Expeditors' Global Forwarding Backdrop Remains Soft, but Conditions Stabilizing

Senior Equity Analyst

Matthew Young

Expeditors International ranks among the top 10 global freight forwarders in a highly fragmented industry, and its record of impressive financial performance leads the industry. The company operates more than 250 offices on six continents, with a core focus on Asia-North America trade lanes, though it's also been gradually expanding its presence on key intra-China and European freight lanes over the past decade. As a global forwarder, the company contracts with airlines and ocean carriers for cargo space then fills that capacity with customers' freight. A large customs brokerage operation (including warehousing and distribution services) complements air and ocean services, along with multimodal and final-mile delivery services in North America (Transcon). Expeditors' asset-light model generated excellent returns on capital near 40% over the past decade, with help from its wide economic moat, which is rooted in the network effect. 

Despite gradually intensifying competition across the global forwarding landscape, Expeditors enjoys a history of notable net revenue expansion (high single digits over the past decade) and industry-leading profitability. This is partly because of its long-running emphasis on organic growth, which has yielded a cohesive network infrastructure and culture. In contrast, many of its global forwarding peers have grown via acquisition. Corporate culture is a core component of its performance record. Salesforce compensation is predominantly commission-based (with below-average base salaries), and managers' bonuses are tied to branch net revenue growth and operating profit, making for an unusually strong profit-conscious setting. 

Historically robust air and ocean activity normalized heavily in 2023, but longer term we expect Expeditors to continue taking market share from less capable global forwarders (on average over the cycle) as demand for sophisticated supply chain technology and access to reliable capacity expands. The firm will need to continue investing heavily in its IT infrastructure (especially in terms of transaction automation) and sales organization to succeed, but we expect Expeditors to remain a margin leader.

Business Strategy & Outlook

Moats are common throughout the asset-light third-party logistics, or 3PL, space. Barriers to entry are lower than those found in the integrated small-parcel shipping industry or among the Class-I railroads, which often build moats via cost-based scale economies. That said, global air and ocean forwarder Expeditors International is a tremendous beneficiary of the network effect, which is the source of our wide moat rating. In short, we think its global footprint and vast network of shippers and carriers creates a robust value proposition to shippers that would be very difficult to replicate. 

Expeditors' customer base of thousands of shippers creates significant buying power. That is, an immense base of customers translates into superior buying scale, which in turn enables Expeditors to negotiate attractive rates with carriers and more easily secure cargo space. As a result, it can usually procure air and ocean capacity more efficiently and at lower rates than small and midsize shippers can secure on their own (directly with carriers). The firm's broad relationships with air and ocean carriers also benefit shippers. Flexible capacity access is an increasingly sought-after attribute (for shippers) because of the threat of logistics-related disruption--long supply chains and tight inventory management among shippers make interruption more likely when faced with capacity shortages, intermittent port delays, and shifting import/export regulation. A deep carrier network can be a key differentiator during the peak season, for example, when air and ocean capacity tends to be most limited. Expeditors' business model benefited tremendously from historic pandemic-driven transportation supply chain constraints (including extremely limited air and ocean capacity) from mid-2020 through mid-2022, as the firm gained material market share, in part because of its vast capacity access. This same dynamic has occurred in past freight upcycles. 

Moreover, as the company opens new offices according to demand, existing offices become more valuable because there are more locations with which to arrange trade. Additional offices also spread corporate costs and IT spend over more revenue-producing locations. In this way, a new entrant would have to endure substantial losses until it gained sufficient scale, particularly given the need for substantial IT infrastructure investment. That said, such compounding cannot continue indefinitely, and ignoring the spike driven by a historically robust operating backdrop in 2020-21 and current normalization phase, Expeditors' margins and capital returns probably won’t see outsize increases over the medium term. While the firm periodically will refine the size and location of offices to adjust for demand fluctuations, its global network is largely established. Overall, global forwarding remains a fragmented industry with thousands of providers, and it's difficult for smaller, less capable competitors to infringe on Expeditors' economic moat.

While there is significant competition among the top global forwarders with scale, the overall market is still fragmented, with the largest 10 providers constituting less than 50% of the industry. Outside this group, there are thousands of small international forwarders based in the United States and Europe. This suggests there is runway left for Expeditors to take market share from smaller, less capable providers given rising shipper demand for robust local-market knowledge, end-market expertise, and broad capacity relationships (an especially valuable attribute during the peak shipping season or other period of tight supply). In fact, there is evidence of gradual market consolidation, as the top forwarders have boosted their share of the market from about 40% in 2006, according to data from Transport Intelligence. 

During the past five years, Expeditors posted average returns on invested capital near 40%, well ahead of its approximate 9% cost of capital. We think this reflects an ability to effectively defend market positioning despite intensifying competition. Given the breadth and depth of its carrier and customer relationships, as well as incremental market share gains and modest growth in the broader 3PL industry, we believe Expeditors will continue generating attractive economic profit.

Wide

Economic Moat

Expeditors International of Washington

Expeditors International of Washington, Inc. engages in the provision of global logistics services. The firm offers air freight, ocean freight and ocean and customs brokerage and other services. It also provides customer solutions such as order management, time-definite transportation, warehousing and distribution, temperature-controlled transit, cargo insurance and customized logistics solutions. The company was founded by John M. Kaiser, Peter Rose, Wang Li Kou, Kevin Walsh, Hank Wong, George Ho, Robert Chiarito, and Glenn Alger in 1979 and is headquartered in Seattle, WA.

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