2014 Was “Year of the Deal” in 3PL Arena

In the annual study and forecast on third-party logistics providers (3PLs) the consultancy Armstrong & Associates note that “big deals” have dominated the last year.

In January, FedEx purchased GENCO, a high quality, value-added warehousing and distribution (VAWD) third-party logistics provider, for $2 billion. In August 2014, Norbert Dentressangle jumped from France to the U.S. by purchasing Jacobson Companies for $750 million in cash. Then, in the spring of 2015, Norbert Dentressangle sold itself to voracious acquirer XPO Logistics for $3.5 billion.

“These deals are reflective of a third-party logistics sector that is now dominated by around 50 companies based in post-industrial countries,” says Dick Armstrong, the consultancy's president. “These third-party logistics providers have scale based on geographical coverage, IT and processes that create threshold levels which bar smaller rivals from overtaking them with organic growth alone.”

According to Armstrong, two U.S. 3PL market segments experienced double digit growth in 2014. Both were domestic segments reflecting U.S. economic growth. Non-asset based domestic transportation management (DTM) gross revenues grew 15.4 percent, while net revenues grew 20.5 percent. Dedicated contract carriage (DCC) gross and net revenues both increased by 10.4 percent.

“DTM is the modern and sophisticated offspring of freight brokerage,” says Armstrong. “DCC provides dedicated truck capacity in a market often dominated by tractor shortages which are driven by a lack of drivers.”

The American Trucking Associations (ATA) has estimated that the U.S. trucking market has a shortage of 35-45,000 drivers. DCC is a primary protection mechanism for shippers when demand outpaces supply.

Large customers of DTMs are often treated as enterprise accounts. They tender large volumes of orders daily to the DTMs. Generally, DTMs optimize the daily tenders from major shippers consolidating LTL shipments and performing end-to-end matches to develop best cost/service routes. Most shipment transactions follow repetitive contractual patterns. Spot market transactions are a small part of the total.

According to research done by William Greene at Morgan Stanley, 48 percent of large shippers use two to five freight brokers, and 38 percent of large shippers use six or more freight brokers. Freight brokers now handle an estimated 14 percent of all LTL/TL shipments in North America. Large shippers look to them more often to increase their options, especially during periods of tight trucking capacity.

Demand exceeds supply on a periodic basis in the U.S. especially during peaks in late summer and fall. During these times, shippers more often choose reliable freight brokerage DTMs to cover their shipment needs. Meanwhile, many shippers add brokers to their core carrier list to assure capacity.

In sum, reasonable adjustments to total logistics costs indicate that 3PL penetration rates are 20 percent in most post-industrial economies, contend Armstrong analysts. North American third-party logistics revenues for 2014 were $187.6 billion. Asia Pacific was the highest region with $269.6 billion in revenues. Overall, 3PL revenues were $750.7 billion, which is 8.2 percent of global logistics costs. Third-party logistics costs are higher in post-industrial economies running in the 10-11 percent range.

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