As was the case in its predecessor report a year ago, third-party logistics (3PL) CEOs are confident and optimistic about the current and future revenue growth, according to the Annual Surveys of Third-Party Logistics (3PL) CEOs, released earlier this week at the Council of Supply Chain Management Professionals (CSCMP) Annual Conference in San Diego.
The survey, which is in its 22nd year, was conducted by Dr. Robert Lieb, professor of Supply Chain Management at Northeastern University, and sponsored by Penske Logistics. It is based on feedback from 30 3PL CEOs throughout North America, Europe, and Asia-Pacific, with cumulative revenues in 2013 around $40 billion.
Average three-year revenue growth averages among CEOs for their companies in North America was at 7.86 percent (down from 10.39 percent in 2014) and Asia-Pacific was at 11.5 percent (down from 15.0 percent). The growth rate for European 3PL CEOs was 5.33 percent (down from 7.71 percent). More than 80 percent of surveyed CEO’s indicating their companies turned a profit in 2014.
And average regional industry growth rates over the next three years were projected at 5.92 percent for North America, 4 percent for Europe, and 5.75 percent in the Asia-Pacific.
“Growth rates are still positive in all three regions while being lower over all, so they are trending downward, but…the reality is these companies are of a much larger scale,” said Lieb. “It is easy to support a 30 percent growth rate for a company of a smaller size but not so much for a larger one. If you look in China, for example, with a declining GDP around 7 percent, that affects not only Asia-Pacific 3PLs but also those in the United States, and Europe, too, in terms of import and export volumes. This year also marked the first time that CEOs in Asia-Pacific saying demand is softer than what we are accustomed to while things are still growing.”
Perhaps the biggest difference between this year’s report and its predecessor was the proliferation of 3PL sector mergers and acquisitions. Putting that into better perspective, the report explained that 7 of the 30 surveyed CEOs reported “significant” M&A activity over the last year, with few large-scale acquisitions having been made since the recession in 2008. Some of these major deals include FedEx acquiring Genco, UPS acquiring Coyote, and several deals made by XPO Logistics.
But since that time, it pointed out that the global 3PL sector has seen ten major 3PL M&A deals accounting for a cumulative $18 billon, which the report said is leading to a major restructuring of the 3PL sector in various markets while also requiring major restructuring and integration efforts as well. Drivers for increased M&A activity cited in the report included: a desire of increased scale; 3PLs having capital to invest; and 3PLs wanting to expand services and geographic coverage. What’s more, surveyed CEOs said that they are likely to be more aggressive on the acquisition front in the coming years, with three indicating their respective companies may be acquisition targets. And on average, the data showed that these 3PL CEOs expect 6.54 percent of revenues over the next three years to be directly related to M&A activity.
“Last year, CEO’s said there were attractive M&A targets out there, but they were overpriced, adding that some deals dealt with multiple subsequent integration problems afterwards,” said Lieb. “But in early 2014, the dominoes started following, and the reason was money was cheap, coupled with customers pushing 3PLs to become more diversified and global. And when a major deal occurs, what happens is competitors feel a need to follow suite and make a deal of their own, which is happening, with non asset-based companies buying asset-based companies and things along those lines.”
Joe Carlier, Penske Vice President of Logistics, said there a few main approaches to 3PL M&A.
One approach, he explained, is being able to buy scale and being strategic in nature to expand 3PL service offerings.
“Our approach is definitely on the strategic side,” he said. “Looking at our customer base, we look at their expectations as they are raising that bar and establishing a reliance on 3PL relationships, and the trend of logistics outsourcing will continue to grow rapidly for a host of reasons. But 3PLs are more integrated partners and a one-stop shop, with shippers looking to us to not only help them design a solution behind their challenges but also to execute. It has a lot to do with how well you can integrate an acquisition in terms of things like culture and IT, as our customers are asking us to integrate their business so we can best serve them.”
Another prevalent theme of this year’s data focused on heightened changes related to the e-commerce supply chain, with 3PLs pointing to things like the increased need for next-day delivery and international e-commerce expansion.
Some notable e-commerce-related takeaways included the impact of Amazon on supply chain and e-commerce in North America and Europe, with Amazon’s emphasis on same-day delivery and bolstering relationships with 3PLs for last-mile delivery.
Looking at revenues, the surveys found that e-commerce represents 11.85 percent of North American 3PL revenue, with an expected increased to 20.85 percent in three years. And it currently accounts for 5.33 percent of European 3PL revenues, with an expected increase to 9 percent in 3 years. Asia-Pacific e-commerce growth is being spurred on by e-commerce titan Alibaba.
“Changes in consumer behavior and continuing to order things online is becoming more prevalent,” said Carlier. “It requires 3PLs to think through multiple aspects of the supply chain like infrastructure and the technology inside facilities to operate….and also spending time to determine how we are meeting demands inside the four walls and geographic placement to serve the end customer. And from a transportation perspective there are multiple different channels so you are focusing on an omnichannel strategy in terms of where am I delivering from and delivering to for delivery and pickup, as well as handling returns.”
Other key themes of the surveys focused on: West Coast port issues, global 3PL industry concerns (like the truck driver shortage in Europe and North America), lower oil prices, economic uncertainties, and future impacts of ride-sharing services, like Uber, which could threaten 3PLs through last-mile service deliveries, becoming a small LTL as well as small volume couriers, too.