3PL sector sees annual revenue gains, reports Armstrong

While both the global and domestic economic landscapes remain tricky to navigate, it appears that the third-party logistics (3PL) sector remains on a straight and steady path, despite various obstacles standing in its way, such as abundant over the road capacity and low fuel prices, too.

That was made clear in data recently published by supply chain consultancy Armstrong & Associates Inc. in its report entitled “Tightened Up: Third-Party Logistics Market Results and Trends for 2016.”

Armstrong said that United States 2015 3PL net revenues rose 4.5 percent to $71.9 billion, which continues a pattern of single-digit annual growth. And 2015 gross 3PL revenues were more “muted,” according to Armstrong, due to reduced fuel prices in 2015 compared to 2014, and the subsequent fuel surcharge revenue for non-asset domestic and international transportation managers.
Individual market segments showed:
-domestic transportation management (DTM) gross revenue at $58.7 billion was up 3.3 percent annually, and net revenue at $9.6 billion was up 12.4 percent year-over-year;
-international transportation management (ITM) gross revenue at $47.3 billion was flat annually, and net revenue at $19.3 billion was up 4.8 percent;
- value-added warehousing and distribution (VAWD) gross revenue at $38.4 billion was up 4 percent, and net revenue at $29.5 billion saw a 2.2 percent annual gain;
-dedicated contract carriage gross revenue came in at $13.7 billion, and net revenue at $13.6 billion was up 4.0 percent; and
-the total U.S. 3PL market grew to $161.2 billion in 2015, with $3.1 billion included for the contract logistics software segment

“The 4.5 percent increase in 3PL net revenues met our expectations,” said Armstrong & Associates Chairman Dick Armstrong in an interview. “That number is about twice the growth of GDP, so it was really a pretty good year for 3PLs, while not a gangbuster year. It was reasonably good and in the black.”

The report highlighted how 2015 was a watershed year for 3PL mergers and acquisition activity, paced by XPO Logistics’ acquisitions of both Con-way and Norbert Dentressangle, and Echo Global Logistics buying Command Transportation, among others. Armstrong noted that 2015 was the single largest 3PL M&A year since it began tracking deal activity in 1999, with 11 deals each valued at more than $100 million. 

And in the report, the firm said that these M&A operations integrations have increased concentration on efficiency and profitability and are expected to add increased emphasis on quality and lean process improvement initiatives.

Chairman Armstrong said that this really comes to fruition in terms of increased scale that the 3PLs bring, as the larger players are clearly becoming a much bigger piece of the market.

“As they do that and if they are spending 5 percent of their budget on IT, that 5 percent becomes a much larger number as they continue to grow and means that they can really drive a lot of improvement. A company like XPO, for example, has all the pieces, with all of the IT to work with and integrate. That is what is happening in that we have bigger companies with more scale and more ability to do more sophisticated things.”

Looking at the Domestic Transportation Management segment again leading the way in terms of profits, Armstrong said it does not come as a huge surprise, considering that it is a situation where virtually all Fortune 200 companies use DTM, coupled with what he called a “real movement” with the larger shippers to consolidate the 3PLs they use by using fewer of them and doing more with them. What’s more, he said that growth is running parallel with 3PLs becoming larger, more global and more capable.

On the other end for VAWD, he said the low 2.2 percent net revenue increase was largely due to pricing pressure in a competitive landscape.

“There was overcapacity for a long time, and that is turning around,” he said. “We are starting to see new building and construction in premium areas. But for the most part there has been plenty of capacity and we are not importing as much. There is an increase in B2B activity and fulfillment (largely driven by e-commerce), but it’s still a relatively small part of what goes on in total retail activity. This led to not a ton of upside for 3PLs looking to increase profits for this segment.”

Looking at 2016 year-to-date, Armstrong said annual growth is estimated to be in the same range as 2015 was compared to 2014, while also noting that most of the growth will likely come from the U.S. economy, which he said remains a bright spot, as international activity remains flat, especially in Europe.