation assets such as trucks and is instead a service company that utilizes people and technology to create transportation and supply chain advantages for its customers. 

The company has more than 124,000 customers and maintains relationships with over 76,000 carriers and suppliers, who it purchases shipping capacity from on behalf of its customers. C.H. Robinson takes of cut of each transaction and in return helps clients lower their costs, improve efficiency, and reduce risk.

About 84% of company-wide profits are from C.H. Robinson's North American Surface Transportation segment, which consists of truckload and less-than-truckload services. 

Global Forwarding (ocean, air, and customs services) accounts for another 10% of profits, and C.H. Robinson also has a small sourcing business (6% of profits) that sources fruits and vegetables for grocers and restaurants.

C.H. Robinson's customer base is diversified, with 20% of revenue generated from the food & beverage industry, 17% manufacturing, 14% auto/industrial, 13% chemicals, 12% retail, and 24% other.

The company’s top 100 customers account for only 33% of total sales, further underscoring its diversification. Around 16% of C.H. Robinson’s net income is generated from operations outside of the U.S., and the business is investing to become more global.

Business Analysis

Many of C.H. Robinson’s advantages come from its scale – the company generates more freight brokerage revenue than top rivals Total Quality Logistics and XPO Logistics combined.

If you were a retailer that needed to cost-effectively ship goods across the country, you would want to use a broker that had access to the greatest number of shipping routes and carriers.

If you were a transportation company, you would want to work with a broker that had access to the greatest number of potential customers in need of your shipping services.

With access to more than one million pieces of equipment, C.H. Robinson boasts the largest contracted pool of motor capacity in North America.

The company has relationships with over 70,000 carriers, which provides its shipping customers with supply chain flexibility. In fact, C.H. Robinson delivers its top 500 customers an average of three different services each.

Connecting a global supply chain with hundreds of thousands of participants and even more variables is very difficult, but C.H. Robinson has the necessary relationships, technology, and employees to get the job done efficiently for customers.

As C.H. Robinson continues adding more shipping customers and transportation companies, its competitive advantages strengthen.

The company has expanded its number of transportation company relationships from 40,000 in 2005 to 76,000 at the end of 2018.

Likewise, its base of shipping customers has jumped from 20,500 in 2005 to more than 124,000 today. This gives C.H. Robinson considerable purchasing power when dealing with transportation companies and helps its smaller shipping customers gain access to more affordable rates compared to what they could achieve going it alone.

As a result, C.H. Robinson has enjoyed steady growth in shipments, which more than quadrupled from 4.4 million in 2005 to 18 million in 2018.

C.H. Robinson’s vast global network of offices has also helped it build valuable customer and carrier relationships over the course of decades. Truckload shipments are often shared transactions between offices, underscoring the network's importance and once again putting smaller rivals at a disadvantage.

According to the company, C.H. Robinson has less than 3% market share across its key areas of business in North America. As the firm's network and number of services offered continue to grow, it should be able to take more market share of its large and highly fragmented industries.

The company’s revenue has doubled over the past decade, and continued gains should be possible as C.H. Robinson uses its scale, breadth of supply chain services, extensive network, and technological investments to consolidate the market in the coming years.

Besides market share gains, several secular changes should serve as tailwinds. Supply chains are increasingly global and complex. It makes less and less sense to keep these operations in-house if you are a business that ships goods, which has helped freight brokers take an increasing share of the overall market.
Source: C.H. Robinson Investor Presentation, Armstrong & Associates
Freight volumes should continue to climb, especially as online shopping grows and businesses outsource more of these complicated supply chain activities.

Real-time tracking data and just-in-time inventory are must-haves in today’s world as well, increasing the importance of robust technology systems.

Over the past decade, C.H. Robinson has invested over $1 billion in technology, including the development of Navisphere, the company's global transportation management system. Its platform connects customers, carriers, and suppliers by the method of their choice – electronic B2B, web, mobile, and person-to-person.

The company’s programs automate the majority of all customer interactions and encompass the entire lifecycle of a shipment from notification through the delivery and financial settlement. This allows customers to have full visibility to all shipments and creates moderate switching costs over time.

