3PLs continue long-term growth

After a couple of tough years, most third-party logistics providers (3PLs) got back on track in 2010, and business is looking even better in 2011 for the four 3PL segments that Armstrong & Associates follows: domestic transportation management, international transportation management, dedicated contract carriage, and value-added warehousing and distribution. Overall, 3PLs' U.S. gross revenues jumped 18.9 percent in 2010 to US $127.3 billion, slightly exceeding 2008's market results. We are forecasting that gross revenues will rise to an estimated US $141.2 billion this year.

This strong performance reflects a long-term growth trend. Since we began tracking results in 1995, the 3PL market has experienced negative growth just once, in 2009. Even with that dip, the market's compound annual growth rate (CAGR) for net revenue from 1995 through 2010 was 12.7 percent. Moreover, the increase in net revenue from 2009 to 2010 was 4.7 times the growth rate of the U.S. gross domestic product (GDP) during that same period.

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[Figure 1] Net revenue estimates for 2011 Enlarge this image

Both revenues and profitability increased in all four 3PL segments in 2010. Gross revenue increases ranged from 12.9 percent for value-added warehousing and distribution to 30.1 percent for international transportation management and were up 19.4 percent overall. Overall net revenues (gross revenue minus purchased transportation) were up 13.2 percent. Net revenues are a better indicator of true business improvement since fuel-related costs have minimal impact. Overall, net income increased 23.4 percent from 2009's levels.

One of the most important factors in 3PL growth was world trade volumes, which increased 12.4 percent in 2010.¹ That increase, together with continued economic globalization, helped 3PLs involved in international transportation management grow the fastest among the four segments, achieving a 30.1-percent increase in gross revenue (turnover) and a 19.2-percent increase in net revenue (gross margin) in 2010. Growth rates for domestic business segments trailed far behind.

Blurring lines
The four different 3PL segments are derived from the regulatory history of the United States. After trucking deregulation in 1980, dedicated con- tract carriage rapidly developed from the practice of single-source leasing of tractors and drivers. Thanks to that same deregulation, brokers' operating authority licenses became widely available, which spurred the expansion of domestic transportation management. The international trans- portation management segment developed in response to loosened Federal Maritime Commission regulations and the elimination of the Civil Aeronautics Board.

Since 1980, the lines between 3PL segments have become blurred as companies have expanded and integrated different types of offerings. Major service providers have consolidated to become global supply chain managers. These multifaceted giants typically conduct business in all four segments and have developed extensive global operating networks. Similarly, nearly all companies whose core businesses were value-added warehousing now have domestic transportation management capability and often engage in dedicated contract carriage. Meanwhile, the leaders in dedicated contract carriage, such as Penske and Ryder, also have large warehousing and transportation operations.

The basic pattern is that non-asset-based transportation management 3PLs are more profitable than are providers of asset-based dedicated contract carriage and value-added warehousing. Many warehousing providers, in fact, have turned to leasing warehouses to avoid the asset-ownership stigma applied by financial analysts. However, such a change normally involves carrying long-term leases, which do not improve profitability.

All of the large domestically based transportation management companies are expanding geographically and developing broader service portfolios. Over time, survival in a consolidating global mar- ket may cause them to suffer diminishing margins. What is certain is that the market is and will remain dynamic, and these companies must continue to grow and change if they are to survive.

The international transportation management and value-added warehousing and distribution segments have grown rapidly since 2000. In contrast, dedicated contract carriage and domestically based transportation management have seen slower net revenue growth. Currently, however, the former is experiencing a short-term rebirth because of growing concerns about driver and truck capacity.

Meanwhile, about one in nine truckloads in the United States today is handled by a domestic transportation management 3PL. The ratio of loads handled by domestic transportation management 3PLs to those handled by dedicated services providers, however, should continue to increase. This growth is driven by non-asset 3PLs, which have the ability to optimize transportation for customers without having to worry about utilizing their own assets or being limited by a specific transportation mode.

Modest but steady growth
Figure 1 illustrates our projections for 2011. On average, the first quarter was strong for all markets. Value-added warehousing and distribution is expected to achieve modest growth of 8 percent for the year, while the domestic transportation management and dedicated contract carriage segments should benefit from a reviving economy. Accordingly, we forecast that U.S. 3PL revenues overall will grow 10.9 percent in 2011. This estimate is 3.5 to 4 times that for U.S. GDP and reflects our expectation that in the last three quarters of 2011 the 3PL market will realize smaller increases than it did in the very robust first quarter.

So, even in a sluggish economy with growth decelerating from the first-quarter highs, we anticipate that 3PLs are back on track to have a historically average growth year in 2011. When you compare 2011 to 2009, most 3PLs will be quite happy with average.

Endnote:
1. "Tension from the Two-Speed Recovery," World Economic Outlook, International Monetary Fund, April 2011, www.imf.org.