Home delivery is a compelling offer for an ever-increasing assortment of items big and small. Already-growing consumer preference for skipping the store only accelerated during the COVID-19 pandemic, driving a boom in final-mile delivery.
In this article, professionals from the Harris Williams Transportation & Logistics Group share insights on this exciting segment, their experience selling a leading asset in the space, and what buyers should know about this powerful opportunity.
Compelling Industry Tailwinds
The total final-mile end market was estimated to be about $40 billion in 2020 and is expected to grow at a rate of 12% or more annually over the next several years.1 The market is divided into the heavy goods sector (typically packages over 150 lbs.) and light goods or traditional parcels. The heavy goods business-to-consumer final-mile sector is estimated at $13 billion and is expected to grow faster than the overall final-mile sector.2
Transportation companies providing heavy goods final-mile service typically also unpack, assemble and install goods, and handle exchanges, returns and haul-aways of old products. In other words, it's a very different, more customer-intensive proposition than other types of delivery.
Growth within the final-mile space is being driven by multiple factors, particularly the shift in consumer buying behavior and e-commerce, which accounts for an increasing percentage of retail sales. "The final-mile has quickly become one of the most critical legs of the supply chain as companies respond to the rapid growth of e-commerce and changing consumer behaviors and expectations," says Jonathan Meredith, a director at Harris Williams.
Consumer spending with online merchants grew from $523 billion in 2018 to $861 billion in 2020.3 Double-digit CAGR in e-commerce is expected for many years to come: Despite its rapid growth, e-commerce penetration is currently just 21 percent of total retail sales.4
"People have gotten comfortable with buying items from their home and having them delivered to their home without ever seeing them in person," says Jason Bass, a managing director and Transportation & Logistics Group co-head at Harris Williams. "As the volume of online purchases continues to grow, the volume of home deliveries is growing concurrently. What people are willing to buy sight unseen has also moved up in ticket value. Comfort with buying lower-ticket items online, such as clothing, has led to greater comfort in buying refrigerators and dishwashers."
Growth in the outsourcing of last-mile service is a second strong industry tailwind. Final-mile delivery is labor-intensive and is often the most time-consuming link in the supply chain. Outsourcing final-mile services to a third party provides retailers with a significant cost-saving opportunity.
"Retailers do not want to be responsible for the employees, trucks, delivery coordination and all of the aspects related to home delivery," notes Frank Mountcastle, a managing director and Transportation & Logistics Group co-head at Harris Williams. "They're continuing to find providers to outsource this to so they can focus on their core business."
The industry also stands to benefit from changing dynamics within the housing market and the increasing demand for smaller, single-family homes as baby boomers enter retirement and begin looking to downsize. De-urbanization and work-from-home trends are also poised to drive growth in last-mile delivery segment.
Case in Point: DSI Logistics
One great example of the opportunity in this segment is DSI Logistics (DSI). DSI is a leading third-party logistics firm specializing in final-mile home delivery and installation of large, non-conveyable goods. Harris Williams recently advised DSI, a prior portfolio company of Headhaul Capital Partners LLC and Argosy Private Equity, on its sale to Pilot Freight Services. DSI exemplified several traits that were attractive to investors.
Jeff Kidd, a director at Harris Williams, highlights that DSI is one of a few platforms of scale in the big-and-bulky last-mile category. "Many competitors are more localized and regional in nature. DSI can provide large retailers with nearly nationwide coverage, which is a significant competitive advantage." The company has an expanding presence in 29 states and Washington, D.C., with a significant market position on the West Coast. Existing and new clients continue to pull DSI into new geographies.
"The company's client base is composed of blue-chip retailers spanning attractive end markets such as appliances, electronics, home furnishings, mattresses and home improvement products," adds Meredith. "DSI has deeply entrenched relationships with leading multi-site retailers at both the local and corporate levels, and a track record of successfully increasing wallet share with its existing customers."
Bass agrees with Meredith that DSI's tenured customer relationships are central to its success. "DSI is differentiated by superior customer service and a culture that embraces a customer-first mentality. In the e-commerce model, the final-mile providers are a critical component. They are essentially the only human interaction that a retailer's customers have during the entire buying, purchasing and delivery process. Final-mile providers that deliver a high degree of service are an extremely valuable component of the retailer's overall customer value proposition and a powerful marketing force that influences customer satisfaction and loyalty."
Emerging Opportunity Areas
While there are several companies with the size and scale of DSI, multiple opportunities remain to participate in the sector. Final-mile transport is a highly fragmented market, with the largest player accounting for less than 10 percent of the total market, says Bass. "It's a fairly immature segment of the logistics world that's going through tremendous evolution. Buyers and investors shouldn’t be afraid to start small. It's a space that has such great tailwinds that there's opportunity to execute a buy-and-build strategy in this segment."
"There's a complete shift in consumer behavior underway that you never would have thought would happen a year and a half ago," adds Mountcastle. "As more large, complex items are purchased online, the distribution of those goods may come direct from the manufacturer or the retail warehouse, bypassing the store. The responsibilities for service and support are landing more squarely with final-mile providers that can offer professional delivery and installation service. We expect to see continued strong investor interest in final-mile providers that can build the scale, delivery network and systems to service a national customer base."
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