Slow U.S. economic expansion will keep North American third-party logistics revenue growth in the single digits through 2011. As part of a long, slow climb back, revenue should reach $130 billion this year, exceeding 2008 by 2 percent.
Among the logistics industry segments, we expect international transportation management to be the leader over the next year. Global supply chain management companies with substantial business outside the U.S. and Europe should do better than those companies limited to North America or Europe.
The economies of China and India will grow at more than three times the rate of the U.S. economy. Brazil’s economy will grow about twice as much. At the same, Europe will grow at half the rate of the United States.
Among U.S.-heavy international transportation management companies, expect Expeditors International of Washington to remain the dominant player because of its strong operations in Asia generally and China in particular. Expeditors’ 2010 net revenue grew more than 20 percent, and earnings before interest and taxes were up by a third. The company has more than $1 billion in cash on hand.
Air freight operations were particularly strong in the first half of 2010. Kuehne + Nagel, DHL, Panalpina, DB Schenker and APL Logistics all should hold their own in 2011 and record modest expansion at the expense of smaller competitors. UPS Supply Chain Solutions also has extensive air freight operations and modest ocean freight operations in this space.
The replacement of Rolf Altorfer by John Hextall as North American president at Kuehne + Nagel is the most interesting personnel change of 2010. Altorfer is a strong operating leader who was one of the Swiss expatriates at the core of U.S. freight forwarding for several decades. Hextall was one of the British-South African group at the core of UTi Worldwide.
With Hextall’s departure, the original UTi group is gone and a younger American top management team is in place of that global company.
In the United States, domestic transportation management will grow modestly in 2011 as freight brokerage and systems-based transportation management gain share from trucking. Freight brokers handle about 15 percent of current truckloads. The largest, C.H. Robinson, continues to gain share within this segment, recording nearly 24 percent growth in net revenue and 40 percent expansion in earnings before interest and taxes through the first three quarters of 2010. C.H. Robinson may have $10 billion in gross revenue by the end of 2010, with an EBIT exceeding $700 million. Other major players are Hub Group, Landstar and Exel Transportation.
Value-added warehousing and distribution revenues should grow 7 percent a year over 2010 and 2011. About half of this growth will be in revenue increases that include “claw backs.” In 2010, the average revenue per square foot for the major U.S. value-added warehousing and distribution companies rose to more than $21.
A major development was GENCO’s purchase of ATC Technology to expand its returns and repair capabilities. ATC also adds significant fulfillment expertise to GENCO’s solid distribution operations. Greenbriar Equity made a significant minority investment in GENCO to help fund the ATC purchase. GENCO is the second-largest value-added warehousing and distribution company in North America behind DHL-Exel.
Another major change in value-added warehousing and distribution involves the retirement of Bill Gates, president of contract logistics and distribution at UTi Worldwide at the end of 2010. Gates is succeeded by Ed Feitzinger, who spent several years as part of Menlo Woldwide’s core team and now joins the transformation at UTi as that company expands its role among global supply chain managers.
Menlo Worldwide, meanwhile, is expanding in multiclient warehousing with an emphasis on high-tech customers. Menlo has become a stable, consistently profitable and growing part of Con-way.
In 2010, 45 percent of total U.S. warehousing was commercial, consisting of value-added and public warehousing. When tallied, 2010 revenue for value-added warehousing and distribution should reach $30 billion, 60 percent of the total commercial warehousing market. We estimate total U.S. warehousing value at $111 billion. By contrast, European contract logistics is $114 billion, consisting of roughly 40 percent warehousing, 33 percent transportation and 27 percent value-added services.
Dedicated contract carriage is the most mature segment of U.S. third-party logistics. This segment continues to change as customers demand more flexibility over exclusive commitments for equipment. Creating this flexibility is a larger company scale advantage, as is the ability to balance longer hauls.
J.B. Hunt Transport Service, Werner Enterprises and Greatwide Logistics remain the leaders among contract carriers. Ryder System, Ruan Transportation and Penske Logistics are the leaders among companies with equipment leasing backgrounds. Dedicated contract carriage revenues can be expected to return to 2008 levels but move slowly, with mid-single digit increases after 2011.
We expect to see a return to mergers and acquisitions, initial public offerings and increased private equity investments in 2011. The success of Echo Global Logistics’ $79 million IPO in October 2009 is a reminder that non-asset 3PLs are attractive investments, even in a down economy. The strongest acquisition interest remains non-asset 3PLs with $20 million or more in net revenue.
GENCO’s private equity investment choice indicates a different approach to financing. Many 3PL executives believe it’s better to remain privately held than to deal with the constant hassles of being a public company. At the same time, a plethora of private equity companies are willing to do a deal.
The quality of 3PL service offerings is evolving. Technology and Web-based capabilities, including those for global supply chain management, are improving and becoming more widely available and easier to implement, even for mid-sized operators. At the same time, customers are still only slowly involving 3PLs strategically. Their reluctance to fully engage this segment is based partly on an unwillingness to provide critical information for strategic partnering and to provide the funding for desired improvements. As the 3PL market matures, we expect to see a continuation of this slow but steady growth in strategic cooperation.
Green initiatives will grow in importance in coming years. Europe-based companies are responding more to the greater European pressure for “social awareness.” However, green capabilities aren’t a major competitive differentiator yet.
Improved and retooled security compliance, especially for air freight, will command more attention. Security solutions and capabilities are an ever increasing scale advantage for global supply chain management companies.
Dick Armstrong is chairman and CEO of supply chain market research and consulting firm Armstrong & Associates Contact him at 608-873-5509 or email@example.com.