Learn the stock market in 7 easy steps. Get spreadsheets & eBook with your free subscription!

Industry Breakdown: 3PL Logistics

“The amateurs discuss tactics: the professionals discuss logistics.”

Napoleon Bonaparte

Military leaders understand that without logistics, successful campaigns would never win the wars. In World War 2, Dwight Eisenhower understood that winning the war would come down to logistics, moving both men and material to the point of attack and continuing that flow until the war was won.

Eisenhower understood that wars are won and lost because of the success or failure of logistics. In today’s retail world, Walmart is one of the leaders in logistics and uses that ability to dominate its competitors. It is evidenced by the fact that Jeff Bezos understood Amazon’s ability to delight its customers with the speed and accuracy of its logistics.

The 3Pl Industry is a vital part of the logistics chain and helps feed the world’s growing economies. As the pandemic situation improves, we will see an increase in demand for products and services, and the 3Pl Industry will meet those demands.

In today’s post, we will learn:

  • What are logistics?
  • What is the 3Pl Industry
  • Key Players in the 3Pl Industry
  • Investor Takeaway

Okay, let’s dive in and learn more about the 3Pl Industry.

What are Logistics?

Shopify, one of the leading logistics companies in the world, defines logistics in this way:

Logistics is used more broadly to refer to the process of coordinating and moving resources – people, materials, inventory, and equipment – from one location to storage at the desired destination. The term logistics originated in the military, referring to the movement of equipment and supplies to troops in the field.”

Many of the more famous military leaders such as Sun Tzu, George Patton, Dwight Eisenhower, Napoleon, Alexander the Great, Julius Caesar, and many more understood the importance of logistics.

Many people confuse logistics with supply chain management, but they are two aspects of the process, despite the interchangeability of the term.

Logistics refers to the goings-on inside Amazon, for example. It includes purchasing and delivering materials, packaging, shipping, and transportation of goods to its distributors. Supply chain management includes the larger outside network of organizations that work in tandem to deliver products to its customers, including vendors, call centers, warehouse providers, etc.

Common components of logistics include:

  • Inbound transportation
  • Outbound transportation
  • Warehousing
  • Fleet management
  • Order filling
  • Materials handling

So why is all of this important?

Many businesses focus on creating and producing a product or services to meet their customers’ needs, such as Shopify. But, if Shopify can’t get the products or services to its customers, it fails.

That is where logistics come into play.

But logistics also supports the economics of the business in other ways beyond revenue. For example, the more efficiently a business can purchase, store, and move its materials, the more profitable the company.

A great example is a fresh produce company. Their main product is the buying and selling of fresh produce, which has a finite shelf life. The quicker the turnaround of their produce, the more profitable the company will be, as the shelf life of an apple is finite. If the apple sits too long, it will rot, and the fresh produce company loses money.

Logistics can help the fresh produce company transport their produce from the farms through the warehouses to stores or restaurants that use their fresh produce. The more efficiently the company buys, stores, and sells its product, the more profitable it will be.

On the customer side, as in Shopify, the more efficiently the company can store and ship its products from its producers on the platform to the customers, the more profitable both Shopify and its sellers will be. For Shopify, customer satisfaction is a huge profit driver for the company.

Some better-known names in the logistics industry are UPS, FedEx, and Amazon. But within those bigger companies, some segments focus on the 3PL Industry.

What is the 3PL Industry?

Third-party logistics or 3PL is the outsourcing of logistic processing to a third-party business. The processes include warehousing, inventory management, and fulfilling orders. 3PL providers are an integral part of the logistics industry, particularly the eCommerce sector.

Businesses such as Shopify, Etsy, and eBay depend on 3PL companies to help satisfy all of their orders; shipping from producers to customers, warehousing of products, and inventory management are a small sampling of the services they provide.

The 3PL Industry offers many of the same services as logistics companies, but with a more complete offering for eCommerce:

  • Inventory management
  • Warehousing
  • Shipping and receiving
  • FTL and LTL freight shipping
  • Picking and packing
  • Kitting and customization
  • Returns (reverse logistics)

The 3PL industry began in the 1970s, but with the recent acceleration in the eCommerce sector, the growth exploded to the point that many of these companies outsource their logistic needs to the 3PL’s.

Different 3PL providers specialize in different services, such as fulfillment or warehousing. Some are outfitted for cold storage, others for smaller orders. Others focus on heavy, bulky, or high-value products.

