The economy may be cooling, but business for third-party logistics service providers (3PLs) continued to gather steam last year, albeit at a more modest clip than in years past. When it released the results of its latest Business Outlook survey last month, the International Warehouse Logistics Association (IWLA) said that 47 percent of the members who responded to the survey reported sales increases of 10 percent or more for 2007. That's down from the 54 percent who experienced double-digit gains in 2006.

Survey respondents in general weren't terribly optimistic about this year: Only 37 percent of IWLA members predict their business will grow by 10 percent or more in 2008, while another 17 percent expect sales gains of just 1 to 5 percent. Twenty-eight percent say they expect sales to be flat or to decrease this year, as more companies feel the pinch of an economic slowdown in the United States. Fourteen percent expect sales to drop in 2008—the highest number since 2003, when 17 percent predicted a sales decrease.

Not surprisingly, merger activity has also cooled in the 3PL sector, once a hotbed of M&A activity (not to mention lofty valuations). Just under two-thirds of respondents reported being approached about an M&A opportunity in 2007, but only 29 percent say they would consider such an opportunity this year.

Ben Gordon, managing director of BG Strategic Advisors, said that the "mega deals" have gone away, but that there still is interest in deals for companies in the $20 million to $200 million range. However, he noted, valuations fell an average of 30 percent over the last few months of 2007, and they may fall further in 2008. Gordon also said that anyone who is considering selling a 3PL business now should bear in mind that valuations might be lower next year. "Companies that are fixated on the stratospheric evaluations of early 2007 may be disappointed," he said.

Not all 3PLs subscribe to a gloomy outlook. Some 13 percent are predicting sales gains of 20 percent or more for 2008. In particular, IWLA members remain bullish on the pharmaceutical industry and the food business. As for which services will be most in demand, survey respondents pointed to value-added services like packaging, pick/pack, and labeling. When it comes to transportation services, respondents predicted that brokerage will be the fastest-growing segment for the second consecutive year. The outlook was less rosy for freight forwarding and just-in-time services. Respondents believe demand for these services will be slower than it was the previous year.