Dynamics behind Flexport’s leadership change signal digital forwarding’s natural endpoint

A Sept. 15 headline in The Information, an online technology-focused publication, declared that Flexport's 2023 revenue had dropped 70% year over year in the first half of 2023. Because Flexport is a private company, the information was sourced to "people familiar with the company's financials."

To outside observers, especially those focused specifically on the world of software-as-a-service (SaaS), this seemed an unforgivable sin. A 70% drop in revenue is a sign of a faltering business, not a rocket ship on course to disrupt an industry.

But let's broaden the picture a bit. Container line Maersk's first-half revenue declined 40%, while Hapag-Lloyd's fell 41%, and Zim's dropped 62%. Among Flexport's direct forwarding competitors, Kuehne+Nagel's revenue fell 38%, DSV's fell 36% and Expeditors' dropped by 51%.

In other words, if The Information's sources are correct, Flexport lost revenue at a pace worse than publicly traded bellwether companies in the logistics industry. But the 70% drop in revenue did not happen in the vacuum in which it was presented, a vacuum that essentially compared a third-party logistics provider, much of whose revenue is gross and not net revenue, to a SaaS industry in which such a market-wide drop in demand would be exceedingly uncommon.

Flexport was not losing revenue in a market where its competitors or asset-based service providers were increasing their revenue. For further context, the market for a core software category such as enterprise resource planning (ERP) software does not rise and fall in line with demand for imports and exports, as it does with forwarding.

Digital model blurring

All of which begs a question: Is Flexport — and more broadly, the digital forwarding model — now basically indistinguishable from forwarding in aggregate? Or to put it more bluntly, is this a sign that digital forwarders are just forwarders?

"The only digital freight forwarders that have done any good are the ones that are attached to a real freight forwarder and it's just a little sideline," Richard White, CEO of forwarding software vendor WiseTech Global, said in an interview with the Journal of Commerce earlier this month. "They're real freight forwarders making money, and the digital platform is just a toe in the water. But the pure play digital forwarders are doing very poorly. And the model [is bad], because let me tell you that every freight forwarder is now a digital freight forwarder."

White has a vested interest in promoting the notion that every forwarder can become a digital forwarder, but that doesn't make his observations untrue.

A few comments from Flexport CEO Ryan Petersen during an interview with the Journal of Commerce point toward the company being described plainly as a forwarder. For one, he said, "we're spending way too much money on software, and not our own software development, but third-party software." That Flexport hadn't yet built a proprietary wall of technology to keep its competitors at bay has been a bit of an open secret.

Secondly, Petersen said it was time for Flexport to become profitable, and not just in years when freight rates go sky high, such as in 2021, when Petersen said in multiple interviews the company was profitable.

"We're not in financial distress, but we are sort of, I would say, in a moment, or a crossroads, where you go, 'hey guys, what kind of company are we going to be?'" he said. "We have to be a customer-obsessed growth company that cares a lot about profitability and is not ashamed to make money. We're going to take pride in doing a great job for customers at a level where we make a profit."

An admission that Flexport uses a lot of external software and that it needs to make money would be common for companies that identify simply as forwarders. The sizable drop in revenue in 2023 not being completely out of step with fellow service providers is another such signal.

Waning support

In the background, patience for funding digital intermediaries might have run out. Huge funding rounds during the pandemic for freight broker Convoy, shared truckload broker Flock Freight, Forto and Nowports — Flexport forwarding competitors in other geographic regions — have not been followed by subsequent venture capital investment. Another signal: broker Transfix's ill-fated attempt to go public via a special purpose acquisition company (SPAC).

"Two years ago, and for probably the five years before that, business models of tech companies where they could burn cash to do a land grab was a big thing," White said. "That is dead and buried."

And so, it's fair to say that 2023 probably marks the end of the digital forwarder land grab era, where venture capital was used to accelerate topline revenue. Now begins the era of the digital forwarder receding into a fragmented market where differentiation is as hard to come by as ever. Petersen essentially acknowledged in the interview with the Journal of Commerce that Flexport forced the market to keep pace.

"I disagree with the idea that we didn't build really important technology that I think really changed the industry," Petersen said. "And I think a lot of competitors will acknowledge that, because they started investing more in [technology]."

In a prescient 2017 Journal of Commerce commentary, logistics veteran Dan Gardner wrote about the pros and cons of the digital forwarding model.

"One internal factor that the digital forwarders have to control is the expenses that they incur while building out their models," Gardner wrote. "Although it's true that digitization reduces the expense of human intervention, the trading of operational salaries for those of high-end programmers is a losing proposition, every time. Also, a number of digital forwarders have taken up residence in the more ritzy parts of town where the rents are considerably higher than areas where most forwarders are clustered."

Petersen acknowledged that spending on non-customer facing roles and on expensive office space had to be controlled, as Flexport had become a digital forwarder unable to escape the same cost constraints as its traditional competitors.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.