Are We Turning the Corner on the Latent Capacity Issue?

Welcome to the 18th edition of The LogTech Letter, a weekly look at a particular aspect of the impact technology is having on the world of global and domestic logistics. Last week, I touched a bit of a nerve by suggesting that the logistics technology market was too dispersed and too low margin for any one provider to drink everyone else’s milkshake. This week, I’m tackling the topic of models that actually tap into latent capacity as their core product, not a byproduct.

As a reminder, this is the place to turn on Fridays for quick reflection on a dynamic, software category, or specific company that’s on my mind. You’ll also find a collection of links to stories, videos and podcasts from me, my colleagues at the Journal of Commerce, and other analysis I find interesting.

For those that don’t know me, I’m Eric Johnson, senior technology editor at the Journal of Commerce and JOC.com. I can be reached at eric.johnson@ihsmarkit.com or on Twitter at @LogTechEric.

Uber for this. Airbnb for that. If there was a trope that founders early in the current phase of logistics technology found currency with, it was comparing their business model to some form of those two businesses.

Most of those comparisons, however, lacked real merit. Uber and Airbnb created new models in their respective industries designed to tap into a very specific resource: latent, privately-owned physical space that could be used and thus monetized. In logistics, that physical space means capacity, whether in a truck, a ship, a plane, or a warehouse or distribution center.

I’d argue that a digital version of a freight forwarder was not doing the same in ocean or air freight. It was attempting to shrink the cost and thus expand the margin on established freight transactions. A rate marketplace was not doing Uber or Airbnb either. It was allowing established providers and buyers a chance to conduct price discovery and then transact on that price if it was satisfactory.

While a lot of companies pointed to (and continue to point to) the notion that more efficient processes allow for tapping into latent capacity, those companies are describing what’s a byproduct rather than the core target.

Look at it this way. Airbnb didn’t set out to create an easier way to book a place to stay. That was the province of the Expedias and Travelocities of the world. Airbnb’s principal value was in opening up space that travelers didn’t even know existed. The ease of use and customer interface was a necessary byproduct - Airbnb was a technology company, after all, and a substandard user experience would have been a big problem in getting people to use its product.

All of this is a way to say that among a swarm of recent venture capital funding announcements into freight and warehousing software providers in the last few weeks, the collective $183 million invested into Flock Freight and Flexe this week stood out. Why? 

Because both of their business models are centered not around the ease of transaction or automating internal processes, but rather around allowing cargo owners to tap into sources of freight and warehouse capacity they never had before. Like Airbnb, the technology surrounding the model has to be slick - that’s a given now. Unlike Airbnb, it has to be easily consumable and integratable because those are key hurdles in enterprise software that don’t exist in consumer applications.

But you can understand why investors have funded both Flock Freight and Flexe over multiple rounds. They have differentiated models from their peers in the market, and they are in that category of having created new niches: Flock Freight by trying to essentially build a new mode between truckload and less-than-truckload; and Flexe by pioneering the concept of on-demand warehousing.

I’ve written about both companies on JOC.com and encourage you to read that and others who have described their respective businesses, but there’s another secondary effect that will be interesting to watch. The benefit of these models is that they are leveraging existing capacity, just as Uber and Airbnb set out to do. The question is, will these models be so successful that additional capacity will be built on spec to take advantage of their demand.

We’ve seen this with both Uber and especially Airbnb, where cottage industries emerged out of buying property purely to rent out on Airbnb’s platform. That’s probably not what the founders originally envisioned - they surely thought of it as a tool to unlock unused space, not as an inducement for fewer suppliers to horde space.

How would this manifest itself in logistics? Could we see commercial property investors build facilities principally to take advantage of on-demand warehousing needs, rather than long-term contracts?  Could we see truckload companies build mini-fleets designed to tap into Flock Freight’s multi-stop model if it’s more profitable than traditional truckload?

It’s not out of the realm of possibility. One thing we have surely learned is that when a technology-based product becomes normalized, it induces a range of behaviors that was hard to foresee. It will also be interesting to see if other founders attempt to build greenfield models that access latent capacity, or if we’ll see most continue to hone in on replacing inefficient processes and legacy software.

If the digital brokers and forwarders get their offering right, they too will tap into latent capacity, even if it’s just a byproduct. Maybe there just aren’t as many latent capacity opportunities as we all believed years ago, which makes the progress of the ones that are surfacing those opportunities all the more worth watching.

Here’s a roundup of pieces on JOC.com the past two weeks from my colleagues and myself (note: there is a paywall):

• Drop-and-hook is having a moment. As my colleague Bill Cassidy - our resident trucking svengali at JOC.com - put it to me, “what I'm hearing is that drop-and-hook is gaining ground, which is why trailer sales have been strong. Carriers that at one point were reducing their trailer-to-tractor ratios are increasing them again.” I talked to Erik Malin at Baton this week about their drop-yard relay model.

• Transfix was in the news this week as rumors swirled around a Bloomberg report suggesting they were eyeing an acquisition by a special purpose acquisition company (SPAC). The company didn’t comment on the speculation, but I wrote about their use of project44 for ELD-based visibility. Incidentally, the most prominent SPAC news in the logistics space was E2open selling to one to go back on the open market, which I reported in October.

• The freight audit space is widening beyond pure post-invoice audit service approaches - though that remains attractive to many shippers - as yet another example of product differentiation in niches that never existed before.

🚨 TPM21 registration is live, and so is a preliminary agenda. We’ll have two days of #LogTech focused programming Feb 25-26, ahead of the main program, which kicks off March 1.

Disclaimer: This newsletter is in no way affiliated with The Journal of Commerce or IHS Markit, and any opinions are mine only.