The boom in e-commerce orders during the pandemic has pushed heightened demand for warehousing and fulfillment operations, a trend that is likely to drive increased merger and acquisition (M&A) activity in the sector during 2021, an investment report said this week.
According to the Boston-based investment bank Capstone Headwaters, 2021 will be an active transaction year as companies adjust to the post-Covid supply chain environment. “The historically under-appreciated segment of third-party storage facilities has not only been reconciled, but prioritized as the rise in e-commerce shifts operational functions such as product storing, sorting, and packaging to outsourced warehouse locations,” Capstone said in its February warehousing & fulfillment industry update, titled “New Factors Impact Valuation in Storage, Supply chain, and Fulfillment.”
While third-party storage services have been undervalued by investors for decades, that situation began to change slowly in the 1980's with the introduction of lean manufacturing philosophies and just-in- time inventory capabilities. The rising valuation of warehousing then accelerated during the coronavirus crisis, as consumers migrated from brick-and-mortar retail to online shopping, Capstone said. Since shoppers were not setting foot in malls and shops, the “operational” functions of a store—storing, sorting, packaging, and servicing products—shifted from a retail location to a warehouse location. With a lot of fulfillment responsibility and customer experience value now transferred to fulfillment centers, investors are seeing greater value in third-party storage companies.
With online commerce growth showing no signs of slowing, acquisition activity in the fulfillment sector has also accelerated, bringing heightened valuations for companies providing the infrastructure that make e-commerce possible. For example, Amazon saw its revenue rise from $75 billion in the first quarter of 2020 to over $125 billion in the fourth quarter, and Shopify reported a revenue jump from $470 million in the first quarter to $714 million in the second quarter. And even before the pandemic boom, enterprise logistics firms were investing in the trend, with deals like Walmart’s 2016 acquisition of jet.com and UPS Inc.’s 2018 launch of Ware2Go, the bank said.
“There is a ferocious land grab for customer accounts and warehousing partners to service these accounts,” Capstone said in its report. “For warehousing companies that have underutilized capacity or are looking to shift from storage to fulfillment models, there are some benefits to partnering with platforms that can deliver significant volume, as well as potential valuation premiums for their own businesses. The question remains whether the unit economics of partnering justifies the required investment in technology, racking/binning/sorting, and additional staffing.”
In response, large supply chain companies value four main characteristics as they search for prime acquisition targets, Capstone said:
- technology integration, featuring fast EDI implementation and e-commerce connectivity,
- value added service, such as picking and packing, and custom packaging and delivery options,
- footprint and scalability, with at least 500,000 square feet of capacity and a muti-market presence, and
- transportation revenue, drawn from parcel management or last mile delivery and from brokerage operations.
