A Rising Tide Lifts All Boats

Key Takeaways from the
3PL Value Creation North America Summit 2018

Last month, third-party logistics (3PL), technology, and investment leaders convened at Armstrong & Associates’ 3PL Value Creation North America Summit in Chicago to discuss trends in the $869 billion global 3PL market.

Many of our 3PL panelists reported double-digit growth this year. As one speaker noted, “the only thing 3PLs don’t like is equilibrium.” Today’s complexity and tight capacity is good for 3PLs, as are growing e-commerce volumes, improvements in technology, and rapid automation. That’s propelled by the impacts of corporate tax cuts coming to fruition, and the sense that trade with Canada and Mexico will continue to be good. Expectations are tempered somewhat by tariff uncertainty, looming inflationary pressures, and challenges in finding labor with increasing wages across the board. Still, the consensus is that 3PL business will remain favorable into 2019.

We had a great turnout on our Financial Briefing day, and for good reason. To put it in the words of one of our panelists, “If you’re inclined to sell your company, now is the time to do it.” Private equity deals will likely dominate through the remainder of 2018 and 2019—there’s a lot of dry powder out in the market. Many strategic buyers, even those that aren’t normally acquisitive, are looking for a good fit—namely a niche service portfolio, sticky customer base, and a good culture overlap.

For those who missed this year’s Summit, we’ve collected a summary of major trends, below.

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Tariffs and International Transportation Management

Uncertainty around tariffs means we haven’t yet seen big shifts in international supply chains, but a number of panelists noted increased forwarding/import volumes to get ahead of tariffs.

  • In the short term, 3PLs have experienced increased forwarding volumes to get imports ahead of tariffs. Executives are monitoring the news about tariffs and are having conversations with customers about longer-term plans.
  • Due to the influx of imports, the full prices of tariffs haven’t been fully felt yet, but that’s expected to change as we head into 2019.
  • In the medium- and long-term, 3PLs expect to see supply chain shifts in Asia. Growth is expected in Southeast Asia (especially Vietnam and Indonesia) and India as supplier bases shift. Companies that can assemble and scale worldwide have a competitive advantage.
  • 3PLs see the opportunity to differentiate with additional services: air freight for cross-border e-commerce, first- and last-mile logistics, and reverse logistics.
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E-Commerce & the Amazon Effect

E-commerce is ripe with opportunity but it can be a risky business. 3PLs differentiate from Amazon’s Fulfillment by Amazon (FBA) program with lower prices, Seller Fulfilled Prime service, and scooping up customers that have outgrown FBA.

  • Armstrong & Associates estimates 2018 e-commerce logistics costs are $141.6 billion. It’s showing strong and consistent growth—nearly 15% annual growth, with no sign of slowing. It’s also quickly changing, and the future of e-commerce is likely to actually be omnichannel.
  • E-commerce presents many opportunities for 3PLs. E-commerce business is also bringing omnichannel business with it. E-commerce can result in higher margins for 3PLs, and its volatile volumes play well for non-asset-based companies.
  • There’s an element of risk, too. Poor forecasting is a risk to margin leakage. 3PLs must be diligent about managing volumes. Diversity in a company’s e-commerce customer base is key, because just as some retailers can result in promising growth, others flame out.
  • Improved solutions are being developed for retailer pain points, namely last-mile delivery and reverse logistics.
  • Is Amazon a threat to 3PLs? Panelists report that Amazon services are expensive, yet the company lacks the responsiveness that 3PLs can offer. Many mid-size retailers that initially use Fulfillment by Amazon “graduate” into using 3PLs.
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Strategic buyers are looking for the right fit. There’s a lot for sale, but big multiples and due diligence add up quickly. Private equity deals will likely dominate through the remainder of 2018 and 2019—there’s a lot of dry powder out in the market.

  • It’s a sellers’ market. Panelists estimated $1 trillion (or more) in “dry powder” capital, with the possibility that 2019 will have more activity than 2018.
  • For sellers seeking private equity, a strong team, proven experience, and future vision are big selling points, as is analytical decision making. A combination of off-the-shelf technology (scalable and carrying less risk) and proprietary customization can minimize risk but also differentiate. “Themes” are also of interest right now—previously, being a 3PL was enough to get investors interest, but now themes like e-commerce and final mile are becoming more important.
  • While private equity may dominate the number of deals in 2018 and 2019, strategic buyers are looking for good fits. Strategic buyers are often looking for a niche business, with a good cultural and geographic fit, with a sticky customer base, and one that can be quickly accretive to the business. Major international strategics want to capture U.S. consumer spending.
  • From strategic buyers, we heard that there’s a tremendous amount for sale right now, but prices are high: business is booming, and multiples have risen incredibly over the last eight years.
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Technology & Innovation

3PLs tend to be risk-averse, which deters technology investment. Gaps in data leave 3PLs in a reactionary mode. Still, forward-thinking 3PLs are working with innovators coming to market with solutions like AI, automation, APIs, sensors, and digital freight matching.

  • A few panelists noted that risk-taking is not a strength of 3PLs. In order to get to the next step in technology, there needs to be an investment from 3PLs. Not every pilot can be paid for by the customers.
  • Besides innovation technologies, many companies are trying to ensure trusted, accurate information; otherwise, 3PLs are still very reactionary. 80% of information required to manage a supply chain comes from outside the enterprise.
  • We polled the audience to see who’s piloting or using blockchain in their operation right now, and we saw the same answer as last year: zero. Despite the buzz, it’s not ready for primetime in the 3PL space.
  • AI and APIs are improving brokerage functions by streamlining and accelerating data transmission and communication.
  • Digital freight matching enables new business models, allows pricing experimentation, and provides an engaging digital customer experience.
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Value-Added Warehousing and Distribution

3PLs are taking nearly a quarter of newly constructed warehousing space in a market with just 5% vacancy. Familiar issues, like scope creep and a tight labor market, continue to be challenges.

  • The industrial real estate market is booming. 3PL absorption of space has rapidly increased, and that should continue into 2019.
  • After a decade of interest in million-square-foot mega-warehouses, warehousing customers are also interested in smaller, local, higher-velocity facilities. There’s also some change in geographic patterns, as 3PLs spread business across multiple nodes in a region to avoid competing against themselves for labor.
  • To combat increasing scope creep, panelists have monthly or quarterly conversations with customers to set expectations for annual contract discussions.
  • Decreasing costs make automation with non-fixed assets attractive in warehousing, so solutions are flexible, not tied to a certain facility or customer.
  • Amazon’s $15 minimum wage has caused some employee turnover, but warehouses also see many of those employees return after a month or so. To retain employees, warehousing 3PLs focus on culture, internal upward mobility, working with high schools to develop career pipelines.

Trucking Capacity, Domestic Transportation Management, and Dedicated Contract Carriage

Trucking capacity has been tight, wages are rising, and drivers are hard to find and retain. But there are some indications the market will look different as we head into 2019.

  • Despite the complexity of the market, historical cyclical trends should be a significant predictor of the current cycle—which means we could see falling rates in 2019 (see Coyote Chief Strategy Officer Chris Pickett’s paper here for more on that topic).
  • Some noted that there has been a slight easing of capacity recently—not to the point of soft capacity, but it’s getting a bit easier to find.
  • Amidst a driver shortage and higher wages, driver recruitment efforts are in high gear.

To receive information about the 3PL Value Creation North America Summit 2019, please email cheri@3plogistics.com.

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