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The Top 50 3PLs Treading water

By Patrick Burnson -- Supply Chain Management Review, 7/1/2009

In the general lexicon of the third-party logistics (3PL) industry, few terms have been viewed as negatively as “measured growth.” But in a down economy, which has proved challenging to even the most aggressive global players, just gaining a bit of margin is quite an achievement. Just ask a few of the front line veterans. The consensus this year is that a step forward—no matter how small—is better than falling further behind.

“What we once viewed as a predictable surge in 3PL demand has trickled down to a weak but steady process,” says Dick Armstrong, chairman and CEO of the Stoughton, Wis.-based consultancy Armstrong & Associates, Inc. “No one can afford to stop investing entirely, but the same level of buying has fallen off considerably.”

That’s not to say that the industry is moribund, however. By Armstrong’s reckoning, more than $498 billion was generated in 2008, and much of that revenue will continue to be reinvested in 2009 in new solutions and competitive tools. However, Armstrong admits that 2009 will be the first recorded negative year for 3PL gross revenue growth since he began tracking it in 1996.

“After 11 modest months in 2008, third-party logistics revenues dove in December and have remained depressed in 2009,” he says. “While a few third-party logistics providers could drown, most are treading water and some are swimming strongly.”

Armstrong’s analysis shows gross revenue (turnover) for 3PLs down by 8.8 percent for 2009. Net revenues (gross margins) were less impacted for many non-asset transportation managers and leading value-added warehousing 3PLs. Expeditors, C.H. Robinson, Kuehne + Nagel, and other major transportation managers report net revenues that decreased anywhere between 3 percent to 10 percent.

Earnings before interest, tax, depreciation, and amortization (EBITDAs) as well as earnings before interest and tax (EBITs) fell proportionately. Additionally, net revenues are expected to be down another 5 percent this year for what Armstrong deems the transportation management group of 3PLs.

Armstrong’s recent survey, U.S. and Global Third-Party Logistics Market Analysis, indicates that for 3PLs as a group, 60 percent show that they are reporting lower gross and net revenues for this year. Among value-added warehousing 3PLs, 57 percent are reporting increased net revenues. Automotive and retail vertical industries were the main drags on 3PL market growth for 2009, with projected revenues down 32 percent and 23 percent respectively.  The food and grocery vertical and 3PL returns management sub-segment are up for the year. GENCO, Kenco, and New Breed expect revenues to increase in 2009.

He says that quite a few 3PL leaders will nonetheless continue to spend with an eye on the future. “And this points to one of the key new trends we see in the global marketplace,” Armstrong says. “Third parties that are already entrenched in overseas operations are building upon their base there, while smaller 3PLs are scrambling to get into that end of the business.”

The key differentiator, says Armstrong, is information technology. The companies that continue to sink portions of their profits into global IT networks, he adds, are going to prevail over those that don’t have them. “So it’s the usual players, as one might imagine,” he adds. “Companies with single information platforms capable of sticking to standards are going to remain in front. Information is power in this game. It’s all about the integrity of the data.”

This is especially important when it comes to moving goods within a foreign economic zone, says Armstrong, noting that it’s often harder to negotiate with the myriad regulatory bodies within a single nation. “Take India , for example,” he says. “A small 3PL would have a very difficult time with the compliance issues generated from one province to another. The logistical challenges are daunting for all but the largest and most-wired companies right now.”

It’s all about costs

While agreeing with many of the same points made by Armstrong, Brooks Bentz, partner at consulting firm Accenture, notes that another trend is taking hold in the global 3PL industry that goes hand-in-hand with the need for more high-tech solutions.

“In this economy, it’s all about cost,” he says. “Pressure on rates and fees is continuing to mount, and 3PLs want to see an immediate return on investment…whether it be in tactical technology or strategic consulting.”

And while this trend began in North America , the emphasis on cost savings has become truly global, says Bentz. What makes this hard, he adds, is that a threshold may now be lurking beneath the surface.

“Many shippers thought they might mitigate their costs by choosing to go with a single asset-based transport provider,” he recalls. “But the 'one-stop-shop’ model is proving to be ineffective in many parts of the world. There’s too much complexity in the supply chain for any one company to control. And the situation becomes worse when capacity becomes tighter in a weak economy.”

Cutting cost at the 3PL management level is another thing Bentz cautions against, noting that market expertise is a nonrenewable aspect of global third-party operations. Technology, he says, is important, but it is more vital for shippers to understand how it is to be used for maximum efficiency when making a 3PL choice.

“Price shouldn’t be the only concern when building for growth,” he says. “When a shipper asks a 3PL to gather intelligence on load-finding, for example, it must be done by seasoned professionals who know how to apply the information they’ve obtained. That solution does not come out of a box.”

Bentz and Armstrong are also on the same page when it comes to hemispheric trade and the penetration of overseas markets. Both agree that Intra-Asia commerce is going to be the most resilient 3PL sector, and shippers that already enjoy a piece of that action are at a decided advantage.

Coping with recession

And this brings us to a dove-tailing of trends, says Jon Manners-Bell, president of Transport Intelligence, Ltd. (Ti), a London-based industry think tank. “A common assumption about the current recession is that it is a cyclical phenomenon,” says Manners-Bell. “The world is experiencing a near universal slow down, caused by an intense downturn in the business cycle focused on debt.”

Manners-Bell allows that while there may be some truth in this, caution should be expressed about the probability of traffic “bouncing-back.” The huge surpluses of goods and inventory in China , Germany , and Japan are probably unsustainable, he argues, and this present crisis will see a shift in economic activity affecting these economies as much as any. The resulting change in trade patterns will be reflected in the nature of the demand for logistics services.

Like Armstrong and Bentz, Manners-Bell is keeping his eye on intra-Asia, but says that there’s untapped potential for U.S. shippers closer to home. While the rate of trade growth in the Mexican market was relatively low in 2008 in terms of transport and logistics development, the Mexican market still shows considerable potential.

“There is little doubt that greater integration of the economy into the region—and better infrastructure links with the U.S. —will see the Mexican contract logistics market increase in strength,” he says.

Meanwhile, the Mexican Government hopes that investment in seaports will complement the southern Californian ports of Los Angeles and Long Beach as the main gateways for shipments of raw materials and components imported, mainly from Asia, on behalf of the approximately 3,000 “maquiladoras” in Mexico .

Many U.S. and Canadian importers, including major retailers, continue to source consumer goods from Mexico , in addition to lower cost Asian markets, like China , and Vietnam . The “maquiladoras” import large volumes of raw materials and components from Asia , as well as other sources. “However, in 2008, its proximity to the US market—which will be a long term strength—was also its weakness,” says Manners-Bell. “The importance of its neighbor as an import/export market meant that weakening in demand had a detrimental impact on the growth of Mexico ’s contract logistics market.”

Finally, trend watchers are noting that there’s also more scrutiny being paid to specific commodities in any given region. In its recent report called Global Contract Logistics 2009, Ti observes that there are likely to be important areas of growth, although these will not be “across the board”—and it will require a certain amount of agility and market knowledge to benefit from them.

“For example, stable state spending in both the West and Asia Pacific will result in on-going demand from the health sector,” says Manners-Bell. “The construction sector will also benefit from the numerous infrastructure projects governments are fast-tracking. And because these sectors have been resistant to logistics outsourcing in the past, the potential for growth could be substantial.”