A looming recession may have sent freight volumes sliding, but that didn't seem to hurt the U.S. third-party logistics (3PL) industry much. Despite the downturn, total revenues climbed to an estimated $122 billion in 2007, a 7.4-percent increase over the previous year's gross revenues. Armstrong & Associates Inc., a Stoughton, Wis.-based consulting and research firm that specializes in the logistics outsourcing market, released those and other figures last month in its annual financial report on the industry. Based on that "bad news/good news" scenario, Armstrong titled this year's report "Hanging tough."
Even in a recession, companies will continue to outsource, said Richard D. Armstrong, chairman of Armstrong & Associates, in an interview. "When you hit a recessionary period, in many cases it actually accelerates outsourcing activities because companies will look at what parts of their business are profitable and what's not profitable and say, 'Let's have somebody else do it if they can do it better and create visibility for us. It helps us to control inventory and allows us to keep our costs down,'" he explained.
Not all segments of the 3PL industry were equally successful. The most profitable was non-asset-based transportation management. In the domestic transportation management segment, for example, net revenues grew by 8.0 percent, and net income margins averaged 13.4 percent. For the international segment, which includes freight forwarders, customs brokers, ocean consolidators, and related services, net revenues grew by 9.5 percent, but profit margins averaged just 5.4 percent. Armstrong attributes much of that slump to UPS; without Big Brown's troubled logistics unit, the profit margin for this segment climbs to 9.5 percent.
Meanwhile, dedicated contract carriage—an asset-based business— was hurt by the decline in freight volumes; that segment realized just 2.7 percent growth and a 4.4-percent profit margin. Least profitable was value-added warehousing; that segment, which includes leased, owned, and non-asset operations, reported a 3.6-percent margin.
All over the map
As for individual companies' results, Armstrong & Associates' latest report indicates that they were—quite literally—all over the map. To provide an "at a glance" summary of who's on top when it comes to profits and growth, Hanging tough includes a chart that places some of the largest U.S. third parties in quadrants. C.H. Robinson leads the "high profit/high growth" quadrant, followed by BNSF, Expeditors, DHL Global, UTi, and GENCO. The "low profit/low growth" quadrant is the most crowded. That's where most of the dedicated contract carriage providers landed, along with value-added warehousing companies like APL, DSC, and UPS, to name a few. Most 3PLs that are heavily involved with the increasingly shaky auto industry also found themselves on the lower end of the scale.
Last year was a busy one for third-party logistics when it came to private equity investment and consolidation. Armstrong's report lists five major investments and acquisitions of U.S.-based companies for 2007, including Apollo Management's buyout of EGL and Oak Hill Capital's purchase of Jacobson Companies. (See the accompanying table.)
This year should be quieter, Armstrong said. "When the bubble burst in the sub-prime market, that led to a tightening of private equity that has had quite an impact on M&A activity," he explained. "We're seeing very few deals now where private equity capital is being used to buy out or buy control of 3PLs." There is still some strategic acquisition activity—such as international deals that help U.S. providers extend their capabilities overseas—going on, he added, but 3PL customers should not see much in the way of domestic mergers this year.