Insights

“We’re not in the shipping business; we’re in the information business.” – Peter Rose, founder

“Expeditors has long believed that it is a competitive advantage to focus on organic growth and to utilize
an enterprise technology platform designed and built by logistics technology professionals for logistics professionals.” – Annual Report 2018

Expeditors is a behind the curtain business that serves its customers by facilitating their cross-border logistical requirements. The freight forwarding business activity the company engages in can be summarized as below.

• • • Acquire cargo capacity in bulk and resell in smaller chunks as needed by customers,
    • Sell the capacity at prices lower than the customer can negotiate directly with the carriers, and
    • Facilitate the logistical process by efficient routing, consolidation and deconsolidation of the cargo,
      and compliance with import-export regulations.

In a business activity that seems rather mundane, Expeditors has built an extraordinarily high-quality and highly differentiated business. The company’s mission captures the differentiation it has created with three focus points.

• • • Set the standard of excellence in global logistics,
      • • Be the player that everyone else aspires to be on a day-to-day basis
    • Total commitment to quality in people and customer service, and
      • • Hire quality people, build high-quality IT systems, and foster high levels of innovation
    • Generate superior financial results.

Expeditors runs a highly decentralized business with its branches having significant autonomy in most of their business activity. Logistics is a local business. The branches are usually staffed by local managers who are involved in selecting logistics service providers and hiring decisions and are responsible for their own P&L. At the same time; certain functions require scale for an efficient operation, including the IT system and the compliance programs.

To that end, the company considers IT as its core function and does not outsource it. All its branches are run on a single integrated system for transportation, customs brokerage, and accounting on a common hardware platform. Similarly, corporate strategy, product development, and compliance program management is managed at the corporate level.

Expeditors has a highly unique compensation system that fosters an entrepreneurial culture and ensures much superior customer service. The company’s compensation levels have a large variable component with lower base salaries than its competitors. As stated earlier, the branches have their own P&L. 25% of the operating income at each branch is reserved as the bonus pool for all branch-level employees. The bonus pool of executives is limited to 10% of consolidated operating income and includes all corporate office employees. On the other hand, the company runs a tight ship on other costs and does not offer any perks. For example, everyone, including the top-management, pays for their parking privileges.

The company’s unique compensation practices and culture is also represented in its employee tenure with a self-selection process at work. A vast majority of employee turnover occurs in the first year. If the employee has been with Expeditors for more than a year, they tend to be with them for a very long time.

This system also fosters counter-cyclicality to business performance, with employee costs dropping during downturns. It also adds to the company’s flexibility. As against downsizing employees during such periods, it can retain them at a lower cost, furthering the loyalty of its employee base.

As a logistics service provider which acts as a sort of network connecting its customers with the desired carrier capacity, it is also important to have a healthy relationship with the carriers. To that end, the company treats these carriers as business partners who are not to be taken advantage of in the pursuit of higher margins. The company ensures that it pats the carriers on a timely basis, ensures that rates are fair, looks to partner with them each year, and constantly improves its process to ensure that it is a low-cost customer to its carrier partners. Not surprisingly, the carriers prefer to work with Expeditors.

To top it all, the company has a clear and consistent capital allocation process. While much of corporate America has been enamored by buybacks, Expeditors has a four-step process as below.

• • • First, invest in operational processes & IT systems,
    • Second, invest in the growth strategy,
    • Third, grow their dividends, and
    • Only when the above are satisfied, look to buyback to set off ESOs and to reduce share count.

Additionally, while Expeditor’s competition has mainly grown via acquisitions/consolidation, the company does not prioritize acquisitions as its source of growth. Expeditor treats its platform as a competitive advantage and finds it challenging to integrate different systems. Acquisitions, when done, tend to be bolt-on transactions and are done to:

• • • Acquire technology,
    • Expand geographic coverage by acquiring or establishing JVs with agents, and/or
    • Gain specialized industry knowledge