Let’s look at the basics of how the companies operate.

3PL providers manage inbound and outbound shipping and warehousing for their customers. Most 3PL companies own or lease their warehouse space, and most don’t own their fleet of trucks, airplanes, or ships. Instead, they contract those services for the benefit of their customers.

Think of using third-party logistics in this way. It allows us, as the customer, to outsource our warehousing of the products. Instead of owning the warehouse, we rent shelf space in a large facility the 3PL owns and manages. The 3PL employees receive our products, place them in inventory, and pick them and pack them for shipping when ordered for sale. The 3PL then organizes the pick up of products and delivery of the same products to our customers.

When a business decides to outsource its fulfillment or have another business shipping its products to the end consumer, it has several options to choose from. The 3PL provides a one-stop shop to meet those needs.

eCommerce platform integration

Shopify and Etsy survive on the multichannel selling, meaning they need strong IT to integrate with those multichannels seamlessly. The 3PL provider supports all the multichannel by creating an API that can track the order from creation to delivery to the end consumer.

FTL and LTL shipping and receiving

Full truckload (FTL) and less than full truckload (LTL) freight can help you save money on deliveries, particularly if you ship large wholesale orders to retailers or retail orders. Another use of freight shipping is moving products between warehouses or distribution centers closer to your customer.

The 3PL can help organize and manage the flow of your products through this process. Managing the process between FTL and LTL can help control costs and find you the best deal for your business.

Inventory Management

The 3PL can manage your inventory, and with the valuable experience the 3PL has, it helps manage costs of storing inventory and order flow. The 3PL’s will know restocking levels, supply chain management, and seasonal change levels. All of which helps you control your inventory costs and manage cash flow.

Picking, packing, and shipping

At the core of fulfillment is picking, packing, and shipping. Whenever any customer orders a product, it goes through a picker picking the product, a packer puts it in the perfect delivery package and then applies the label for shipping. And the final step, making sure the correct carrier picks it up for delivery to the end customer.

Reverse logistics

A fancy term for returns, which is a normal business operation in the life of an eCommerce business such as Shopify. The 3PL company can handle all aspects of the return, from processing the return, picking up the product, returning it to the warehouse for inspection, inspecting the product, and placing it back in inventory if the product is in condition resale.

Here are some benefits of a 3PL:

  • Lower costs of goods sold
  • Greater flexibility of product sourcing
  • More control of logistics
  • Faster order fulfillment
  • Easier processing of returns

Key Players in the 3PL Industry

The third-party logistics market is huge worldwide, with Asia the largest market and North America second.

Chart courtesy of Statista.com

As we can see from the above chart, the total world TAM (total addressable market) is $951.6 billion, with Asia number one at $380.2 billion and North America at $252.5 billion.

The leading 3PL logistics leaders in revenues in 2019 worldwide was DHL, and C.H. Robinson was the leader in the US with more than $16 billion in revenues.

Chart courtesy of Statista.com

As we can see from the above chart, overall revenues stalled from 2018 to 2019 and improved in 2020 by 8.79%. Over the last ten years, the industry has grown 6.15% CAGR. And industry experts predict that the market will grow 7.1% CAGR into 2027.

Let’s look at some of the leading companies in the 3PL space.

C.H. Robinson (CHRW)

The U.S. leader in 3PL solutions, with revenues over $16 billion in 2020, provides third-party logistics across a broad spectrum of services. Services ranging from FTL and LTL freight, warehousing, inventory management, rail and trucking combinations, air shipments, and organized door-to-door deliveries.

The company’s current market cap is $13.09 billion, and the company carries a total debt of $1.3 billion. The company has a current P/E of 26.82, with revenue growth in 2020 of 5.86% and a 3-year revenue CAGR of 2.91%. Analysts predict revenue growth in 2021 of 8.6% and 1.61% in 2022.

XPO Logistics, Inc (XPO)

The number two 3PL logistics company in the US, with 2020 revenues of $16.2 billion. XPO offers many of the same services as C.H. Robinson, focusing on freight services from FTL, LTL, and brokerage services. XPO does own its fleet of trucks that it manages from drivers and maintenance. The logistics side of the business offers warehouse management, e-commerce fulfillment, inventory management, etc.

