Prospects for 3PL market in 2013 look promising, says Armstrong

Annual growth for the third-party logistics (3PL) market in 2013 is expected to be north of 6 percent, with much of current market activity centered around mergers and acquisitions, with many of the same underlying market fundamentals of 2012 still intact, according to Evan Armstrong, president of supply chain consultancy Armstrong & Associates.

Speaking on Logistics Management’s first quarter News Webcast earlier this month, Armstrong said there is a fair amount of interest among domestic transportation managers in acquiring some of the smaller players in the international transportation management section of 3PLs to further diversity and expand their service offerings to international transportation services like freight forwarding and related value-added services like those offered by large players like UTI Worldwide and Expeditor’s International.

Armstrong cited the acquisition made by C.H. Robinson Worldwide last year, when it acquired Chicago-based international freight forward Phoenix International for $571.5 million in cash and about $63.5 million in CHRW stock. 

“We anticipate this year that we will see additional interest on the strategic acquisition side by domestic transportation managers looking to acquire players in this area,” said Armstrong.

Addressing 2013 3PL conditions for 2013, Armstrong explained that on a global basis Asia-Pacific and the South Pacific continue to be the fastest growing markets, with the growth range for those regions in the 15+ percent range, as there is increasing demand among their respected populations for finished goods.

Much of the growth in places like China, Singapore, Thailand, and Indonesia will be on the warehousing and distribution side.

“Indonesia, now that it has a stabilized political environment, is very interesting for 3PLs,” said Armstrong. “It has the fifth-largest global workforce, a median age of 28.5, and the 16th largest GDP, which is growing at 6.5 percent. Many auto and high-tech shippers are looking for warehousing space providers in Indonesia.”

Other global growth areas for 3PLs, according to Armstrong, are the more modernized parts of the Middle East, which are continuing to grow and facilitate demand for air and ocean services on the freight forwarding side.

While 3PL M&A activity is expected to continue at a healthy pace, Armstrong cautioned that there are not enough acquisition targets.

“When you look at the domestic and international transportation management sides, there are just not a lot of companies with EBITDA’s in the $10 million-to-$15 million range, which everybody likes,” he said. “You might see some smaller players get acquired. As long as it is non-asset focused, we will see private equity continuing to play in the 3PL market, because the returns on invested capital are good.”

Another growth area for 3PLs is U.S.-Mexico cross-border traffic, noted Armstrong.

A main driver for this, he said, in renewed interest in companies’ near-shoring in Mexico to cut down on labor and transportation costs. He noted how Con-way Truckload and Con-way Multimodal recently introduced a cross-border service offering that provides a new service for shipper customers of both Con-way Truckload and Con-way Multimodal for U.S.-Mexico shipping, which it explained is timely with more companies locating manufacturing and distribution operations in Mexico, which has resulted in a need for capacity and reliable cross-border shipping services.

Other 3PLs offering cross-border services include Werner and Transplace, among others.

“So much of the cross-border traffic is automotive-related, so slowing U.S. auto sales could put a cap on what is happening with Mexican-American trade,” he said.

Overall U.S. 3PL market growth for 2013 is expected to be roughly 4-6 percent, which would be triple of Armstrong’s 1.5 percent U.S. GDP estimate, with domestic transportation expected to continue to lead the way.

And project logistics related to oil and gas development, especially for the Marcellus shale region in the Northeast and the Bakken formation out West will continue to be strong, with companies like BNSF Logistics, among others, driving additional revenue from related operations such as moving fracked sand for natural gas extraction and to help coordinate oil and gas rig moves, he said.

“Domestic transportation management and freight brokerage will continue to be important, and we have seen this over the last three or four years as companies like TQL have passed the $1 billion revenue mark and others like Coyote and XPO Logistics continue to grow,” he said. “Many 3PLs are looking to increase their scale and operations. There has been a lot of pressure on small brokers as those types companies take business away from them, coupled with the presence of CHRW, which has about a quarter of the market on the domestic transportation management side. We have seen gross margin pressure as these companies gain scale and have seen the overall gross margin in that market drop to 58.1 percent for 2011.”