3PL news: Armstrong amp; Associates report says industry is growing

Third-party logistics providers are growing at multiples of Gross Domestic Product, and should be able to sustain this pace through 2011, said a prominent industry analyst.

According to Armstrong & Associates Chairman Richard Armstrong, his consultancy’s recently released market analysis shows that the international transportation management 3PL segment led with a 30.1 percent gross revenue (turnover) and net revenue (gross margin) increases. Dedicated Contract Carriage followed at 13.1 percent. Overall, 3PL U.S. gross revenues jumped 18.9 percent in 2010 to $127.3 billion slightly exceeding the 2008 market result.

“The main takeaway here is that 3PLs are taking advantage of ongoing economic globalization,” he told Modern in an interview.

The compound annual growth rate (CAGR) for third-party logistics market net revenue from 1995 through 2010 was 12.7 percent. 2009 was the only negative year since we began tracking results in 1995. From 2009 to 2010, the increase in 3PL net revenue was 4.7 times the rate of U.S. GDP growth.

One driving factor of 3PL growth was world trade volumes, which increased 12.4 percent for 2010. Armstrong cited a recent report from the International Monetary Fund suggesting that freight integrators are mirroring the success of major multinationals.

“Shippers are continuing to ‘go global’” said Armstrong, “and the larger 3PLs are expanding at a rate to meet this demand.” This observation mirrors that of other analysts LM spoke with this year.

Armstrong said that this does not mean smaller “niche” players will not remain in the game, however.

“There is still room for a few specialists to compete in the global marketplace,” he said. “This is especially true of 3PLS focused on auto parts, pharma, and anything in the cold chain.”

At the same time, though, Armstrong said the barriers to entry are getting higher all the time.

“This is a capital intensive business,” he said, “with requirements for sophisticated supply chain visibility. That means IT at the front end and back end of every enterprise. A new company would have real trouble competing in this marketplace.”

Yet even at the current pace of maturation, Armstrong maintained that 3PLs have room to expand beyond current penetration levels.

“Right now, it’s at 20 percent,” he said. “We see it moving to 40- or 45 percent before leveling off.”

Revenues and profitability increased in all four 3PL segments in 2010. Gross revenue increases ranged from 12.9 percent to 30.1 percent and were up 19.4 percent overall. Net revenues (gross revenue minus purchased transportation) were up 13.2 percent.

According to Armstrong, 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 levels.