Third-party logistics providers thrived as the economy stalled last year, but will have a tough time making money in the coming year as the recession settles in and trade retreats.
Total revenue among U.S. 3PLs grew an estimated 5.5 percent last year to $128.7 billion, said Richard Armstrong, chairman and CEO of supply chain consultant Armstrong & Associates, Stoughton, Wis. Net revenue for domestic transportation management grew 6.5 percent.
Several companies made big gains: C.H. Robinson’s gross revenue for 2008 jumped 17.3 percent to $8.6 billion, and operating income increased 12.1 percent to $572 million. Kuehne + Nagel’s net income rose 9.1 percent to $503 million. Panalpina’s net revenue grew by just 2.7 percent, but the company said it increased free cash flow by 29.2 percent mostly because of strict management of net working capital.
But Armstrong cautions against paying too much attention to 2008 results because “the economy fell off the table in December.”
This recession will test the assumption that 3PLs that can save their customers money in bad times and good are “recession-proof.” Until recently, the 3PL sector had been growing at a rate of 2 1/2 to four times GDP growth. If GDP declines by 1 to 2 percent in 2009, revenue in the 3PL sector will likely grow only 2 to 3 percent, Armstrong said.
“I don’t see any reason to get excited about the 3PL industry” now that China and India are the only countries whose economies are growing, he said.
The good news for 3PLs is that more companies will continue to outsource their supply chain operations during the economic downturn. Pressure is mounting on global companies to contain their costs and downsize their in-house staff. Many companies are tempted to outsource their logistics to third-party specialists.
Still, 3PLs are in for a rough ride over the short run. “At least nine out of 10 companies that are customers of 3PLs will have less business,” Armstrong said. “All the verticals are soft.” Gaining a larger share of a shrinking pie won’t necessarily add up to making a profit.
Other analysts are more sanguine, saying that unless the global economy goes into a multiyear funk, 3PLs’ long-term prospects continue to be strong. A recent report by business research company Frost & Sullivan said the global logistics market “is at a prolific phase of its development.”
Its author, research associate Archana Rajagoplan, said, “Although the transportation segment was hit by rising fuel prices, the industry has maintained a steady profit of 10 to 15 percent.”
Frost & Sullivan is “less optimistic about the short term given the current circumstances” than it was a few months ago when its survey was completed, Rajagoplan said. But he expects companies to increase outsourcing as they try to cut costs, and increase transportation and supply chain efficiency.
Although profits will be difficult to come by in 2009, gross revenue will grow in every sector except dedicated contract carriage, Armstrong predicted. International transportation management revenue will grow 7 percent, and domestic transportation management revenue, 5 percent in 2009.
Despite the negative sentiment, it’s worth remembering how far the 3PL market has come during the past decade: U.S. 3PLs nearly doubled their revenue from $65 billion in 2001 to $128.7 billion in 2008. If Armstrong is right, the total will reach $145 billion in 2010, more than double the $71.1 billion recorded in 2002.
Contact Alan M. Field at email@example.com.