Key takeaways from Stifel’s 3PL call with Armstrong & Associates

(Photo: XPO Logistics)

The good news is that Evan Armstrong of Armstrong & Associates thinks that U.S. third-party logistics providers’ (3PLs) revenues will grow at a 7.7 percent compound annual growth rate (CAGR) over the next five years, and brokers will become more productive as artificial intelligence automates up to 50 percent of their repetitive tasks.

The bad news is that digital freight brokerages like Convoy, Uber Freight and Transfix are expected to put pressure on gross margins, dragging down the industry average from roughly 16 percent today to about 13 percent five years from now. And any recession in the U.S. economy would likely have an outsized effect on the 3PL industry – in 2009, GDP contracted by about 2.5 percent, but 3PL revenues fell 16 percent.

Technology is making logistics providers more productive, but is also changing the balance of power. Intermediaries traditionally exploited information asymmetries and opaque markets to widen gross margins arbitrarily, but that is changing.

“Every year there’s more and more price transparency, especially in ocean freight forwarding,” Armstrong said. “But we never recommend competing on price.”


Those were some of the key takeaways from the 3PL conference call hosted by Stifel transportation equities analyst Bruce Chan and Evan Armstrong, president of Armstrong & Associates, on Friday, June 7.

Armstrong’s firm, now 20 years old, focuses on the global 3PL market, deriving 30 percent of its revenue from research and 70 percent from consulting. Armstrong’s consulting practice handles buy-side merger and acquisition work like due diligence for private equity groups, advises shippers on outsourcing their logistics, and helps 3PLs with their digitization strategies.

The beginning of Armstrong’s presentation addressed two major trade relationships under threat – U.S. trade with China and Mexico. Armstrong said that the reconfiguring of supply chains and migration of suppliers out of China and into emerging markets in Southeast Asia was a heavier lift than it appears.

“With outbound air freight out of Hanoi, there are three freight forwarders you can choose from,” Armstrong said “You have cheap labor – all those good things – but they don’t have the logistics infrastructure to support the wholesale move from China manufacturing to manufacturing and distribution from that country.”


The market for logistics services in the Asia Pacific region will transform over the next few years as the region’s 3PL revenues grow at an estimated 8.4 percent CAGR over the next five years, the fastest growth of any major region in the world. What’s even more impressive about the projected Asian 3PL growth is that it’s coming off a large base – $358.8 billion in 2018 – compared to the next largest region, North America, which accounted for $251.5 billion in 3PL revenues in 2018.

(Chart: Armstrong & Associates)

On the other side of the transaction, Armstrong broke out 2018 global logistics costs by mode or function, mapping out where shippers spend money on services. Trucking, a labor- and capital-intensive business, represented the lion’s share of global logistics spending at $4.132 trillion last year. The cost of carrying inventory was the next largest category, at $2.116 trillion, while warehousing costs were just over $1 trillion.

Globally, in 2018, shippers spent $714 billion on “Water and Miscellaneous,” $301 billion on air cargo and $297 billion on movements by rail.

Armstrong usefully mapped out the landscape of U.S. shippers by transportation spend – only about 750 companies spend more than $100 million annually on transportation, and all of them already outsource at least some of their logistics needs. Digital freight brokerages have been focusing on this segment of large shippers, who often tend to use multiple 3PLs and take advantage of arbitrage opportunities.

There are an estimated 320,000 companies, though, that spend between $1.5 million and $29.9 million annually on transportation and form a much larger overall market than the very largest shippers. While those companies may not require the long, complicated sales cycles of Fortune 500 companies, the time and labor to on-board smaller accounts represents a different challenge for digital players.

Trends in 3PL mergers and acquisitions were also discussed during the call. Armstrong said that private equity firms are driving most of the deals, with strategic acquirers largely on the sidelines. Non-asset-based domestic transportation management companies (like freight brokerages) are still selling for EBITDA multiples of 10x or above. Last year saw 14 acquisitions over $100 million, more deals of that size than any other year except the 18 deals that took place in 2015.

“2019 doesn’t look like it’s slowing down – there is a lot of money on the sidelines looking for deals to happen,” Armstrong said.

As Armstrong pointed out, though, a large amount of capital is competing for deals in a fairly small universe. Private equity firms generally want to acquired 3PLs with net revenues above $20 million, and there are only 50 or so of those companies in the United States.


Taking up a somewhat contrarian position, Armstrong said that competitive advantages deriving from superior information technology were smaller and shorter than ever as logistics technology becomes commoditized. Dozens of venture-backed startups in the space offering low-cost, cloud-based software solutions to 3PLs have succeeded in leveling much of the playing field between large and small companies. Armstrong counseled a focus on innovation and process automation, especially through artificial intelligence.

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