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Highlights
- An analysis of the rail industry in the US shows that the rail freight volumes are gradually decreasing due to several customer challenges.
- Rail companies must create or co-own a digital freight marketplace, which will help bring in more business to their core operations.
- The owners of the future digital freight marketplaces will have end-customer data and will be able to nudge customers, thereby influencing their preferences.
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Immense market potential
In recent years, the freight industry has witnessed tremendous growth in terms of market size and volume of goods transported.
This is due to a rise in consumer demand, better connectivity, and enhanced information sharing. The North American logistics market was valued at over US$ 2 trillion in 2020 . Within this expansive sector, the freight rail industry contributed around US$ 80 billion, while the trucking industry revenue alone crossed US$ 875 billion. Revenue in the third-party logistics market was more than US$ 340 billion, indicating its sizeable commercial stake.
We explore the huge potential for growth of freight rail within the freight sector, including the trucking sector. Rail companies must participate in the digital freight marketplace to overcome the challenges and increase their market share in the freight market. We highlight several potential features of this digital marketplace, including integration with truck, air, and shipping operators; first mile and last mile integrations; warehousing services; special handling; and so on. Additionally, we outline some ways the marketplace can be taken to market.
Rail vs. trucking – a market share analysis
While the freight industry is set to grow, one of the critical issues plaguing the freight rail sector is the dwindling volumes.
The rail freight volumes in the US over the years are illustrated in Figure 1. The number of carloads has gradually decreased over the years, which is offset by a slight increase in intermodal units. Consumer demand is shifting to cargo, which can be moved either by truck or rail. This shift is being captured today by the trucking industry. Also, the total number of units (represented by the blue line) has been decreasing continuously in the last three years.
Total freight rail volumes in the US from 2000-2022
The challenges that plague the freight rail space
Freight rail offers cheaper movement of goods, while providing extensive coverage across the US.
It also contributes less to pollution and emissions per mile travelled. Despite these advantages, the trucking industry is whittling down the market share of rail freight transport. We outline some reasons rail is less preferred by customers as compared to trucking.
Longer delivery times: Movement of goods through rail often takes longer than through trucks, owing to the time taken for the loading and unloading processes. Trucks are often fast and nimble in this aspect.
Lack of transparency: Customers often find it difficult to get accurate information about freight rates, availability, and transit times. This can make it difficult to plan and budget for shipments.
Complex booking process: The booking process for freight rail can be complex and time consuming. This can be especially frustrating for customers who are not familiar with the process.
Lack of door-to-door service: Customers booking freight rail services usually have to book trucking services separately for pick up and drop purposes. Rails offer very few integration opportunities with other freight services.
Poor customer service: Customers may have difficulty getting in touch with customer service representatives or receiving timely responses to their inquiries. This can be a major inconvenience, especially if there is a problem with a shipment.
Inaccurate estimated arrival times (ETAs): Freight railroads are not always able to provide accurate ETAs. This can lead to delays and disruptions, which can be costly for customers.
Damaged shipments claim: Freight shipments are sometimes damaged in transit. This can be a major problem for customers, especially if the shipment contains fragile or valuable goods. The process for raising damage claims is also arduous, which discourages customers from opting for freight rail.
Difficult to track live location: The real-time update capabilities of trucks are much better than those of railcars. Also, the user interface of tracking is much simpler in the case of trucks.
Lack of special handling services: The rail cargo movement currently does not accommodate or encourage goods that require special handling. This deters customers dealing in fragile, temperature-controlled, or moisture-controlled products.
The problem increases if multiple legs of freight journeys need to be booked. In such cases, it is much easier for customers to entrust the shipment to trucking operators, which requires minimal switching.
Overcoming challenges
An integrated digital freight marketplace has the potential to streamline the traditionally fragmented and complex rail freight industry.
By bringing together shippers, carriers, brokers, and other stakeholders (see Figure 2) onto a unified platform, the marketplace can facilitate real-time communication. The ecosystem model can enable agile decision making and timely problem solving. It not only reduces operational inefficiencies but also minimizes monetary losses caused by delays and disruptions in the supply chain.
A significant selling point of this marketplace is that it eliminates the complexities involved with freight booking and enables the end-to-end booking of the freight movement through ancillary services integrated with the booking. It can act as a single-stop-shop for customers where they can book and track all the services.
An overview of the digital freight marketplace
Freight rail companies must ride the digital marketplace wave if they aspire to thrive in this competitive environment. Many freight digital marketplaces and third-party logistics vendors are coordinating and offering multimodal services using railway services. As with all marketplaces, only a handful of them will be able to prevail in the future based on their agility and adaptiveness to the market.
Freight rail companies should aim to influence decision-making at these marketplaces and have access to the control of their operations. If they do not create or control a marketplace, then they will be just a freight service provider to future marketplaces, simply transporting goods as instructed by the marketplace and forced to comply with a fee structure favoring the marketplace and its owners. Marketplaces of the future will have access to the end customer data and will be able to influence or nudge customer decisions. If rail companies control these marketplaces, they will be directly interacting with end-customers. They will be able to influence or nudge the customer to choose rail when provided with options, thereby bringing in more business to their core operations. Also, they might be able to gain the margins of the third-party logistics vendors, bringing in additional profit.
The way forward
Some companies are partnering with third-party logistics providers or trucking companies to bring in leads and considerable revenue.
But to stay ahead in the game, freight rail companies must consider creating or controlling a full-fledged marketplace that is easy and effective for end-customers to use. The revenue of the third-party logistics market, more than US$ 340 billion in the United States alone, is so high that many marketplaces could co-exist if they found their niche. But in the end, like all marketplaces, only a handful of them will cater to the broad market.
We have highlighted four ways in which freight rail companies could get involved in a freight marketplace.
Create a greenfield marketplace: This would involve a significant amount of investment and resources as companies would need to set up the whole ecosystem and then compete with existing players. Setting up the marketplace would take considerable time, and rail companies would need to create separate departments for these initiatives.
Acquire an existing marketplace: Rail companies can acquire existing marketplaces and make some tweaks to them. This would still be capital intensive, but it will be easier than the aforementioned as existing marketplaces will come with their own teams.
Collaborative marketplace within the freight industry: A group of leaders in the freight industry could come together to create the marketplace. The group could be identified based on their operations and distribution of tracks across the country so that they can cover the entire region and not worry about competing. This would not be as investment heavy as the previous two options since companies can share the costs.
Collaborative marketplace with digital service providers: If freight rail companies have apprehensions in operating and maintaining a digital marketplace by their own, they could partner with leading technology companies. This collaboration would be based on a partnership. The digital service provider and a team from the freight rail companies could maintain the operations of the marketplace, and the freight rail companies could focus on their core business.
Freight rail companies must undertake analysis and research to choose the right method to participate in the marketplace. The final decision must be customized for each company based on their revenue, market share, investment potential, future goals, and organizational design. Buy in from the senior management is crucial. We believe participating in a marketplace will unlock great value for freight rail companies and they must embark on this sooner to gain a first-mover advantage.
Kapil Thakur, Lead, Transportation Domain COE, Travel & Logistics, TCS and R.H. Subramaniem, Lead, Industry Advisory & Pre-Sales, Travel & Logistics, TCS also contributed to this article.
