ICFG USA discusses the US 3PL Market and the Key Growth Trends Post 2020 Pandemic
Westbury Group Logistics Practice
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By Jonathan Rubin and Kevin Ardon from Westbury Group LLC
The Third Party Logistics (3PL) market in the US, like most industries worldwide, was not exempt from the effects of the 2020 pandemic and economic downturn. However, due to a variety factors, the 3PL market fared better than most in 2020, and is poised for a strong 2021. E?commerce, which relies heavily on the 3PL industry, not only continued its prior expansion, but also benefitted from a dramatic move to online shopping during the pandemic. Additionally, in spite of the pandemic, the long-term globalization trend continued, and distributors and manufacturers worldwide turned to 3PL firms to make their global trading networks more robust in the face of unprecedented challenges. This strategy allowed businesses to focus on their own core competencies while relying on 3PL firms’ efficiencies. However, the industry faces certain headwinds, specifically geopolitical tensions and the possibility of a second coronavirus lockdown, which could threaten 3PL market growth in 2021. 3PL companies will be better positioned to face these risks and continue their growth trajectory with the adoption of technologies that improve efficiency. 2020 witnessed many 3PL companies making such investments to improve their technology infrastructure during the pandemic. In the vibrant M&A environment, companies which made such investments were of particular interest to acquirers. Westbury expects that M&A will continue to show strength in 2021.
The US 3PL Market Overview
Although economic activity has suffered in the global pandemic, the US 3PL market – the world’s largest – actually benefited from the crisis. Consumer behavior changed in response, with more people than ever before shopping online. Even sectors which previously had minimal e-commerce activity, such as food and grocery, saw a significant increase in online purchases. This increase in e-commerce created a boom for logistics firms. Furthermore, the march of globalization continued, leading to greater trade volume and outsourcing of 3PL services.
Figure 1, Industry Overview – Public Company Analysis
Source: S&P Capital IQ
The US 3PL market has experienced substantial growth over the previous decade, doubling gross revenue from 2009 through 2020. Projected revenue growth for 2020 reached 28%. The US 3PL market is forecast to grow at a CAGR of over 3.5% during the period of 2020-2027.
E-Commerce’s Banner Year
The most important factor in the growth of the US 3PL market in 2020 was the e-commerce boom, accelerated by the pandemic, during which consumers showed a strong preference for shopping from the comfort and safety of their own homes. To manage this growing demand, e?commerce retailers increasingly rely upon Amazon and 3PLs to help manage omnichannel and e?commerce supply chain operations.
US E-commerce grew at a 14.6% CAGR from 2015 through 2019, and now represents 16.1% of all US retail sales. This growth rate spiked to 32% in 2020. In the US, before the pandemic hit, YoY online order count grew by 15% to 17% in 3Q 2019 – 1Q2020. Once the pandemic struck, YoY growth reached 44.5% and 36.7% in 2Q 2020 and 3Q 2020 respectively (Figure 2). Globally, April, May and June all witnessed extraordinary year-over-year increases in online order count (Figure 3). The surge in e-commerce and online orders in 2020 mitigated the negative effects of the pandemic for the 3PL market. We expect that consumer adoption of e-commerce will continue to expand in the post-pandemic environment.
Figure 2, Estimated Quarterly US Retail Sales: Total and E-commerce
Source: US Census Bureau
Figure 3, YoY Change in Monthly Shopping Activity, Global
Source: Bazaarvoice Network
Globalization – Double-Edged Sword #1
Technological advancements, dynamic market conditions, and improvement in the global economy have benefitted globalization, spurring a rapid increase in trade, and compelling manufacturers and retailers to manage logistics more efficiently. 3PL companies help these companies with their global logistics needs so they can focus on their core competencies. This benefit has led manufacturers and retailers to leverage 3PL companies’ capabilities.
However, globalization has also increased geopolitical tensions, specifically between the US and China, leading to trade wars and tariffs, reducing US market imports. If these tensions continue or increase, they may curtail 3PL market growth. As the US economic recovery accelerates in 2021, the incoming Biden presidential administration faces a trade-off between its free trade principles and the need to fight against real or perceived unfair Chinese trade practices.