Smaller service providers may be unable to keep up with customers’ demands for use of comprehensive, streamlined technology platforms.

The increasing importance of global transportation management systems and global trade will likely put further pressure on the industry to consolidate, with larger players such as C.H. Robinson benefiting the most.

At the end of the day, C.H. Robinson appears to be a simple, time-tested business with numerous opportunities for continued earnings growth.

The industry is very competitive with relatively low barriers to entry (hence its fragmentation), but C.H. Robinson’s size, technology platform, breadth of services, and excellent financial health provide support for continued growth. Few companies can match the company’s scalable, reliable, and cost-effective service.

Key Risks

Despite C.H. Robinson’s variable cost structure, its margins can be noisy any given quarter depending on a range of factors – fuel costs, truck capacity, freight volume, etc.

C.H. Robinson’s transportation margin is the spread between the money it gets paid by customers to help them efficiently ship products and the price it pays transportation companies for their shipping services.

Margins usually compress when demand from shippers is weak and C.H. Robinson is unable to pass on all of its carrier costs to customers.

No one knows where margins could trend over the next few quarters, but investors should always be prepared for volatility. Over the long run, the company's margin seems likely to remain in the high teens, just like it has historically.

Long-term, what could challenge the high returns enjoyed by C.H. Robinson?

Amazon launched a freight brokerage service in August 2018, and Uber launched its own Uber Freight solution in May 2017. If either of these companies becomes a meaningful player in this space, prices and margins could come under pressure over the long term.

However, some industry experts are skeptical that Amazon or Uber can become effective competitors, at least not anytime soon.

That’s mostly thanks to the large and fragmented freight brokerage market, C.H. Robinson’s massive two-sided network, and the many challenges of scaling in this industry.

Investors should continue keeping a close eye on the risk posed by Amazon and Uber to make sure that they don't infringe on C.H. Robinson’s long-term profitability.

Besides new tech-savvy entrants eyeing the logistics space, major transportation companies (such as UPS) are continuously trying to bring logistics services in-house and consolidate, reducing the need for middlemen.

C.H. Robinson works primarily with small carriers, mitigating some of this risk. The large and fragmented nature of the market further reduces this risk as there are a number of opportunities for growth, especially as e-commerce continues taking off.

Technology advancements are perhaps a bigger threat because they could potentially disintermediate brokers. The rapid rise of Uber is one example of how technology can quickly disrupt previously slow-changing industries.

However, the transportation and logistics industry has been deregulated since 1980 and subjected to plenty of competition. C.H. Robinson has its own technology platform (Navisphere) that it is continuously investing in. It also has the balance sheet strength to acquire potential threats and turn them into opportunities. 

Many customers and transportation companies have developed a familiarity with C.H. Robinson’s technology as well, creating switching costs. New competitors would also need to deal with the challenge of building a two-sided network.

For now, it doesn’t appear like C.H. Robinson will be disintermediated anytime soon, but it’s worth keeping an eye on. Brokerage and logistics markets are extremely competitive with relatively low barriers to entry and volatile pricing trends.

However, C.H. Robinson’s scale, network relationships, technology platforms, and reputation seem likely to protect its long-term earnings power and growth opportunities.

Closing Thoughts on C.H. Robinson

C.H. Robinson has proven to be a durable company over the years. The business enjoys an asset-light model which generates consistent free cash flow, holds profits fairly steady during industry downturns thanks to its variable cost structure, and earns solid returns on invested capital.

When combined with management's conservative capital allocation and the essential logistics services C.H. Robinson provides, the company has been able to reward shareholders with higher dividends each year since it went public in 1997. 

While the company's margins can fluctuate from quarter to quarter depending on various factors, C.H. Robinson's long-term outlook appears to remain solid. The firm's large and fragmented markets, its leading scale, the challenges of building an effective two-sided market, its continuous investments in technology, and the continued growth in e-commerce shipping volumes all support this view.

As the company continues to expand its number of services and route locations, C.H. Robinson should continue strengthening its moat and rewarding shareholders with predictable dividend growth for many years to come.

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