What's the future for family-owned 3PLs?

It's a familiar story: An enterprising party with a truck or some extra storage space starts a local business. Over time, the company extends its service menu and broadens its reach, becoming more of a full-service provider than simply a warehousing or trucking firm. Eventually, the business is passed down to the next generation of family members, who may further expand the operation.

That story's been repeated countless times throughout the industry's history, and today, companies bearing family names still stand side by side with the giant global third-party logistics service providers (3PLs). Indeed, some of the largest 3PLs, like C.H. Robinson, started out as family-owned businesses.

But times have changed. Higher barriers to entry and tighter margins have made the industry less appealing to entrepreneurs. At the same time, more customers are looking for a one-stop shop solution that can provide global reach at a low cost. Under the circumstances, it seems appropriate to ask: Is there still a future for the family-owned 3PL?

Size matters
There's no getting around the fact that there are competitive disadvantages to being small. Few family-owned 3PLs can offer the same geographic reach or end-to-end solutions that a global 3PL can. "The biggest [challenge facing family-owned 3PLs] is they don't have the asset base," says Tom Speh, professor of distribution at Miami University in Oxford, Ohio. "When you're talking about IT systems, advanced handling systems, or [the capacity for] rapid expansion should a major client want that, they're really constrained in terms of their ability to do that because of the capital requirements."

Similarly, the smaller players are at a disadvantage when it comes to leveraging economies of scale. "We don't have the buying power to compete in a large-volume, low-cost scenario," admits Nicholas Carretta, president of Ultra Logistics, a family-owned 3PL based in Fairlawn, N.J.

But just as there are disadvantages to being a small player, there are also advantages, these 3PLs say. For one thing, they don't have to worry about pleasing Wall Street. "I've heard a lot of stories [suggesting that] multinational 3PLs can lose sight of who pays the bills," says John Ness, president of ODW Logistics, headquartered in Columbus, Ohio. "Consolidation in the industry has brought a lot of private equity players into our market, and I wonder how many CEOs spend their time and energy working to please boards versus their customers. That's a tough battle. But that's not an issue for us; we know who our customer is."

That kind of freedom can translate to service advantages for customers, these smaller 3PLs say. For one thing, there's the small players' agility and responsiveness to clients' requests. "Family-owned companies typically can make quick decisions," says Bill Butler, CEO of fourth-generation family-owned Weber Logistics, which is headquartered in Santa Fe Springs, Calif. "When the managers are also the shareholders, you don't have a lot of processes or bureaucracy that you have to deal with. You don't have to call someone back at the corporate office before you can make a decision."

For another, there's management stability. Carretta notes that in the wider world, career advancement often comes through hopping from one competitor to another. In a family-owned business, there's a greater likelihood that senior managers will be at the company for the long haul. "When you're working on a project with a family-run business and you know the stakeholders, you don't have to worry about a changing of the guard or a major reorganization," he says.

But most important of all, perhaps, is the culture and attitude that infuses these smaller operations. "When it's your name on the side of the truck or the building, you treat customers just as if you were ... welcoming someone into your home," explains Mark Richards, who took over Orange, Calif.-based Associated Warehouses Inc. from his father. "You're going take care of them, treat them as a guest. The big national companies can try to have that feeling and at some locations they do, but having that across the board is pretty rare."

Perception problem
Given all the advantages they cite, you might think these 3PLs would be eager to promote their status as family-owned businesses. But that's not necessarily the case. Some downplay the fact out of concern that potential customers will hear "family owned" and think "mom and pop."

There are times when being a family-owned business works to your advantage, says Carretta of Ultra Logistics, particularly if the potential customer is itself a family-owned business. "But other times, a family business is seen in a different light and may create a negative perception," he says. "Some potential customers may think you're not as capable or you don't have the abilities of some of the larger companies."

That concern is not unfounded, says Speh. "I think sometimes shippers have this assumption that bigger is better, that to get sophistication and so forth, you need to go to the big global players," he says. "I think they'd really be surprised if they took a close look at some of the family-owned fairly sizeable 3PLs."

Carving out a niche
To survive in the modern marketplace, family-owned businesses cannot rely solely on a folksy culture, say those at some of the leading entities. They must supplement their traditional customer focus with the kind of business discipline, technology, and information services typically associated with corporate enterprises. For example, Ultra Logistics has developed proprietary technology solutions, including a transportation management system, a spot bidding tool, and carrier monitoring programs, that it makes available to customers.

But developing and maintaining these types of systems does not come cheap. Not only are the solutions themselves expensive, says Speh, but companies also have to hire specialists to operate and maintain the software. The high price tag may keep some of the smaller family-owned 3PLs from truly competing on technology, he says.

Some of the smaller players have found success through the specialized services route. This might include focusing on a specific product category or providing regional expertise or highly customized solutions. For example, Weber Logistics, which counts a number of Fortune 500 companies among its clients, has also carved out a niche serving small yet growing companies that tend to be overlooked by the mega-3PLs.

The next generation
Ultimately, however, the future of family-owned 3PLs rests with the next generation—specifically, those in line to take over today's operations. Speh, who has been consulting for family-owned 3PLs for more than 30 years, says he sees fewer entrepreneurs entering the business. That means as family-owned businesses exit the market, they're less likely to be replaced.

And as much as heads of family-owned enterprises like to brag about the business's being in their blood, that's no guarantee their descendants will prove equally enthusiastic. After all, only 15 percent of family-owned businesses make it to the third generation, says Butler of Weber Logistics.

Butler adds that increasing consolidation in the marketplace, driven by factors like international competition and an infusion of private equity dollars, will likely further diminish the role of family-owned businesses. "I don't see family businesses as a dying breed, but the increasing consolidation in the industry will mean that you see fewer of them," he says.

Others remain more optimistic. Ness believes that there will always be a place for family-owned businesses in the 3PL industry. "I am an advocate of family business," he says. "I believe it represents some of the best business stories in our country. I'm regularly encouraging my peers to fight the good fight and stay private, but I recognize that selling the business makes sense for some people. For me, a better path is building a business that sustains the values of the family and flourishes for multiple generations."