The momentum many U.S. third-party logistics providers and freight brokers reported at the end of 2010 appears to be extending into 2011. C.H. Robinson, the largest domestic 3PL in the U.S. and fifth-largest in the world, recently said truckload volume grew 7 percent in January and net revenue grew in the “mid-teens.”
Higher volume on land, sea and in the air drove revenue and profit up at the company in 2010, with total sales jumping 22.4 percent to $9.3 billion.
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“We have much better net revenue growth momentum going into 2011 than we had the last few years,” said John P. Wiehoff, C.H. Robinson chairman and CEO.
If there’s a cloud to that silver lining, it’s the same one facing C.H. Robinson’s shipper customers: rising truck prices. The Minneapolis-based company and its competitors are walking a high wire as truckload freight rates and fuel costs climb steadily.
C.H. Robinson, No. 5 on the JOC’s ranking of Top 40 3PLs (see page 30) raised its truckload rates 8 percent in the fourth quarter, excluding fuel surcharges. But the company’s truckload costs also increased about 8 percent.
Striking a balance is critical to the 3PL. Truck transportation accounted for three-quarters of C.H. Robinson’s $290.5 million net revenue in the fourth quarter. The 3PL’s trucking revenue grew 16.2 percent in the quarter and 3.4 percent in 2010.
Although Wiehoff is pleased with the company’s progress, “a lot could change in marketplace demand and capacity availability as the year progresses,” he said.
Wiehoff and other 3PL executives remember the second quarter of 2010, when truck rates shot up as freight demand leaped. That shipping surge gave logistics companies a boost, raising the total dollars they billed 13 percent year-over-year, according to the Transportation Intermediaries Association.
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But the surge put immediate pressure on profit margins as truck pricing rose.
Echo Global Logistics, a 3PL in Chicago, experienced what CEO Doug Waggoner called “net revenue margin compression” in the second quarter last year, as that margin slipped from 19.1 percent in the first quarter to 18.2 percent. It climbed to 19.9 percent by the fourth quarter, as net revenue — what’s left of gross revenue after transportation providers are paid — jumped 41.5 percent to $22.6 million.
|Logistics companies are in a better position as the second quarter approaches than they were in 2010, in part because of what they experienced last year. Companies caught short when demand surged have made plans to secure capacity if demand spikes again, expanding their network of transportation suppliers.
In addition, the economy is healthier and freight demand is higher in the first quarter this year than a year ago, so a spike of the same magnitude is unlikely.
Rates already are rising, too, which means the lag some 3PLs experienced last year between the time their costs rose and when shippers began accepting rate increases has closed.
And the same capacity vise that squeezes 3PLs squeezes their customers, which means as the economy picks up — freight demand is expected to rise 5.2 percent this year and 5.6 percent in 2012, according to ACT Research — more shippers may turn to 3PLs for help finding trucks and controlling costs.
“We’re seeing a lot of opportunity to reduce costs across the whole supply chain,” said Herb Shear, chairman, president and CEO of Genco ATC, a Pittsburgh-based reverse logistics specialist with more than $1.5 billion in annual sales — ranking it No. 39 on the JOC list.
“Companies aren’t growing their top line right now,” Shear said. “The only way they can keep up profitability is by reducing costs and finding areas of cost to take out.”
Rising fuel costs are a variable that could have as big an impact on capacity and pricing this year as inventory restocking in the spring of 2010.
By early last week, crude oil futures had been trading at or near $100 per barrel for more than a week and settled at $104.42 per barrel March 4 on the New York Mercantile Exchange. The average national retail price of diesel rose 22.4 percent, or 70.9 cents, in the 15 weeks ending March 7, reaching $3.87 a gallon.
Higher fuel prices have a direct and an indirect effect on transportation prices. The first hit comes in the fuel surcharge. But higher prices have a knock-on effect on capacity and rates as carriers reduce speeds and tighten dispatching to save money on fuel. As shipping lines turn to slow-steaming on the oceans and truckers throttle back on the highways, available capacity is effectively reduced without removing a ship or truck from distribution networks.
“When you get oil costing over $100 a barrel, behavior starts to change,” Shear said.
And everything — especially transportation — gets more expensive.
Contact William B. Cassidy at email@example.com.