The Coronavirus – Double-Edged Sword #2
The Coronavirus pandemic impacted supply chain operations globally. During the crisis, limited staff and reduced staffing placed an unprecedented strain on transportation and logistics resources. This strain reduced capacity for all elements of the supply chain, including long-haul and last-mile fulfillment services. In the first half of 2021, a return to a widespread economic lockdown represents the main risk to 3PL growth. However, given the expanding coronavirus vaccine rollout plus COVID “fatigue”, Westbury does not anticipate that either the Federal or state governments will reestablish the stringent lockdowns we witnessed in March through May. Westbury expects 3PL gross revenues in 2021 will rise by high-single to low double digit levels as the US economy returns to its normal growth cycle.
Despite – or perhaps because of – the pandemic, publicly traded US 3PL stocks outperformed the S&P 500 during 2020, with the average EBITDA valuation multiple increasing almost 75% faster: a 37% increase vs 21% (Figure 4). In 2021, we expect that valuation growth of 3PL companies will continue to outpace the S&P 500, though at a narrower margin.
Figure 4, 3PL Trailing 12 Month Stock Performance vs. the S&P 500
Source: S&P Capital IQ. 3PL publicly traded companies include C.H. Robinson Worldwide, Inc., Echo Global Logistics, Inc., Expeditors International of Washington, Inc., Hub Group, Inc., Landstar System, Inc., Radiant Logistics, Inc., TFI International Inc., Universal Logistics Holdings, Inc., XPO Logistics, Inc.
The last five years have witnessed 3PL companies utilizing new technologies, such as automation and blockchain, which have helped 3PL providers better manage their cost base and remain price competitive. To maintain competitiveness, 3PL companies will need to invest in next-generation logistics technologies, such as software applications for fulfillment, cloud-based platforms, and automation development.
3PL Mergers and Acquisitions
Despite the challenges of the pandemic, M&A deal volume grew 10% to 89 closed deals in 2020 compared to 81 during 2019. Excluding the outlier acquisition of Canadian National Railway by Cascade Investments for $77.3 billion, disclosed deal value grew even more, from $572 million in 2019 to more than $4 billion in 2020, a seven-fold increase.
Figure 5, US Mid?Market M&A Activity 2020: VOLUME
Figure 6, US Mid?Market M&A Activity 2020: VALUE
Source: S&P Capital IQ (all closed deals with disclosed values)
. *2019 numbers do not include Cascade’s $77.3 billion acquisition of CNR
Figure 7, Select M&A Transactions 2020
Source: S&P Capital IQ
Strategic buyers are focusing particularly on 3PL companies with strong e-commerce presences, especially those with significant last-mile capabilities and those with strong technological infrastructure. Examples include CRST International’s acquisition of last-mile firm NAL Group in March 2020, and Traton SE’s (XTRA:8TRA) acquisition of self-driving truck company TuSimple in September. In 2020, strategic buyers sought out bolt-on deals to strengthen specific growth opportunities that emerged during the pandemic. This was seen with TFI International’s (TSX:TFII) ten acquisitions in 2020, such as their DLS Worldwide acquisition, which was their first major US logistics operation acquisition focused primarily on LTL. This deal trend was also exemplified by Lineage Logistics, which completed 39 acquisitions in 2020 in response to the impact from COVID-19 and the unpredictable surges in demand and impact to the cold chain.
These market trends led to one of the 3PL’s strongest M&A years in recent times in both volume and value. With companies seeking to solidify and enhance their market positions, historically low interest rates, reduced economic uncertainty, and an M&A landscape populated by capital-rich buyers, Westbury believes that the strong M&A environment will continue in 2021 and could even set new records. During the 2008-09 global financial crisis, companies that made significant acquisitions during the downturn outperformed those that did not. We believe that judicious 3PL acquisitions made in 2021 will yield similar benefits. Strong companies selling in this environment are likely to attract broad interest and command strong valuations.
About the Westbury Group
The Westbury Group is a FINRA-registered investment banking broker-dealer dedicated to providing exceptional financial and strategic advisory services for entrepreneurial middle market clients. Founded in 2003 and headquartered in Westport, Connecticut, Westbury’s bankers serve clients across the country. Westbury, which is a member of the International Corporate Finance Group (http://www.icfg.net/index.php), regularly works on cross-border transactions as well. Westbury’s finance professionals bring transactional and real-world operations experience to engagements in a broad range of industries, including logistics/transportation, technology/media/telecom, manufacturing, aerospace/ defense, healthcare and consumer/food/retail. Drawing on this experience, teams assist clients with mergers, acquisitions, raising debt and equity capital, IPO advisory services, fairness opinions, valuations, and strategic counsel. The Company works on transactions ranging from $20 million to $300+ million. www.westburygroup.com