In Cincinnati, logistics is to business what five-way chili is to local cuisine. The Cincinnati area is home to hundreds of trucking operators, is served by two Class I railroads and boasts an international airport and one of the largest U.S. inland ports.
That’s a freight-rich environment for Total Quality Logistics, which tripled its revenue over the past five years despite the worst recession in decades. Last year, privately owned TQL passed the $1 billion revenue mark for the first time, making it one of a handful of billion-dollar non-asset domestic logistics companies.
And although economists fret over the impact of the European debt crisis on the global economy and warn of slower U.S. growth and high unemployment ahead, the future looks sunnier to Kerry Byrne. “We’re going to hire several hundred people this year,” TQL’s executive vice president said. “We continue to gain market share, particularly in the truckload brokerage area. There’s a real need in the marketplace for a high level of service regardless of short-term conditions,” he said.
TQL is one of many third-party logistics companies reshaping the domestic freight market, rapidly increasing revenue year after year as shippers look for help containing transportation costs and managing increasingly complex supply chains. Companies such as C.H. Robinson Worldwide, Hub Group, Transplace and Echo Global Logistics are tapping into new veins of transportation spending as shippers outsource larger portions and multiple strands of their domestic and global supply chains. That’s pumping billions of dollars into the domestic logistics market.
“It’s a very hot area, and there’s a lot of change going on,” Richard Armstrong, chairman of logistics consulting firm Armstrong & Associates, said during a Jan. 24 Journal of Commerce Webcast on the outlook for 3PLs in 2012. Armstrong estimates the dollar value of the U.S. logistics market will hit $151.1 billion this year, a 40 percent increase from 2009, when logistics spending dropped 16 percent.
The increase in logistics spending by shippers is more dramatic when viewed over the past decade. If logistics expenditures hit Armstrong’s 2012 estimate, they will have more than doubled since 2002, when they totaled only $71.1 billion.
While the details may be complex, the reasons behind that growth are simple.
“Shippers are driving to improve efficiencies and reduce costs” by outsourcing non-core services such as freight management, Byrne said. Although logistics outsourcing has been a trend since the 1990s, shippers that came under enormous cost pressure during the recession accelerated the process, he said, and larger 3PLs and brokers “had an advantage: our ability to invest in people and technology.”
That advantage is attributable to the non-asset nature of much of the logistics business. While asset-based carriers typically have operating ratios in the 90s and are fortunate if net margins break 10 percent, 3PLs often have net margins starting in the high teens. The net income margin for 3PLs primarily engaged in domestic transportation management was about 17.3 percent in 2011, compared with 8.4 percent for internationally oriented 3PLs, according to Armstrong.
That in turn is drawing private equity investment to logistics. “Wall Street is noticing those numbers,” Armstrong said. The $150 million investment in XPO Logistics, the former Express-1 Expedited Solutions, by investors led by Bradley S. Jacobs is a good example. Jacobs hopes to parlay his initial investment into a multibillion-dollar enterprise built through acquisitions, following a pattern he established at United Waste and United Rentals. “We’re going to buy a lot of freight brokers of all sizes all around the country,” he told The Journal of Commerce.
TQL is increasing not just revenue but also its customer base, its staff and its network of offices, Byrne said. The company hired 585 employees in 2011 and opened satellite facilities in Denver; Columbus, Ohio; Indianapolis; Lexington and Louisville, Ky.; and Dayton, Ohio. The company has 11 satellite offices. It works with more than 50,000 trucking partners and handles more than 500,000 loads a year.
For seven years, the Cincinnati Business Courier has honored TQL as one of the city’s fastest-growing private companies, averaging 31 percent year-over-year sales growth since its founding in 1997. It had $762 million in revenue in 2010, which means it matched or beat that annual growth record when it passed $1 billion.
“A willingness to continue to invest in people and technology is what got us to $1 billion,” Byrne said. “Our technology spend this year will exceed $10 million. Not everybody can do that. We’re going to enhance services through technology.”
In the past year, for example, TQL rolled out and enhanced a mobile freight-finding application for its carrier base that works on Apple iPhones and Android phones and upgraded its carrier Web portal. “You’d be surprised at the volume of interaction we’ve had with our carriers these mobile apps,” Byrne said.
The ability to invest in technology still improves with size and scale, which means larger 3PLs find it easier to develop and deploy systems their customers and carrier partners need. “The threshold requirements (for 3PLs and brokers) are getting more difficult all the time, and a lot of those requirements revolve around information technology,” Armstrong said during the webcast. “You’re seeing real shrinkage with smaller freight brokers and forwarders and it parallels what we’ve seen in the asset-based sector where smaller guys are being squeezed.”
Byrne said TQL has seen consolidation, though the truckload brokerage market is still widely fragmented, much like the truckload carrier market. “The number of players that have the resources to compete has shrunk a little bit,” he said.
On a large scale, TQL has seen consolidation as shippers with multiple divisions cut back on the number of 3PLs they use. “That is absolutely happening,” Byrne said. “We’ve been on both sides of that, and at the end of the day it certainly makes sense for the shipper.”
He still sees plenty of opportunity for expansion. “We’re optimistic about 2012 and 2013, and I think that opportunities will continue to present themselves,” Byrne said. “We’re gearing up for another big year.”