Getting big in a fragmented industry

When Echo Global Logistics announced recently that it was purchasing a rival for $420 million, it signaled that the 10-year-old company’s ambition to become a dominant player in the highly fragmented industry was far from satiated. But the company’s larger size also makes it a bigger target.

Chicago-based Echo’s deal for Command Transportation in Skokie, which is expected to be completed soon, has the potential to push the firm’s revenue up by close to 50 percent and will result in a nationwide sales force approaching 1,700 people. Next year, Echo is likely to cross $2 billion in sales, up from $35 million during its initial full year of operations in 2006.

Becoming one of the biggest logistics firms in the U.S.—Echo was the sixth-largest freight brokerage this year, according to trade publication Transport Topics, even before buying Command, which ranked eighth—doesn’t diminish the fight for market share with both sophisticated rivals and smaller players.

“It’s becoming more and more competitive,” says Evan Armstrong, president of Madison, Wis.-based Armstrong & Associates, a logistics consultancy that has conducted research for Echo. He estimates the domestic transportation management market could be worth $63 billion this year, with around 2,000 companies trying for a piece of it.

At the top end, Echo’s rivals include Eden Prairie, Minn.-based C.H. Robinson, which had $13.5 billion in revenue in 2014, and Coyote Logistics, a Chicago-based company that’s the fourth-biggest brokerage in the U.S. and earned nearly $2 billion in revenue last year.

Still, Echo CEO Doug Waggoner doesn’t discount “Billy Bob Brokerage,” shorthand for the little guys swarming the sector. “On any given day, on any given customer asking us to quote on a load, we could beat anybody in the industry or we could lose to anybody in the industry,” Waggoner says. “It’s that fragmented.”

The combination with Command should pay off as a trucker shortage makes freight- brokerage services more valuable. Investors have liked what they’ve seen: Echo’s stock closed at $33.82 on April 23, two days after the acquisition was announced, its highest ever. It closed May 8 at $30.56.

“I don’t really feel like there’s any major risk items, but you just worry that momentum’s going to slow or stop or somehow hit a pothole,” Waggoner says. At 56, the California native has been in trucking since 1980, when the industry deregulated but still was an “old school” business dominated by middle-aged men, he recalls.

Like its larger adversaries, Echo, which was founded in part by Chicago tech entrepreneurs Brad Keywell and Eric Lefkofsky, tries to stand out by investing in proprietary technology systems that ease how brokers connect shippers with truckers. In the logistics industry, technology “at the end of the day is going to rule the day,” says Jason Seidl, an analyst at Cowen in New York who follows Echo.

“Our system is highly automated with our clients, which means we’re integrated on the front end for order entry,” says the company’s chief operating officer, David Menzel.

BOOK OF BUSINESS

Echo also fights to hire young, ambitious brokers and keep them around so they build books of business and hone their skills. It’s this workforce that holds the key to improving Echo’s profit margins, which on an operating basis stood at 2.4 percent last year, compared with a 7 percent average among its peers, according to a recent report from Chicago-based research firm Morningstar.

At the company’s headquarters at 600 W. Chicago Ave., brokers chase business in a trading room-like atmosphere. Like other outfits seeking to find young workers and inspire them to stay, the office has the requisite pingpong table, beer on Friday afternoons and a dress style that means the only folks in suits are usually bankers or outside consultants.

Echo is a “relatively young company, and the key to operating margins improving in the future is the degree to which they can grab sales force productivity improvements,” says Matthew Young, an analyst at Morningstar.

Right now, the average tenure at Echo is about 21 months, a number dragged lower by the 20 to 30 people it hires each month, according to Waggoner. But many of those employees are going to stick around because they see opportunities to earn money, develop their careers and win deals, he says.

“In our world it’s about winning more than you lose. It’s about getting smarter and it’s about putting the data to work,” he adds. “It’s getting your people trained up and experienced and more competent. And that’s what we try to do.”

Source: Chicago Business