Article - March 2, 2023
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Key Takeaways
Spurred by growing container volumes, rising freight velocity, and port congestion, shippers’ focus on intermodal logistics is increasing.
With market leadership depending upon greater sophistication and customer value, investors focused on people, capabilities, technology, and scale stand to pull ahead.
Recent Harris Williams transactions exemplify this opportunity and provide concrete insights on how to pursue it.
Recent supply chain bottlenecks and the ongoing surge in ecommerce have highlighted the importance of intermodal moves within the supply chain. Here, we explore trends driving increased investor interest in the intermodal logistics sector and key company differentiators, highlighting RoadOne Intermodal Logistics, STG Logistics, and Evans Network of Companies as exemplars.
Complexity and Opportunity
Over the past decade, intermodal shipping volumes have grown consistently, supported by multiple long-term tailwinds. Increased globalization, for instance, translates into more goods coming through ports, leading to greater demand for intermodal moves. These intermodal moves facilitate transportation to and from ports to other transition points such as railheads and distribution centers across the supply chain. Spurred by growth in ecommerce, freight velocity is also accelerating, increasing focus on all areas of the supply chain, including intermodal, where freight touchpoints and interaction are greater and the opportunity to drive efficiencies is amplified. These trends make efficient intermodal logistics increasingly important to overall supply chain operations, since potential acceleration zones or chokepoints in the supply chain can have a significant ripple effect.
“These touchpoints within the intermodal market occur earlier in the supply chain at the first or middle mile, offering shippers opportunities to optimize spending and time efficiency if managed properly,” says Jason Bass. “The growing focus on final mile logistics and expedited transportation is creating greater emphasis on these intermodal touchpoints earlier in the freight lifecycle to manage overall spend. Shippers are increasingly turning to leading intermodal third-party logistics providers for their expertise in managing and facilitating execution of these moves at a higher level.”
As the overall supply chain continues to grow in complexity and interconnectivity, operators in this space can leverage expansion and investment to facilitate growth and increase their opportunity set. Jeff Kidd notes the opportunity for intermodal businesses to differentiate from the competition by investing in increasing data sophistication and visibility. “Intermodal logistics is a critical component of the supply chain that can be very complicated and congested, requiring meaningful coordination and management that is still latent in many instances. Both shippers and investors are seeing the intermodal logistics space as an area where high-quality providers can serve as true supply chain partners adding reliability, visibility, and cost and time savings in the movement of goods.”
Likewise, as shippers seek to minimize supply chain disruptions, they are looking to work with larger, more sophisticated intermodal logistics operators that can provide national coverage and a more fulsome suite of solutions across the intermodal and related services spaces. Given the highly fragmented nature of the intermodal logistics sector, such providers of scale and scope are relatively scarce, creating an opportunity for strategics as well as financial investors to aggressively pursue M&A and capitalize on these advantages of scale.
Key Levers for M&A Investors
With market leadership depending upon greater sophistication and customer value, investors focused on people, capabilities, technology, and scale stand to pull ahead.
Intermodal service reliability is crucial. Drayage (part of an intermodal move related to the specific transportation to or from an ocean port to or from another link in the supply chain, such as a railhead, warehouse or distribution center) is a relatively small portion of most companies’ overall transportation spend, but service failures can bring their supply chains to a halt. As worldwide container volumes continue to grow, the need for reliable providers to move goods from congested ports will only rise.
Providers offering additional services to complement core intermodal or drayage moves (such as transloading, yard management, or warehousing, for example), offer further value to customers, increasing “stickiness” of the customer relationship via more end-to-end solutions.
As with many areas of the supply chain, technology is becoming increasingly necessary to provide cost-effective, reliable service. It helps intermodal providers navigate and streamline complex supply chain networks, effectively communicate with and dispatch drivers, manage assets, and give customers visibility to goods in transit. Traditionally an underpenetrated section of the supply chain from a technology perspective, there remains strong opportunity for intermodal providers to increase adoption of more tech-forward strategies and applications to drive customer value and differentiation in the industry.
Scale also offers competitive advantage. Since the U.S. market is so highly fragmented, providers with a larger national coverage footprint have significant scarcity value. Frank Mountcastle highlights multiple ways that scale can create differentiation. “Shippers increasingly want to work with fewer providers for their transportation needs, focusing on operators that offer multiple solutions including drayage, transloading, warehousing, truckload, and more,” he says. “They are also interested in providers that can serve their drayage needs across a wider geography in ports and railheads across the U.S.”
Mountcastle posits that logistics companies that offer singular focused services such as drayage at scale across the U.S. as well as those offering multiple services that complement core drayage offerings are more highly valued by customers and investors alike. In instances where an operator can provide both scale of footprint and scope of services, differentiation can be most meaningful.
To complement scale, providers’ geographic footprint strength is becoming increasingly important to driving customer value. Of note here, says Nick Petrick, is that operators are continuing to reassess and recalibrate their footprints amidst evolving freight movement patterns at ocean ports to meet shippers’ needs. Many primary shippers—also known as Beneficial Cargo Owners, or BCOs—are shifting their port priority from the West Coast to instead focus on East and Gulf Coast locations, due to congestion, labor and cost factors, and regulatory changes at the largest West Coast ports. Compared to 2019 volumes, South Carolina’s port container imports were up 28% in December, Georgia’s up 26% and Virginia’s up 21%. California volumes were down 15% and Washington down 20% in the same period.*
Intermodal logistics providers that have strong geographic density in these higher-activity locales are well-positioned to service the evolving landscape. In addition to offering drayage coverage in these areas, providers with port-proximate locations for transloading—transferring a shipment from one mode of transportation to another—also have an advantage. Ecommerce has driven growth in distributed micro-warehouses and in routes across the country, increasing the potential domestic touchpoints once freight is moved from a port, so those that offer these complementary services further up the supply chain are proving to be in high demand.
Finally, companies that can show diverse and direct customer relationships are best positioned for stability and growth. Those working with customers in end markets that span multiple B2B and B2C industries are advantaged in times of economic and supply chain volatility, supporting revenue and platform stability. Similarly, providers that focus on the end shipper, or BCO, have a more direct relationship with the customer and key decision-makers, increasing strength of the relationship and enhancing retention prospects as compared to those facilitating moves on behalf of other third-party logistics providers or steamship lines.
Overlooked No Longer
Prior to extensive globalization and ecommerce growth, intermodal logistics was an area of the supply chain that was often overlooked. Spurred by growing container volumes, rising freight velocity, and the disruption caused by post-COVID-19 port congestion, shippers’ focus on intermodal logistics is increasing. Leading providers in the sector as well as investors have an opportunity to take advantage of this focus and the growth it supports.
