Pandemic Upends Logistics Market
The COVID-19 outbreak created a volatile U.S. third-party logistics market in 2020, which presented growth opportunities for 3PLs with strong carrier management, e-commerce and airfreight forwarding capabilities, while other 3PLs did not fare as well.
After a lackluster 2019 in which transportation activity declined year-over-year as import tariffs took hold, the industry awoke to a pandemic nightmare in March 2020 with vast economic shutdowns. By May, things began bouncing back as shutdowns were dialed back and the V-shaped recovery took hold. Even with local and regional economic “spits and spurts,” inventories needed to be replenished and personal protective equipment drove strong airfreight demand. There was no time like the present for logistics expertise, and 3PLs prevailed as an essential industry.
Overall, strong domestic and international transportation demand has continued into 2021, further driving up domestic and international transportation rates. With inventories increasing and COVID-19 cases waning, demand for 3PL services seems to be becoming more stable and manageable. As the nation gets closer to herd immunity in the COVID battle, we should continue to see increasingly strong demand as more consumers leave quarantine and boost spending. In fact, 2021 might be the true start of our generation’s roaring ’20s.
While many 3PLs still are providing us with 2020 financials, Armstrong & Associates’ current estimates show U.S. 3PL market gross revenues grew 8.8%, bringing the total market to $231.5 billion. Most of the growth came from international and domestic transportation management, which responded to COVID-related demands for PPE and to restock inventories upon economic reopenings. Overall, 2020 was a better year for 3PLs than 2019, which registered the market’s first decline since 2009. But segment growth was uneven.
Total 3PL segment net revenues (gross revenues minus purchased transportation) grew 2.1% to $93.5 billion, reflecting gross margin compression due to a volatile carrier sourcing market and transportation management 3PLs spending more to secure hard-to-find carrier capacity. The overall gross margin for all segments declined to 41% from 44%.
International Transportation Management
Leading all 3PL segments for revenue growth in 2020 was international transportation management (ITM) which consists of air and ocean freight forwarding, customs brokerage and complementary value-added services. Airfreight revenues swelled in 2020 with the pandemic and extraordinary demand for PPE. With commercial passenger aircraft making up approximately 40% of total air cargo capacity, the pandemic upended airfreight forwarding, and rates surged albeit on lower overall volumes.
With the economic reopenings in May, ocean freight demand came on strong as shippers worked on replenishing inventories. The ongoing results have been port congestion, tight container drayage capacity and increased rates. “Blank sailings,” in which a scheduled ship is canceled from a route, and stronger ocean carrier alliances also have reduced ocean capacity and buoyed rates.
Overall, ITM realized a 19.2% gross revenue gain in 2020, expanding to $70 billion. While having a lower growth rate than overall gross revenue due to a tight carrier capacity market, net revenue increased a healthy 11.4%, to $24.6 billion. Our expectation is for demand and pricing to remain strong in ITM for the remainder of the year.
C.H. Robinson Worldwide’s global forwarding division saw 2020 gross revenue grow 33.2% to $3.1 billion and net revenue increased 17.8% to $629 million. It has been expanding rapidly in ITM via a mix of acquisitions and organic growth. In 2011, it had net revenue of $100 million.
Expeditors International of Washington, the largest U.S.-based freight forwarder, had a better-than-average 2020 with gross revenue increasing 23.7% to $10.1 billion and net revenue increasing 11% to $2.9 billion. Growth primarily came from airfreight, where gross revenue grew a whopping 63% to $4.8 billion, from $2.9 billion in 2019.
Apex Logistics International, headquartered in Hong Kong, has significant operations in the U.S. and is one of the largest China-U.S. airfreight forwarders. Its airfreight metric tons grew 44% to 750,000 in 2020, driving a 53% increase in gross revenue to $2.3 billion. Apex Logistics managed multiple weekly air charters of PPE from China to the U.S. and has burgeoning e-commerce business. It also more than doubled its ocean freight forwarding business, which ended 2020 with 190,000 20-foot equivalent units.
In late February, Kuehne + Nagel announced it was acquiring Apex Logistics for about $1.5 billion. The combination makes Kuehne + Nagel the largest global airfreight forwarder with just more than 2.1 million metric air tons, surpassing DHL Supply Chain and Global Forwarding. It also significantly expands Kuehne + Nagel’s Asian 3PL operating network.
Dedicated Contract Carriage
The asset-heavy dedicated contract carriage (DCC) 3PL segment had the second-highest net revenue growth of the four 3PL segments at just 0.3%, to $20 billion. Gross revenue declined 2%. The negative effect of COVID made 2020 a volatile and lower-volume year versus 2019, when DCC net revenues grew 12.1%.