The company’s current market cap is $15.29 billion, with the balance sheet carrying the total debt of $9.1 billion and $2.05 billion in cash. XPO’s current P/E is 175.47, with declining revenues in 2020 of (2.38)% and a 3-year revenue CAGR of 1.85%. Analysts predict revenue growth of 11.87% in 2021 and 4.43% in 2021.

Expeditors International of Washington (EXPD)

Expeditors offer 3PL services worldwide, compared to the US-centric companies above, with a current market cap of $18.70 billion. The company focuses on airfreight as its main strength and manages all aspects of air freight, warehousing, air and marine freight, freight forwarding, and customs clearance. It also offers services such as packing, shipping, and customs documentation.

The company offers nice liquidity with total debt of $483.1 million and cash on the balance sheet of $1.53 billion. EXPD had a TTM P/E of 27.23 and revenues of $10.1 billion in 2020. Revenue growth of 23.74% in 2020, with a 3-year CAGR of 13.49%. Analysts estimate revenue growth of 5.69% in 2021 and a decrease (3.04)% in 2022.

J.B. Hunt (JBHT)

The J.B. Hunt company offers complete freight services from over-the-road services to door-to-door delivery services. The company owns and manages its fleet. JBHT currently has a market cap of $17.88 billion with total debt of $1.3 billion and cash balances of $552 million.

The company produced $9.6 billion of revenues in 2020, with year-over-year growth of 6.6% and 3-year revenue CAGR of 9.93%. The TTM P/E is 32.98, and analysts predict revenue growth of 16.71% in 2021 and 7.97% in 2022

UPS Supply Chain Solutions

The original gangster of logistics, UPS offers 3PL logistics through its segment supply chain solutions. The segment offers LTL freight and truckload services and forwarding services, including air and ocean freight.

The company’s overall market cap is $178.96 billion, with an enterprise value of $172.64 billion. The company’s current P/E is 116.5, with 2020 revenues of $15.1 billion for the segment. The company experienced overall growth in revenues of 14.2%

Overall metrics for the 3PL market leaders:

Company

P/E

ROIC

Rev %

Gross

EBIT

FCF

WACC

CHRW

25.6

25.2%

5.7%

8.3%

5.5%

3.7%

5.59

XPO

137.9

1.0%

58.9%

14.5%

1.7%

1.8%

10.87

UPS

116.5

24.9%

5.5%

18.7%

10.9%

7.4%

6.61

EXPD

26.8

49.8%

5.4%

12.4%

9.6%

6.3%

6.42

JBHT

32.2

19.4%

9.8%

16.6%

10%

4.3%

7.53

FDX

24.5

11%

7.1%

20.9%

7%

1.6%

7.45

AAWW

5.5

9.2%

5.1%

24.2%

11.3%

(6.2)%

5.70

Investor Takeaway

As with almost every industry in the world, tech is disrupting the 3PL Industry. As mobile technologies and smart AI take more and more market share, the 3PL Industry adapts to these technologies.

The AI industry is helping warehouses move, pick, store, and manage their inventories even better than before. All of which saves both its customers and warehousers more money, and making them all more profitable.

3PL companies are turning more and more to technology to connect with their customers. With the growing acceleration in e-commerce, the reliance on technology to move products and services is increasing.

Companies such as Shopify, Etsy, and eBay turn to these 3PL companies to help them move their products quickly and efficiently. Amazon started a trend of moving packages quickly with its commitment to Prime customers, and that expectation is now set across the 3PL Industry.

Mobile apps and smart technology dedicated to the 3PL world are here, and it is making the moving of products more efficient and cost-effective.

Most of us think of logistics as moving packages or mail from one location to the other. But it has evolved into more than that; in many cases, it is a total package that allows a company to outsource the movement of its products or services to the consumer without having to spend the money on warehouses, staff, vehicles, and systems to manage all of those processes.

The 3PL industry will have a larger and larger portion of the pie in the logistics industry as e-commerce company’s revenues grow. The industry will likely see growth over the coming years, with more entrants in the logistics space because of tech growth. The growing tech will also create more specialized services such as AI for warehouse management or systems designed to manage areas of logistics such as air freight or ports.

With that, we will wrap up our discussion on the 3PL industry.

As always, thank you for taking the time to read today’s post, and I hope you find something of value in your investing journey. If I can be of any further assistance, please don’t hesitate to reach out.

Until next time, take care and be safe out there,

Dave