3rd Party Logistics

Third-Party Logistics Providers Are Shrinking in Number, Growing in Size

Third-party logistics (3PL) providers play an essential role in hooking up shippers with the right kind of transportation service. But their numbers are shrinking.

The trend is toward fewer, larger players. A recent example was the acquisition of One Stop Logistics byEcho Global Logistics, Inc. Chicago-based Echo earned $884 million in revenue in 2013, drawing on a network of more than 26,000 transportation providers. One Stop, with $50.7 million in gross revenue last year, offers both truckload and less-than-truckload brokerage services out of offices in Northern California and Florida. Purchase price of the deal was $37.3 million.

Two months earlier, Coyote Logistics LLC bought Access America Transport. The combined company has revenues of more than $2 billion, working with some 40,000 carriers out of 17 locations in North America. That deal created the second-largest freight broker in the country, according to Jett McCandless, founder and president of logistics consultancy Carrier Direct. And earlier this year, XPO Logistics, Inc. snapped up Pacer International, the third largest intermodal service provider in North America, for $335 million.

Prior to 2013, said McCandless, there was only one broker in North America with revenues of more than $1 billion — C.H. Robinson Worldwide, Inc. Today, a handful of companies has surpassed that benchmark, but the total number of providers is on the decline.

“Consolidation is real,” said McCandless. “Companies that were excited to be small have acquired a more corporate environment.”

The latest wave of deals has been triggered by an influx of private equity, including venture-capital funds, McCandless said. Much of that money sat on the sidelines during the Great Recession, and is now searching for new targets as the economy sputters toward recovery. Freight brokerages and 3PLs, with their extensive rosters of contracted carriers and loyal shippers, are especially attractive prospects.

Investors are drawn to the industry’s growing level of sophistication. The roots of many smaller 3PLs were in transportation and warehousing, giving their executives a “blue-collar” quality, McCandless said. As old-line brokers and 3PLs expand their offerings into full-service supply-chain management, their level of expertise rises accordingly.

Big firms like XPO and Coyote are even attracting talent from major universities offering degrees in supply-chain management. “It’s a different crowd,” said McCandless.

The very definition of a broker or 3PL today is in flux. The lines between pure brokers and “value-added” providers are blurring. Many are offering intermodal service, arranging for the shipment of containers by rail over long distances, in addition to truck and ocean transport. Some entities operate their own trucks or warehouses, while others function as pure intermediaries between shippers and underlying asset providers.

As North American 3PLs become bigger and more successful, they could themselves become targets for acquisition by foreign-based transportation conglomerates. Companies that have sought a U.S. market presence in the past include Germany’s DB Schenker and Deutsche Post AG, the latter of which owns DHL. Denmark’s DSV is another European entity that is looking to grow globally, McCandless said.

In actuality, third parties are migrating in both directions. Pure brokers are moving up into value-added services, while the biggest companies are venturing into brokerage to supplement their higher-level offerings, McCandless said. At the transactional level, those “bedroom brokers” that  are too small to compete will likely give way to internet-based exchanges that can serve the needs of small shippers. In this historically low-margin industry, the key to survival today is either to broaden one’s service menu or abandon the business altogether.

Exchange-type platforms such as uShip are already making their mark, but McCandless expects them to disrupt the traditional brokerage market within the next decade. Simple bookings can already be made with tablets or mobile phones, cutting out the middleman’s fee. “For Atlanta to Chicago, there doesn’t need to be six people involved if the cost is $200 per transaction,” he said.

All this is bound to leave the shipper with fewer choices, but a higher quality of service from surviving providers. “Shippers will benefit from having brokers that can cover 500 loads a day,” said McCandless. “Prior to 2012, only one company in the country could do that as a non-asset-based provider – C.H. Robinson.” Now that venerable company, with revenues of nearly $12.8 billion in 2013, is being challenged by a spate of acquisition-hungry rivals. Also under pressure are big 3PLs such as Menlo Worldwide Logistics andRyder Integrated Logistics, Inc., which specialized from the start in meeting the supply-chain needs of the largest accounts.

Of course, fewer players with greater market power leads to higher rates, but that trend is already evident, said McCandless. The nationwide driver shortage is forcing carriers to raise wages in order to attract talent, capacity is tight due to the new boom in domestic oil and gas production, and fuel prices are likely to rise in the coming year. Even without the inevitable consolidation of third parties, shippers can expect to pay more for transportation in the coming year.