Even in a slow economy, third-party logistics is a growth industry. U.S. 3PLs’ gross revenue rose 5.2 percent last year, according to an annual report by supply chain consulting firm Armstrong & Associates.
“Outsourcing to 3PLs has been growing at a multiple of 2.5 to 4.5 of GDP growth,” said Richard Armstrong, chairman of the Stoughton, Wis., firm. “I think we’ll continue to see that kind of growth. 3PLs’ market penetration is only 15 to 20 percent, so there’s a lot of room for it to increase.”
Last year’s growth rate was tepid compared with the 10 percent compound annual growth rate U.S. 3PLs have enjoyed over the last 15 years, but it still outpaced the 1.7 percent increase in U.S. GDP in 2011.
U.S. 3PLs’ net revenue, or gross margins, rose 5.9 percent in 2011, led by domestic transportation management and value-added warehousing and distribution.
3PLs’ gross revenue for domestic transportation management increased 12.2 percent to $41.3 billion last year. Net revenue after transportation costs also rose 12.2 percent, and totaled some $6.3 billion.
Net revenue for value-added warehousing and distribution increased 8.4 percent to $26.6 billion. 3PLs’ dedicated contract carriage services grew 4.7 percent, to $10.9 billion.
Lagging the market were 3PLs specializing in international transportation management. Their net revenue rose only 2.1 percent, to $17.7 billion. The small increase contrasted with a 16 percent compounded annual growth rate over the previous 15 years.
The international transportation segment of the 3PL market continues to be affected by Europe’s recession and slowing growth in Asia, Armstrong said. He expects that trend to continue for the foreseeable future. “The big question is what happens in the global economy and how much and how quickly it turns around,” he said.
Other 3PL segments have a healthier outlook, Armstrong said. He expects net revenue for 3PLs specializing in domestic transportation services to rise 10 percent this year and continue to grow rapidly for the next several years.
Dedicated contract carriage services will have “modest increases” as they raise rates amid tight capacity and declining fuel costs. Armstrong said 3PLs’ contract carriage operations are benefiting from oil and gas exploration and production in the Bakken and Marcellus shale formations.
Private equity investors have noticed 3PLs’ profitability and are pursuing acquisitions of large non-asset-based 3PLs specializing in domestic transportation and freight brokerage, Armstrong said.
Investors are primarily interested in the 40 or so 3PLs with net revenue of more than $20 million in domestic transportation management and freight brokerage. It’s not unusual for these companies to have earnings before interest and taxes of 30 to 40 percent, Armstrong said. “These companies have very attractive financial characteristics,” he said. “The returns on invested capital are incredible.”