Summary
- Time Critical Freight (”TCF”) has a sizable TAM with high gross margins, piquing our interest as a potentially compelling opportunity.
- IoT, Blockchain, and AI are examples of technology players have and continue to look to for improved TCF logistics.
- However, dynamics such as customer disincentives and improved supply chain efficiency limit our belief that TCF presents an opportunity for venture investment.
Time Critical Freight Background
Following a dive into organ logistics and the resulting conclusion that the size of the market did not support a venture opportunity (see here for more), we began to think about what adjacencies one might be able to tackle to expand the TAM.
Time Critical Freight (”TCF”) is the broader market segment that organ logistics falls within which covers sensitive, valuable cargo with the fastest end-to-end delivery option. The primary segments within TCF tend to be automotive, healthcare, financial services, and agriculture — particularly around harvest season. Dynamo roughly estimates the TCF market size to be $25B.
TCF is a service offered by incumbents such as Kuehne-Nagel as well as new entrants such as Airspace (more on that below). UPS’ recent acquisition of MNX Global Logistics demonstrates the importance of TCF capabilities, in this case focused on radiopharmaceuticals and temperature-sensitive products.
Innovation in TCF
Until the supply chain is perfectly efficient with optimized demand forecasting and little to no human errors, TCF will continue to be an important service that logistics providers offer. Key innovations that players have and continue to look to include:
- IoT to enable tracking of shipments in real time as providing visibility for every stage of the process is not only important for customer transparency, but also aids shippers in better planning.
- AI to optimize routes, predict demand, and reduce delivery times, all of which enable better planning, cost efficiencies, and improved customer experiences. AI can also support price determinations and visibility, especially important in TCF where accessorials such as special equipment (and subsequent fees) may be required.
- Compliance controls during fulfillment to ensure goods are handled appropriately and launched into trailers in a timely fashion. This can include IoT but can be as simple as a scanner with some form of a database.
The launch of of new(er) entrants Airspace and RXO (a spin out of XPO) provide helpful examples in seeing the adoption of these technologies.
- Launched in 2016, Airspace operates a technology-forward platform for TCF, offering next flight out, on-demand ground, charter, and specialty services. Airspace leverages AI and ML to identify the best and fastest delivery routes for urgent shipments, along with unique GPS trackers for accurate shipment tracking and monitoring not just of location but also factors such as humidity and light exposure.
- In 2022, logistics giant XPO spun out RXO, a preeminent digital freight brokerage. It is interesting to note they cover TCF and leverage their technology to stand by delivery assurances. Within TCF, RXO offers services across time-sensitive air as well as LTL/FTL. RXO leverages AI & ML for improved shipping decisions, and the firm’s RXO Connect™ provides real-time shipment updates alongside automation to optimize carrier pricing, routing and performance options.
TCF Conclusion
While TCF does present a much larger market, there are some critical dynamics which prevent us from viewing this market as primed for venture dollars.
- Customer Disincentives. Ultimately one’s customers in this space have inherent incentives to not use TCF services, as these are often costly and the last resort. It is therefore difficult to expand ones’ revenue book with its users. Particularly in a market where CFOs are especially stringent, it’s difficult to build a business around a service that your customers’ goal is to not use.
- Supply Chain Optimization. As the global supply chain continues to become more efficient, the need for TCF services should be reduced over time (even if slowly) which presents a structural headwind for this segment. Growth in technology such as 3D printing should also enable more localized and therefore more accessible just-in-time delivery, which adds another layer to this constraint. Due to unforeseen events such as natural disasters, TCF will always be a necessary available service but consistent demand growth is unlikely.
- Little Difference in Net Margins. One of the more compelling pieces of TCF to us is that while the TAM is smaller than general freight, the value of the products and the gross margins are meaningfully higher. General freight typically hovers around the 10-15% range with pressure such as declining rates pushing this into the mid-single digits. In comparison, some of our conversations suggest margins of 40-60% for TCF, driven both by the nature of the goods and the price insensitivity in time critical situations. While this may be true, there is little difference in the ultimate net margin due to the vast human resources required to execute these shipments. These human resources are also difficult to fully automate away due to the great deal of variables involved with each shipment and the exceptional expectations for customer support. These factors, alongside higher bars for speed and visibility, result in net margins closer to those of broader freight. As a result we view TCF as a valuable tuck in to a larger platform, but difficult to build a business around on its own.