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Weekly UpdatesThe third-party logistics (3PL) industry continues to change as a result of large-scale consolidations, the pressures to globalize service offerings, and market pressures on prices and margins. Management is challenged on a regular basis to develop global positioning strategies, restructure their organizations, and deliver solid value propositions to increasingly demanding customers.
For more than a decade several co-authors and I have attempted to provide insight into the provider side of the 3PL industry by conducting annual surveys of the CEOs of many of the largest 3PL companies in the world. While these surveys initially began in 1994 in the North American 3PL marketplace, in 2004, recognizing of the increasing globalization of the 3PL industry, we decided to restructure the annual CEO surveys, and focus on three separate third-party logistics marketplaces. The three areas selected were North America, Europe, and the Asia-Pacific region. Separate questionnaires were developed that specifically focused on those three regions, and the CEOs of major companies operating in each of those regions were contacted and asked to participate in the market-specific surveys.
We have been very fortunate in that many of the individuals contacted initially agreed to participate in the surveys, and have continued to share their perceptions of regional market dynamics with us each subsequent year. Collectively, the results of the three annual surveys allow us to provide a truly global overview of the third-party logistics industry from the perspective of the CEOs of many of the major participants in the industry (Lieb and Randall 1996, 51-66; Lieb and Butner 2007, 40-52). We have continued to follow the regional approach since 2004, and this note focuses on the results of a 2007 survey of the CEOs of twenty-one major logistics service providers serving the North American market.
The 2007 questionnaire focused on a variety of issues, including the key marketplace dynamics in the North American 3PL industry, the industry's service offerings in the region, and the current status and future prospects of the industry in the region. The 2007 survey also gave considerable attention to a number of other important issues, including the expanded involvement of private equity companies in the North American 3PL industry, new regional recruiting, training, and employee retention programs started by 3PLs during the past year, the recent branding efforts of 3PL companies operating in North America, and industry efforts to deal with price compression and intense competition for management talent. The survey also gathered data concerning the operations of these companies in Mexico.
The CEO of each of the companies included in the survey was contacted by telephone or email and asked to participate in a Web-based survey. An initial target group of twenty companies was contacted, and the CEOs of all those companies agreed to participate. Another company that had been included in the previous surveys, but had not participated in 2006 due to an acquisition, subsequently contacted me and was also included in the survey. Twenty-one questionnaires were completed online. Exhibit 1 lists the companies that participated in the 2007 North American survey.
Two points should be noted before proceeding. First, due to individual company policies concerning financial disclosure, some questions were not answered by all respondents. Second, in a number of instances, average industry data is presented, but there is often substantial variability around those averages. That variability reflects a number of factors, including differences in company strategies, operating policies, and market segments served.
RESULTS
Revenues and Profitability
Several North American 3PL provider revenue and profitability issues were addressed in the 2007 survey and each is discussed below.
Annual Provider Revenues. Seventeen companies reported revenue data in responding to the survey. The annual revenues for 2006 reported by the respondents ranged from $60 million to $8.2 billion, with the average being $1.253 billion. Their average revenues in the two preceding years were $1.136 million in 2005 and $817.8 million in 2004. Based upon those numbers, and our general knowledge of the revenue base of the companies that did not provide financial data, we believe the twenty-one companies involved in this survey generated well in excess of $30 billion in North American 3PL revenues in 2006. Five of the companies included in the survey registered annual North American operating revenues in excess of $1 billion in 2006.
Those surveyed were also asked to indicate where their companies' North American revenues were generated during 2006 (United States, Canada, and Mexico), and to project the revenue split by geography for 2009. As shown in Table 1, the averages for companies participating in this survey were 85 percent from the United States (86 percent in last year's survey), 10 percent from Canada (8 percent last year), and 5 percent from Mexico (7 percent last year). Collectively, the participants projected modest shifts in that revenue split for 2009, with the averages being 81 percent from the United States, 10 percent from Canada, and 9 percent from Mexico.
Success in Meeting Growth Projections. Those surveyed were also asked about the success of their companies in meeting their North American revenue growth projections during 2006. Eight CEOs (40 percent) reported their companies had exceeded company revenue growth projections (eleven last year), eight (40 percent) indicated that their companies met their projections (seven last year), and four (20 percent) indicated their companies failed to meet their projections (only one last year).
Company and Industry Profitability. The CEOs were also asked to categorize the profitability of their companies' North American business units during 2006, and for the fourth straight year their responses were quite positive. Three CEOs reported that their companies were very profitable during 2006, and sixteen reported their companies were moderately profitable for the year. For the first time in four years one of the participating CEOs reported that his company's North American business unit failed to record a profit during the year.
In the 2007 survey the CEOs were also asked to categorize their views of the profitability of the North American 3PL industry as a whole in 2006. Twenty (95.2 percent) of the CEOs categorized the North American 3PL industry as being moderately profitable for the year, and one believed the industry broke even for the year. Only once in the past four annul surveys has one of the participating CEOs believed the North American 3PL industry was unprofitable during the year.
Operations in Mexico
Sixteen of the companies involved in the 2007 North American survey reported providing 3PL services in Mexico, with ten initiating those services prior to 2000. As noted earlier in this note, on average they generated 5 percent of their 2006 North American revenues in Mexico, and forecast that number to average 9 percent three years from now. On average their Mexican revenues grew by 16.1 percent during 2006. Those surveyed were asked a number of questions about their operations in Mexico.
Operating Problems in Mexico. Much has been written about the operating problems that some companies have experienced in Mexico (CSCMP 2007, 14-17, 28-29). As a result, the CEOs were asked if their companies had encountered any significant operating problems in Mexico, and interestingly, all fifteen of the respondents who answered the question said "no."
Success in Mexico. Those surveyed were asked several questions concerning the success of their companies in the Mexican 3PL market to date. Their responses are summarized in Table 2. As shown, 80 percent of the CEOs indicated their companies have been very successful or successful in establishing the company brand in Mexico. Similarly, two-thirds said that their companies had been very successful or successful in penetrating the Mexican 3PL market. Eighty percent also said that their companies had been very successful or successful in generating operating profits in that market.
Geographic Shifts of Customer Manufacturing Activities
The business press has frequently asserted that due to rising costs in China, some of the American manufacturers that had established manufacturing operations in China for export to North American are now reducing their manufacturing base in China, and moving some manufacturing activities back to either North or Central America. The CEOs were asked if any of their major manufacturing accounts had participated in such a movement, and eight of the twenty-one respondents said "yes." When asked how significant that shift has been to their companies and what were its long-term implications, all respondents indicated that the impact so far has been minor, but that the trend is likely to continue.
Mergers and Acquisitions (M/A)
The worldwide consolidation movement in the 3PL industry continues. This movement is dramatically affecting the structure of the industry, and in recognition of this fact, several questions related to that restructuring were included in the 2007 survey.
Percentage of Revenue Growth Expected from Acquisitions. Those surveyed were first asked what percentage of their companies' revenue growth over the next three years was expected to come from acquisitions. The average response was 14.2 percent (15.4 percent last year) with a range of zero to 25 percent. Surprisingly, six CEOs indicated that they do not expect any of their companies' growth over that time period to come from acquisitions.
Extent of M/A Activity. Only six of the twenty-one CEOs indicated their companies had been involved in significant mergers or acquisitions in the region during the past year. However, several reported their companies made multiple acquisitions. Collectively, the 3PLs acquired two 3PL companies, two transportation companies, one warehousing company, two freight forwarders/customs brokers, and one contract manufacturer.
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