For the third-party logistics industry, there may never be another year like 2021.
Surging volumes and a massive emphasis on outsourced logistics capabilities to manage volatile inventory flows turned 2021 into the best year ever for the trillion dollar industry, according to an annual report from Armstrong & Associates Inc., the leading 3PL research and consulting firm.
There is more to come, according to Evan Armstrong, the firm’s president. The U.S. 3PL industry is expected to post $414.1 billion in 2022 gross revenue, a 22% gain from 2021 levels, according to the report, which was published in mid-July. Net revenue, which backs out transportation expenses, is expected to close in on $140 billion, a near 17% increase.
The domestic transportation management (DTM) subgroup, which is one of four subcategories that make up Armstrong’s 3PL world, will report a 25.6% gross revenue gain to $174.6 billion. The DTM category, comprising truck brokerage and managed transportation, is the largest of the U.S. subgroups tracked by Armstrong.
The three other subgroups — international transportation management (ITM) comprising air and ocean freight forwarding, customs brokerage and related value-added services, warehousing and distribution, and dedicated contract carriage — will all report double-digit increases this year in gross and net revenues.
The warehousing segment will bring up the rear in 2022. However, it should show significant strength in 2023 as demand for storage remains elevated while the other categories cool down somewhat, Armstrong said.
In an interview earlier this week, Armstrong said he was surprised by the growth recorded during the first half of the year. The numbers will normalize over the rest of 2022 as supply chain bottlenecks ease, he said. Still, any meaningful leveling off is a 2023 story, if it even happens then, he added.
Last year will be a tough act to follow, with the industry racking up numbers never before seen in the report’s 27-year history. U.S.-based ITM reported an “unheard-of” 75% gross revenue gain last year to $122.4 billion, propelled by surging ocean and air freight rates, according to the report. Net revenue grew 44.6% to $35.6 billion despite tight capacity and high spot market rates.
U.S. DTM reported a 52.4% gross revenue gain to $139 billion. Net revenue rose 50.2% to $19.8 billion despite a compression of gross margins caused by a rapid rise in spot market rates, according to the report’s data.
The warehousing and distribution subcategory, which marked 2021 with near-full warehouses, posted a 17% gain in gross revenue to $54.6 billion and a 15.2% increase in net revenue to $41.1 billion. The asset-heavy DCC segment posted less robust growth as it was constrained by shortages of drivers and equipment. Gross revenue increased 15.3% to $23.1 billion and net revenue grew 14.7% to $23 billion.
The surge was not limited to the U.S. Global revenues reached $1.4 trillion in 2021, a 41.8% year-over-year gain, and exponentially greater than the 7.7% year-over-year increase to 2020 from 2019. The ITM segment led the way with a 60.8% year-over-year gain in gross revenues.
These trends didn’t go unnoticed by investors. There were 25 M&A transactions last year in the 3PL space that were each valued at more than $100 million, a figure the Armstrong report called “astounding,” noting that was more than three times the number of large transactions in 2020.
In the interview, Armstrong said deals will continue apace through 2022. However, they are likely to be more strategic with 3PLs acquiring one another. There will be less involvement from private equity, the exception being if the PE company already owns 3PL assets.
Higher interest rates will not prove to be much of a deterrent. Capital costs are historically cheap, liquidity remains abundant and many deals will be financed with equity rather than debt, he said.
One of the wild cards will be the direction of truckload rates, Armstrong said. Spot rates have come off sharply from their 2021 highs and are currently below contract rates. He expects contract rates to remain elevated well into 2023 and for spot rates to settle at levels consistent with their five-year averages.
Armstrong is advising its 3PL clients to lock in contracts with their shippers as soon as possible. “We will see a lot of renegotiating in the fourth quarter and into the first quarter of 2023.,” he said.