When the Transaction is As Valuable as the Contract
Welcome back to the fourth 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. Apologies for my radio silence last week - I was off on Friday and thus decided you all needed a quick break from my musings as well!
Other than that blip, 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.
Let’s talk about transactional and relationship-based customer engagement in the ocean freight world. I think it’s fair to say that container lines have historically had a pretty singular view about what constitutes success in their businesses: landing large-volume, big-name accounts.
Those accounts, and the volume they promise over a calendar year, have helped container lines along three dimensions that are very time-related:
In the short term (ie quarter by quarter), they constitute a strong base of revenue for a carrier
In the medium term, they allow carriers to plan their networks to effectively deploy their assets
Over the long term, they allow carriers to plan their vessel order strategy
That focus is not likely to change any time soon, because the industry is oriented around this approach on both sides of the equation. In other words, large volume shippers are as inclined to lock in annual contracts to provide some degree of rate, capacity and service certainty as carriers are inclined to lock in volume.
But, let’s layer over this fundamental market structure the emergence of e-commerce marketplaces, like Amazon and Alibaba. I’m not referring to those two companies’ logistics ambitions here, but rather their approach to reshaping the transactions behind the buying and selling of goods. Here is where some container lines have taken a cue, understanding that the power of a low-value, high-frequency transaction is not to be overlooked, but rather to be leveraged.
Let me be more explicit. A container line that negotiates a 100,000-TEU, year long contract with a big box retailer engages with the shipper for a certain period of time, and then the “transaction” is complete. Aside from booking activity, or ad hoc capacity the shipper might need fill through short-term contract rate sheets, the amount of procurement activity is confined to that negotiation period.
Now let’s look at a small shipper moving, say, one TEU per week with that same carrier. If that shipper transacts directly with the carrier on a weekly basis, the carrier is thus gathering information about the shipper on a weekly basis. Historically, a carrier would view these two accounts very differently: one, a Titanic, and the other, a speck of dust on a deck chair on the Titanic.
But certain carriers are understanding the value of a more regular flow of customer information that only comes in a more transactional relationship. They’re understanding that A) if the channel to manage those transactions is set up digitally, all the data can be captured, structured and leveraged; and B) the cost to capture those transactions is minimal compared to the sales resources required to land bigger customers.
This is fundamental to the future of the industry, and it’s not to suggest that carriers and shippers will gravitate away from long-term contracts. But it is to suggest that companies that have channels to capture transactional business and utilize the data from those transactions will be ahead in the race to understand how demand wends and weaves in the future.
Here’s a roundup of pieces on JOC.com the past week from my colleagues and myself (note: there is a paywall):
And here are some recent discussions, reports, and analysis I found interesting:
https://a16z.com/2020/08/17/role-of-entry-multiples-in-valuations/
Disclaimer: This newsletter is in no way affiliated with The Journal of Commerce or IHS Markit, and any opinions are mine only.