Traditional DCC contracts have one- to three-year terms with specific trucking assets being dedicated to customers. This makes DCC contracts much “stickier” than standard shipper-carrier trucking contracts. A&A’s market research shows dry van trailers being used for 70% of DCC truckloads, refrigerated 16%, flatbeds 6%, and tankers and others 8%. Three-fourths of major DCC providers have dry vans and reefers. Half of major DCC providers have flatbeds. Customer trailers/containers often are used, especially for retail operations such as Walmart.
DCC segment leader J.B. Hunt Dedicated Contract Services, with 9,911 power units in dedicated, posted above average net revenue growth of 3.2% to $2.2 billion, making its DCC market share 11% on a net revenue basis. It has more than 160 customers, and A&A estimates that about half of J.B. Hunt’s dedicated tractors are tandem axle sleepers. About as many are day cabs used in regional operations. A significant part of Hunt’s DCS operations involve direct store delivery. It also has developed a large last-mile delivery network that has significant home-delivery capabilities.
Penske Logistics, helped by its 2020 acquisition of Black Horse Carriers and 2018 acquisition of Epes Transport System, has grown into the second-largest dedicated fleet with 6,718 power units. Combined DCC revenues are estimated at more than $1 billion.
We expect moderate DCC demand and growth for 2021 as the economy further rebounds. A lot will hinge upon continued strength in contract truckload rates.
Domestic Transportation Management
The non-asset-based domestic transportation management (DTM) segment includes freight brokerage, which represents 83% of segment revenues, and managed transportation, which accounts for 17%. In 2020, 3PLs scrambled to find carrier capacity to meet shipper demand. DTM gross revenue increased 9.9% to $91.2 billion, but net revenue decreased 1.8% to $13.2 billion as volatility in motor carrier capacity quickly increased spot market rates, compressing segment gross margins by 1.7%.
The ongoing digitalization of transactional truckload freight brokerage continues at a rapid pace as more large shippers have built integrations with 3PLs’ transportation management systems for truckload spot-market rate quoting and automated load tendering and booking. In turn, about 20 3PLs have built TMS interfaces that provide these shippers instant rate quotes and the ability to complete load tendering and booking through system APIs (application program interfaces). This process automates traditional spot market freight-brokerage sales functions and is increasing shippers’ use of more spot versus contract pricing.
Sales automation for spot market truckload is happening in conjunction with the automation of carrier sales (procurement) functions. Freight brokers are using intelligent capacity-management systems to digitally match shippers’ loads to carriers based on historical and real-time carrier capacity data analyzed via machine learning algorithms.
This digital freight-matching capability has become a competitive differentiator within the DTM segment as 3PLs look to increase the number of loads or shipments they manage per person per day. Ultimately, this automation will put further pressure on freight brokerage gross margins, while it should improve overall profitability.
Large companies such as C.H. Robinson, TQL, XPO Logistics, Hub Group and Echo Global Logistics are some of the 3PLs driving industry automation, along with the newer tech-first digital freight brokers and DTM market entrants Convoy, Transfix and Uber Freight. At this point, most of the top freight brokers are strategically looking at ways to digitalize operations while adding value through improved carrier management and customer and carrier experiences.
Value-Added Warehousing and Distribution
Rapid growth in e-commerce fulfillment could not offset the loss of business-to-business-related activity as overall revenues for the value-added warehousing and distribution (VAWD) 3PL segment sagged in 2020 versus its 9% growth 2019. VAWD net revenues declined 1.1% to $35.7 billion.
VAWD 3PLs continue to benefit from growth in retail e-commerce business, which continues to be the fastest-growing domestic 3PL segment with a compound annual growth rate of 28% since 2017. Many VAWD 3PLs are supporting retail brands’ strategies to manage their own order fulfillment channels and avoid being captive to large e-retailer platforms such as Amazon. Operationally, the growth in e-commerce business has meant an expansion in multiclient warehousing and fulfillment operations, with many having footprints of less than 100,000 square feet.
An ongoing headwind for VAWD 3PLs has been the “Amazon effect.” 3PLs are continuing to see increased competition from Fulfillment by Amazon, which controls 60% of the U.S. e-commerce 3PL market. It dramatically has impacted warehouse employee wages and lease rates in key distribution areas such as Plainfield, Ind., and California’s Inland Empire. In turn, it is driving significant interest from VAWD 3PLs to automate warehouses with autonomous robotic solutions. With some autonomous robots costing less than $500 per month to operate, the cost-benefit and positive return on investment are increasing 3PLs’ interest in warehouse robots to support activities such as picking, putaway and cycle counting.
Armstrong & Associates Inc. is a market research and consulting firm based in West Allis, Wis. The company publishes a Who’s Who in Logistics and Supply Chain Management and provides legal and expert witness services and advice on mergers and acquisitions to investors, industry analysts and supply chain participants.