LQ's Top 36 3PL's 2007
Although growth has been modest in 2007 due to the weak U.S. economy and freight
recession, growth in the 3PL sector still consistently outperforms the growth in U.S. GDP
by 4.2 times. Armstrong & Associates has developed a categorization system for 3PLs that
reflects the current market and profiles some of the top 3PLs in today’s marketplace.
By Richard Armstrong
Third party logistics providers (3PLs) have held their own this year. The growth in this sector for 2007 is predicted to be 6 to 8 percent. For the last decade, growth in this sector in the U.S. has had an annual 12.6 percent average, as the U.S. economy and globalization have expanded. The weak U.S. economy and freight recession are the primary culprits in reducing 3PL growth this year. From 1997 to the present, the rate of third party logistics growth has averaged 4.2 times the growth rate of the U.S. gross domestic product (GDP). (See Figure 1.)
Growth and profitability in third party logistics have drawn increasing financial interest recently. The bright financial picture in third party logistics has attracted private equity capital, which has dominated acquisition activity over the last two years. For example, major deals by Apollo Management for CEVA and then EGL have involved high earnings multiples and stock premiums that have driven strategic buyers with less cash to the sidelines. This trend continued as Oak Hill Partners reportedly paid 11–12 times EBITDA for Jacobson Companies. During late summer, the sub-prime mortgage market retrenchment cooled off private equity financing. As a result, the potential for strategic acquisitions has increased. Financial attractiveness, acquisitions and globalization have driven an increase in the size of major 3PLs. Recently, Armstrong & Associates developed a categorization system that reflects the current market:
The 3PL marketplace divides conveniently into three major categories. The first category, Tier 1 Global Supply Chain Managers (GSCMs),have advanced integrated IT systems essential to uniform global operations. These companies have informative websites, transportation and warehouse management systems, EDI skills, governmental data flow capabilities and ERP systems. They constantly improve their technology and information control.
Tier 1 GSCMs exceed one billion dollars in gross revenue. As a result, they have the necessary financial resources to make major step adjustments to their infrastructures, geographical coverage and customers needs.
Over the next several pages, we have put together profiles for 18,Tier 1, 3PLs starting with UPS. We subcategorize Tier 1s based on universal coverage (more than 90 percent of world GDP) and freight forwarding specialization. Several major market GSCMs, such as Expeditors, are evolving into universal players.
The second group, Tier 2 3PLs, consists of companies that serve North America. These companies usually have revenues between $200 million and $1 billion. GENCO and Kenco are good examples. A company in this group still derives most of its revenues from value-added warehousing, dedicated contract carriage or transportation management. These are specializations in the U.S. and Canada that were tied to our governmental regulation of transportation and warehousing. Most Tier 2 3PLs now participate in all of these specializations. Kenco, for example, grew from value added warehousing and distribution (VAWD) by adding transportation management and dedicated contract carriage in the last five years. It now has individual customers for whom it provides all of these services.
Also in the Tier 2 group are a series of 3PLs who branched off from their original trucking roots. Landstar Logistics started with transportation management but has added warehousing and freight forwarding. Werner Enterprises started with dedicated contract carriage. It now has freight management operations in China and transportation management operations in North America. Menlo, an offshoot from less-than-truckload transportation, does transportation management and VAWD. Menlo recently landed a large deal with the U.S.Department of Defense for its U.S. Transportation Command initiative. Tier 3 companies usually have net revenues less than $200 million and are function specialists. BNSF Logistics and Kelron are transportation managers. A.N. Deringer is a Canadian–U.S. cross-border specialist.
Tier 3 companies tend to be very good at their main specializations. As a result, they are tough competitors when they match up to specific customer needs.
Profitability varies significantly by functional specialization. Traditionally, freight forwarding (international transportation management) was a 20 percent gross margin business with a 15–20 percent operating income margin, based on net revenue. Domestic transportation manage- ment (freight brokerage grownup) had 15 percent gross margins and operating income margins of 10–20 percent. VAWD runs 8–10 percent. These varying margins have fueled the debate about asset versus non-asset attractiveness of businesses.
The transportation managers have nonasset businesses that achieve high returns on capital invested and other measures. Dedicated contract carriage and VAWD usually have three or five year contracts with guaranteed incomes but lower returns. Stock analysts and investors have preferred the non-asset operators. As a result, VAWD 3PLs now often lease their assets to try to improve their financial return ratios. This practice, however, does not significantly change overall expenses or net incomes.
While profitability varies by functional specialization, there is wide variation by company. Companies like C.H. Robinson, Expeditors and Kuehne + Nagel have consistently outperformed the Tier 1 competitors. J.B. Hunt and Werner Enterprises have led the way among Tier 2 dedicated contract carriers. UTi Contract Logistics and Jacobson have been leaders in VAWD. Many well-run Tier 3 specialists have better margins than their Tier 2 competitors. The 36 companies profiled in this edition have brand recognition. UPS SCS and DHL are the best known Tier 1 players. Other Tier 1s have about one-half as much brand recognition. Ryder and Penske are the best known transportation managers. Along with J.B. Hunt, they are the most recognizable brands in dedicated contract carriage. Ryder, Penske and CEVA are the most recognizable in automotive logistics.
In VAWD, Menlo, UTi Contract Logistics, GENCO and Kenco are the most recognized Tier 2 players.