3PLs Face Slowing Growth in 2014

Richard ArmstrongRichard Armstrong

Third-party logistics had a better year than President Obama in 2013, but that’s not saying much. Gross revenue topped $150 billion for the first time. All market segments showed growth, with domestic transportation management leading the way. Overall net revenue growth was 4.9 percent.

Domestic transportation management, led by C.H. Robinson, Hub Group, Coyote Logistics and Echo Global Logistics, has been a hugely successful, rapidly growing segment over the last decade. Shippers have continued to outsource to freight brokerages expanding less-than-truckload shipment offerings. For Echo, LTL makes up 45 percent of total shipments. The evolution of transportation management systems has mushroomed over the last decade. Transportation management system enterprise solutions allow domestic transportation managers to handle all of a shipper’s daily offerings and optimize networks.

Just as importantly, domestic transportation managers have developed efficient models for organizing their business. The key is to separate carrier capacity procurement from account (sales) management. Account managers work with customers intensively, while a capacity procurement section provides capacity.

Growth by U.S. 3PL Segment
Revenue, in billions of dollars, and 17-year compound annual growth rate in net revenue.
Segments 2013 Gross Revenue 2013 Net Revenue CAGR 1995-2012  
Transportation Management
$49.2 $7.2 11.2%  
International Transportation Management $48.7 $18.8 14.2%  
$12.1 $11.9 7.3%  
Value-Added Warehousing/
$37.2 $28.7 13.7%  
Total $150.3 $66.6 11.8%  
Source: Armstrong & Associates, www.3plogistics.com  

Joining the pieces together is transportation management software that gets more sophisticated each year. Coyote, for example, improves its software continuously and has added driver cell phone tracking. CEO Jeff Silver points out that Coyote’s operating staff needs to continue to improve its efficiency and reduce cost of service to maintain net profitability.

In a sign of profitability pressure, financial analysts over the last few quarters have challenged C.H. Robinson, the largest DTM. The rising cost of trucking capacity has reduced C.H. Robinson’s gross margin (net revenue). Over the last decade, 15 percent gross margins have become the threshold level for respectability. It was a level C.H. Robinson regularly exceeded. Going forward, however, the company is promising only double-digit gross margins, a consequence that will be reflected for other DTMs.

For many smaller DTMs and old-fashioned mom-and-pop freight brokerages, the evolving pressure will mean their demise. Modern domestic transportation managers have a threshold level of sophistication for IT and processes that will allow the larger to grow at the expense of the small. In addition, shippers can be expected to expand the portion of traffic handled by domestic transportation managers. Between some consolidation and expanding market share, domestic transportation management should continue to be the largest growth segment in third-party logistics.

In addition to companies that grew from truckload freight brokerage, intermodal marketing companies, led by Hub Group, are an important segment of domestic transportation management. Hub’s Unyson Logistics subsidiary, is a rapidly growing systems DTM. Hub also owns Mode Transportation, a stand-alone transportation manager with traditional truck brokerage and intermodal marketing abilities. Hub itself has developed a significant pool of containers and trucking pickup/delivery capability to expand door-to-door service. Hub does a large amount of business with Union Pacific Railroad, competing heavily with trucking company J.B. Hunt, which has extensive operations with BNSF Railway.

For U.S. domestic transportation management activity, Chicago is the control tower. Hub, like Echo and Coyote, is based in Chicago. C.H. Robinson has a regional operation with 650 employees in Chicago.

Globally, we estimate the third-party logistics market has grown to $704 billion. Asia-Pacific is the largest region, with 36 percent of the market. The North American market estimate is $177 billion, representing 25 percent of the total.

Revenue of top 10 DTMS/freight brokersRevenue of top 10 DTMS/freight brokers

Growth in third-party logistics should be led by China over the next two to five years. China’s growth should slow from double digits to high single digits and become more domestically oriented. The Asia-Pacific region, outside of China and Japan, should grow in the 4 to 5 percent range. The Americas should be above 4 percent. Europe should lag at 0 to 2 percent. Africa is all the rage, but it’s early in the game. Investments are being made; anecdotal evidence abounds; accumulated 3PL revenues are meager.

Global exports have fallen to 31 percent of GDP from 33 percent in 2008. The trend lines aren’t promising, and the days of double-digit growth are over for international transportation management, at least for the next five years or so.

Expeditors International of Washington is the poster child for international transportation management. Expeditors’ containerized volumes and air freight  trends reflect what is happening in North America. Expeditors handles 870,000 TEUs and 730,000 metric tons of air freight a year, with more than half of its air volume moving between Asia and North America. Benjamin Hartford of Robert W. Baird & Co. estimated that Expeditors’ net and gross revenues grew 3 percent and 1 percent, respectively, in 2013.

In addition to slippage in world exports, international transportation management’s share of TEUs has decreased from 39 percent to 35 percent. The container lines are going directly after more business and cutting out the international transportation manager. As a result, we expect overall international transportation management growth to be less than 5 percent outside of the Asia-Pacific.

Dedicated contract carriage continues to become a larger part of growth for major motor carriers. Dedicated contract operations are mostly regional in the U.S. Werner Enterprises’ average length of haul is now 455 miles, for example. Our study of major dedicated contract carriers found an average length of haul of 414 miles. Challenges are occurring for all carriers operating multistop runs of 400 miles or more because of new hours of service rules. Particularly vexing is the requirement for two off-duty periods between 1 a.m. and 5 a.m. during the 34-hour restart period for drivers. The restart provisions have disrupted Sunday starts with Monday deliveries, particularly to retail and food/beverage customers. Longer peddle-run drivers also are having trouble completing routes because of the 11-hour driving limits.

3PL revenue by geographic region3PL revenue by geographic region.

Although these rule changes make operations difficult, they ultimately become the customer’s problem. Carriers must add expensive capacity to solve the problems, and the costs get passed through to customers.

The other asset-based segment of third-party logistics, value-added warehousing and distribution, continued to expand incrementally. More emphasis is being placed on returns, transportation management system integration, automation and IT improvements. The current economy still limits construction of new warehouses. The major value-added warehousing and distribution companies continue to get better at what they do, and all companies will have to do a better job with what they have.

Growth should be in the 5 percent range. It could change if elected officials in Washington can do their part to stimulate economic growth instead of hindering it or we get some extra push from energy independence. But don’t hold your breath. 

Richard Armstrong is chairman and CEO of supply chain research and consulting firm Armstrong & Associates. Contact him at dick@3plogistics.com.

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