3PLs prep for price wars, bankruptcies amid pandemic

3PLs prep for price wars, bankruptcies amid pandemic

Falling non-essential freight volumes amid business shutdowns squeeze truck brokers. Photo credit: Shutterstock.com.

North American shippers that aren’t producing, packaging, and shipping goods during the pandemic won’t feel immediate pain from truck freight broker bankruptcies or layoffs, but they could be caught flatfooted when freight demand eventually resumes its growth, logistics industry executives warn. That could propel US transportation costs upward by this fall.

The sudden shutdown of freight-generating businesses is rippling through the third-party logistics industry, leading to layoffs and putting thousands of transportation intermediaries at risk. Most endangered are small to mid-size companies without specialized niches and little technology. As volumes shrink, even larger companies face tough challenges.

“When it comes to trucking and logistics, almost the entire industrial economy is shut down,” said Andrew Lynch, president of Zipline Logistics, a privately owned third-party logistics provider (3PL) in Columbus, Ohio. “I think we’ll see just as many bankruptcies on the 3PL side as we’ve seen on the trucking side. There are folks telling me they have no freight to move.”

Layoffs have been reported at Arrive Logistics, a 3PL based in Austin, Texas, and Total Quality Logistics (TQL), headquartered in Cincinnati. TQL said the layoffs were unrelated to the pandemic. "We terminated some employees last month for underperformance,"  Tom Millikin, corporate communications manager, told JOC.com. "No other internal or external factors played a part in those decisions, and those employee separations were not part of any company reduction in force program. In fact, we’re actively hiring right now."

The full extent of layoffs in the logistics industry is difficult to assess, as many companies do not discuss or widely advertise workforce reductions. Although transportation is an essential business, as the economic shutdown is extended, job losses are likely to be significant.

The shutdown and the coronavirus disease 2019 (COVID-19) threaten not just freight capacity sourced from truckers and brokers, but the integrity of supply chains. Suppliers whose buyers are shut down are not moving goods to market, and those that are often find labor shortages attributed to the pandemic mean too few workers at warehouses or customer docks.

Massive shakeout predicted

“Things are shaping up for a massive shakeout,” and additional consolidation in trucking and brokerage markets, said Jeffrey Tucker, CEO of 3PL Tucker Company Worldwide of Cherry Hill, New Jersey. “There’s going to be a structural change to our economy,” especially in retail markets where consumers might not return to pre-pandemic behavior quickly, if at all, he said.

“This pandemic will have a far greater material impact in my book than anything we’ve ever seen,” Tucker said, comparing it to the 2003-05 capacity crunch, 2009 recession, and the shock to capacity from the electronic logging device (ELD) mandate in 2018. In those cases, “the recovery time needed to reach a new normal and equilibrium was about a year and a half.”

Tucker believes each month the economy remains in shutdown adds “at least a year or a year and a half to the recovery,” making the reopening of the US economy longer and messier. “The market will be disrupted, with many brokers and carriers gone,” he said. The survivors, he and other 3PL executives believe, will be those who can nimbly adjust to new market conditions.

That means shippers likely will pay more to move goods this fall, whether through 3PLs or directly with motor carriers. “[Truck] capacity shrank in 2019 and it will shrink further this year,” said Brian Fielkow, CEO of Jetco, a Houston-based trucking company and brokerage. “When things come back, there’s not going to be enough capacity to serve the supply chain.”

The longer the shutdown and pandemic last, rehiring workers, fluctuating customer demand, the need for new suppliers, and underutilized assets will lead to widespread supply chain dislocation. “I personally think it will make capacity constraints of 2018 look mild,” Fielkow said. “How does this economy turn back on overnight?” asked Tucker. “I think it’s going to be slow.”

Separating the essentials from the rest

The US 3PL and brokerage market right now reflects the trucking sector from which it draws capacity. Companies involved in moving freight considered essential — largely food and groceries, paper products, and medical supplies — have almost as much business as they can handle. 3PLs built around industrial supply chains, on the other hand, are scrambling.

Freight volumes at Zipline, which specializes in helping shippers move consumer packaged goods (CPG), groceries, and items headed to big-box retailers, are up 20 percent or more from a year ago, Lynch told JOC.com. The company hasn’t had to even contemplate layoffs. “We’re still adding new business every day,” he said, most of it heading to grocery stores.

That freight is not just what might be considered “essentials,” he said. “I think the surge and panic buying are largely over,” he said last week. Lynch now sees increased replenishment of groceries of all types, such as Fever-Tree cocktail mixers and Stroopwafels. “This is stuff people are buying because they’re not going out to get lunch,” or to bars and restaurants.

That type of purchasing will continue “all the way through until we’re really back to being a fully functioning economy, which is probably months away,” Lynch said. “I think a lot of consumer goods brands are going to have a really successful 2020 for this exact reason.” So will the 3PLs and brokers that are closely aligned with their CPG customers and their businesses.

Tucker Worldwide is also benefiting from close connections with the grocery and drug industries. “All the immunity-boosting drugs are in short supply,” Tucker said, both prescription and over-the-counter drugs. “You’ll see an increase in flu and cold remedy demand,” he said. “Our business is definitely shifting toward these high-replenishment products.”

But so is every 3PL’s business, and he expects price wars ahead. “It’s going to be trench warfare for the next few weeks and maybe even months,” said Tucker. “Those companies that were serving the automotive industry and had exposure to non-essential freight, they’re desperate at this stage, whether they’re brokers or carriers.”

Eventually, those who will absorb the biggest blow are the more purely transactional brokers and 3PLs, and the shippers that “chase the pennies,” Lynch said. “There’s thousands of small brokers, and there are hundreds and hundreds of companies our exact size [about $75 million in annual revenue], that I’ve never heard of. A lot of those guys will just vanish.”

Lynch believes there’s reason for optimism in the long-term. “Our brick-and-mortar retailers are still doing their July floor sets,” he said. “They may be overly optimistic, but they’re in position to come out of the gates operating as they did before. A lot of what we’re bringing in for them will go to stores eventually, or move through their e-commerce omnichannel network.”

The survivors and winners, Lynch said, will be those shippers with control over their supply chains, and by extension the brokers and 3PLs with the ability and technology to help shippers maintain that control. “I do see [dislocation] as a continued risk,” he said, “but it’s a risk to established suppliers, it’s an opportunity for everybody else. For us, dislocation is a good thing.”

Contact William B. Cassidy at bill.cassidy@ihsmarkit.com and follow him on Twitter: @willbcassidy.