3PL Part 2 – Yesterday, Today, TomorrowJuly 5th, 2012 | Posted by in Logistics
(Click here for Part 1)
The 3PL industry was more or less born out of the Motor Carrier Act of 1980. This act deregulated trucking, morphing it from a concentrated and somewhat cozy industry into an extremely fragmented and price-competitive one. The result was an explosion in the number of trucking carriers: there were less than 20,000 in 1980, but there are 1.2 million today. This explosion necessitated a middle man to help the customer navigate the multitude of new trucking options. 3PLs as we know them today were born.
Then came China. Economic initiatives implemented there in 1990 quickly turned the country into the world’s low-cost manufacturing hub. This made almost all finished goods and components cheaper, but it also added great complexity to global supply chains. Sourcing these goods, shipping them, storing them, and keeping track of them became something companies could no longer do on their own, so they started hiring 3PLs. In 2001 only 46% of Fortune 500 companies used 3PLs, but today about 85% do.
Finally came computers and the internet. Software has enabled great advances in the efficiency of logistics and distribution. More importantly though, as the internet has turned retailing into an art of scale and distribution rather than of selling, use of 3PLs by retailers and tech/consumer goods companies has grown dramatically. Once upon a time, moving agricultural products from farms to factories and grocery stores was the U.S. 3PL industry’s biggest business. Today, moving consumer goods is far larger.
Trucking deregulation, Chinese manufacturing, and internet retailing took the 3PL industry from virtually nothing in 1980 to $140 billion today. But those trends are losing steam. While online retailing continues to grow faster than traditional retailing, the growth rate is slowing. And on absolute basis, U.S. online retail sales are growing by $20-25 billion each year, but not much more or less. So while Internet retailing will continue to drive 3PL usage at the margin, the growth will not be industry-changing like it once was.
Globalization also seems to have played out as a driver of 3PL growth, as virtually all large companies have become sophisticated outsourcers by now. Nearly all of Fortune 100 companies use 3PLs, and more than 80% of the largest 300 Fortune companies do. Since these 300 largest companies account for 90% of total Fortune 500 revenue, the remaining opportunity for offshoring-driven 3PL use is likely quite small.
If the 3PL’s industry two biggest growth drivers of the last fifteen years are losing power, it seems reasonable to wonder if the industry is starting to mature. The table below, which shows “then & now” growth rates for some of the largest 3PLs, appears to confirm this suspicion, although with the caveat that recent growth rates include the global financial crisis.
So what opportunities remain?
Today, many investors and 3PLs are focused on U.S. truck brokerage as the next driver of industry growth. The domestic trucking industry generates about $350 billion of revenue annually, but 3PL gross revenue from domestic transportation management (“DTM”) is only $50 billion. That means just 15% of trucking revenue goes through a broker. Here is what Bradley Jacobs, the CEO of XPO Logistics (and formerly the founder and CEO of United Rentals and United Waste Systems), has to say about the truck brokerage opportunity:
For me, [truck brokerage penetration] was a very important point, because my bet is that the $50 billion penetration – which is 15% of the total trucking transportation spend in the United States – is going to increase significantly. It’s a very similar bet to the one I made at United Rentals, where I saw a lot of construction equipment that was under-utilized. It was being used only a week or two, or maybe a month total out of a year. Yet people were buying the equipment. I was certain that over time, people would rent that equipment instead of buying it. And the penetration of equipment rental has indeed grown from 15% in 1997 to around 45% today.
I think it’s a very similar situation with the way transportation is purchased in the United States. That 15% is going to increase. If you look at the growth rates of brokerage versus trucking as a whole, trucking has mainly been going up and down with GDP. The outsourcing to brokers, on the other hand, has been growing at two or three times GDP.
I think the reason the pie is growing is because it makes good economic sense to use a broker. The Fortune 500 have discovered that about brokerage. 85% of the Fortune 500 uses a broker. But below the Fortune 500, transportation is very inefficiently purchased, by and large. The average small-to-medium sized shipper doesn’t have a freight department, and frankly, for the amount of freight that they move, they really shouldn’t have people dedicated to checking out the market all day long. That should be outsourced to brokers like C.H. Robinson, Echo, or hopefully XPO Logistics.
Mr. Jacobs makes a compelling case, and it seems quite likely that brokerage will indeed continue to grow faster than GDP. But DTM is already the single most-used service among existing North American 3PL customers, with 75% reporting using it. This means the opportunity is not massive like it was 10 years ago, which will be a limiting factor of growth. Arguing more favorably for truck brokerage however, DTM’s high penetration rate among existing 3PL customers suggests that DTM will be the first service adopted by future 3PL customers. It is also worth pointing out that North America’s 75% DTM usage rate is the lowest of all the major regions—European, Asian, and Latin American DTM usage rates are 94%, 89%, and 80% respectively.
So I am of two minds about the U.S. truck brokerage opportunity. The opportunity is clearly there, but its size is up for debate given the already-high penetration of DTM among large U.S. companies. I wouldn’t want to bet against Mr. Jacobs’ track record, but I nonetheless wonder whether consolidation is not the bigger opportunity. I will finally discuss why in Part 3.