State of the Industry: Hot Topics with the New 3PL Majors

This is part of a series of articles based on panel discussions held during the 2019 Harris Williams Transportation & Logistics 3PL Conference. The conference explored key trends in the space and the opportunities they are creating for 3PL companies and their prospective buyers. Note that the panel participant opinions expressed in this article do not necessarily reflect the views of Harris Williams.

What’s the outlook for the economy in 2020, and how will geopolitical dynamics influence it in the coming months? How are Amazon and the emerging “digital freight brokers” affecting 3PLs’ business?

Here we explore these and other key issues raised at the 2019 Harris Williams Third-Party Logistics Conference in Nashville. The discussion was led by a veteran of the transportation and logistics industry, and featured four panelists who serve in an executive capacity at leading 3PL companies:

Moderator: Andy Clarke, 3PL executive
Panelists: Bob Farrell, GlobalTranz; Rob Rose, Worldwide Express; Tom Sanderson, Transplace; Paul Thompson, Transportation Insight

Key Takeaways

  • Predictions regarding the economy varied widely among panelists, but all agree that greater certainty will follow the 2020 election.
  • Panelists also agreed that strong technology capabilities are now table stakes, and those that don’t have them are in danger of being left behind.
  • Private equity investors are widely perceived as helping 3PLs expand their footprints in the marketplace and accelerate growth.

The Economy and Geopolitics: What’s on the Horizon?

When panelists were asked where they thought the U.S. economy was headed in 2020, sentiment varied widely. Despite being more than a decade into the current positive economic cycle, one panelist indicated he simply didn’t see a catalyst on the horizon that would trigger a recession. Others were less positive, pointing to slowing growth in Europe and parts of Asia, two straight months of negative numbers from the U.S. manufacturing sector, and ongoing trade wars.

“We've decided not to focus on an impending recession, but on building solutions that our customers can use through any type of economic period—partnering with them and building new ways for them to go to market and to work with us,” noted one panelist. “That will help us deliver more value, be more profitable and expand the footprint of customers we're working with.”

Closely tied to the economy is the country’s current geopolitical situation—particularly tariffs and the upcoming election. “We talk to our customers every day, and they express a lot of mixed feelings about trade tensions,” one panelist said. “They want us to lead them someplace, to some conclusion about how they should feel about the overall geopolitical environment and what they should do in their business. We're trying to be educated and to help them move in the right direction, but it's really hard. When I look at the election next year, I hope that it creates a way for everybody to get focused on what the next steps are going to be and how that will manifest itself into a more predictable trade environment.”

Amazon and Digital Competitors: What’s the Impact?

As Amazon continues to expand into new businesses and build out its own delivery capabilities, the question of whether Amazon is a friend or foe for 3PLs becomes increasingly important. Will Amazon eventually take its place alongside UPS and FedEx as the third major parcel distributor? While some panelists noted that Amazon currently isn’t having a direct impact on their business, they certainly aren’t taking their eye off the company, either, given Amazon’s history of aggressively pursuing service offerings it deems strategic or markets where it really wants to compete.

“I wouldn't label them purely a friend or a foe, but I also wouldn't say that we don't care about them—they come up in our boardroom [discussions] all the time,” noted one panelist. “There's concern because nobody can be sure what they’re going to do. They've got huge scale and great resources. It's a great fulfillment company. They're excellent at pick and pack, parcel and last-mile delivery. The question is, what else could they be, what else do they want to be?”

But Amazon isn’t the only technology-forward company that could affect 3PLs’ business. A growing number of digital freight brokers such as Uber Freight and Convoy are fighting for market share, using algorithms to match carriers and loads based on origin, destination, type of load, price and timing. According to Frost & Sullivan, the digital freight brokerage market will reach $54.2 billion by 2025.1

Panelists agreed that digital freight brokers are disrupting the market with their “land grab”—effectively buying market share with low pricing—although one panelist sees an eventual end to the practice. “They've been disruptive in the marketplace to some of our business by brokering loads at cost,” he indicated. “But that can only go on for so long. At some point, they have to start making money.”

20193pl-1.jpgBut these emerging competitors also are having an impact on panelists’ businesses in an unexpected way: forcing established 3PLs to use technology more effectively and widely to reduce manual and non-value-adding work and help them scale more quickly. Panelists generally see plenty of opportunities to introduce automation into their operations and subsequently increase the amount of revenue they generate per full-time equivalent employee—while maintaining the human touch they say is critical to providing superior, value-adding customer service.

“What digital brokers have done is sort of forced the issue,” said one panelist. “It made our company and others look at what they're spending on technology. Is it enough? Is our CAPEX right considering what these disruptors are doing? Are we able to go to the next level? I think they've done a good job of making us really focus on our technology opportunities, but I don't really see them completely disintermediating the traditional third-party logistics company.”

One panelist even questioned the distinction between digital brokers and traditional 3PLs. “I don't think there's such a thing as a ‘digital broker,’” he noted. “I think there are simply brokers that are at different places on the technology adoption curve. Some are further than others. Many 3PLs have built technologies for doing digital freight matching. The question is how much human interaction is required and how many loads are done without a human touch. I think digital brokers have gotten a lot of notoriety because of the valuations they've achieved and the “unicorn” status they've gotten from investors.”

“It's not Uber Freight necessarily that's going to change the model,” he continued. “I think it's companies like Coyote or CH Robinson that already have all the freight capabilities. They just need to continue to deploy the technology. I'd much rather start from that position than the other way around.”

Panelists agreed they’re in a technology arms race—that strong technology capabilities are now table stakes, and those that don’t have them are in danger of being left behind. All panelists 20193pl-5_0.jpgindicated they’re making significant investments in technology—particularly on tools to help them harness and generate insights from data, such as predictive analytics and artificial intelligence—and expect to continue to do so in the coming years.

“We should be able to predict with a high degree of certainty when a shipment will be delivered,” said one panelist. “We should be able to predict where capacity will fall short and what we can do about it, or how we should price, sell or buy in a spot market environment based on what's likely to happen rather than on a snapshot of where the market is right now. That’s really important.”

Private Equity Investors: Are They Good Partners?

In general, panelists have found their private equity investors to be disciplined, focused and engaged. All panelists indicated they’ve had the good fortune of working with a number of really strong private equity partners that have helped them expand their footprint in the marketplace and accelerate growth. These partners have brought not only the capital to build or acquire new capabilities, but also insights and a strong board that can be invaluable to an entrepreneurial company.

“I think PE adds a lot of value, particularly on M&A transactions and giving the CEO someone to talk to,” one panelist noted. “Obviously, you're going to talk to your management team, but as a CEO, I’ve found having a partner that you can bounce ideas off of to be hugely valuable.”

With their PE partners’ help, panelists’ companies have executed numerous transactions over the years—some of them transformative—and they’re not done yet. All of the panelists indicated they’re aggressively looking for new acquisition targets that will help them continue to improve and expand their business.

“While there’s strong competition for the best assets, M&A is still one of the best ways for 3PLs to grow their capabilities and capacity,” says Jason Bass, a managing director in the Harris Williams Transportation & Logistics Group. “We see tremendous opportunities to grow market share and create shareholder value.” 

Read more from the 2019 Harris Williams Transportation & Logistics 3PL Conference: