Armstrong data points to record-breaking 2021 3PL revenues

The trio of strong consumer demand, ongoing supply chain bottlenecks, and tight carrier capacity worked in tandem to drive air, ground, and ocean transportation rates to all-time highs in 2021, with shippers turning to third-party logistics (3PL) services providers on various fronts, including inventory replenishment and avoiding stock outs, according to a new report recently issued by Milwaukee-based supply chain consultancy Armstrong & Associates.

The report, entitled “A Roaring 2021: Demand Drives 3PLs to the Best Growth and M&A Year on Record—Latest Third-Party Logistics Market Results and Predictions for 2022,” estimated that 2021 gross net revenues for the U.S. 3PL market increased 48.1% annually, to $342.9 billion. As for 2021 net revenues, which is comprised of gross revenues less purchased transportation, there was an annual increase of 27.8%, to $119.4 billion, which the report explained is a reflection of gross margin compression due to a volatile carrier sourcing market, as well as transportation management 3PLs needing to spend more in a tight-capacity market.

What’s more, Armstrong said that 2021 saw the fastest rate of annual growth, going back to when it first started estimating market size in 1995, with the caveat that that 3PL market segment growth was viewed as uneven.

Individual market segments for 2021 in the report showed:

  • Dedicated Contract Carriage (DCC) revenue increased 15.3% to $23.1 billion, and net revenue increased 14.7% to $23 billion, with 3PLs with freight brokerages that can handle “overflow” business from DCC operations doing well;
  • Domestic Transportation Management (DTM) gross revenues, which include freight brokerage, rose 52.9% annually, to $139 billion, with net revenue up 50.2% to $19.8 billion buoyed by strong demand and volatility and motor carrier capacity increasing spot market rates;
  • International Transportation Management (ITM), which includes air and ocean freight forwarding, customs brokerage, and complementary value-added services, was the true 2021 pacesetter, with revenues up 74.9%, a tally the report said was “unheard-of,” to $122.4 billion, and a 44.6% net revenue gain to $35.6 billion; and
  • Value-Added Warehousing and Distribution (VAWD) gross revenue saw a 17% increase to $54.6 billion, with net revenue up 15.2%, to $41.1 billion, paced by most VAWD 3PLs having full warehouses and participating, to some extent, in rapid e-commerce fulfillment growth

On a global basis, the report noted that 2021 global 3PL revenues came in at $1.4 trillion, for a 41.8% annual gain, well above the 7.7% gain, from 2019 to 2020, and paced by a 60.8% annual gain for ITM.

In an interview, Armstrong & Associates President Evan Armstrong said that 2021 3PL activity served as a continuation of 2020.

“Demand came back and we did not have enough carrier capacity, everything was super tight,” he said. “As the year went on, warehouses were trying to replenish inventory, but it was always a challenge. There was a ton of inventory flowing through the warehouses, which is good for warehousing 3PLs as well. On the international side, there was tight ocean capacity, and there were a number of shutdowns, which was inhibiting what could be done from a labor standpoint, and rates went through the roof. Supply and demand happened, and 3PLs were the beneficiary of a lot of inflation.”

Addressing the very strong 2021 ITM performance, Armstrong said that with ocean carrier capacity being so tight, there were freight forwarders whom had never previously chartered an ocean vessel before that started to do so, as well as on the air cargo side, too, doing whatever was needed to secure capacity as an option.

“3PLs responded and got inventory back in stock, and inventory levels are much better, with things getting closer to equilibrium, he said. “It will still be a pretty good growth year in 2022 but not quite like last year.”

As for the things holding 2022 back from 2021 revenues, include current challenges such as inflation, oil and gas prices, and labor and employee retention issues.

And Armstrong added that while U.S. businesses are currently holding up, it would be nice if something was done on import duties and reducing tariffs, which he said would help bring prices down.

“Capacity still has its challenges, because of what is going on with China, the nation’s largest export market, which has its issues, as does the situation in Ukraine, and other global issues,” he said.

Even with these challenges, Armstrong expects the ITM market to grow 22.1% in 2022, to $149.5 billion in gross revenues.

For the DTM market, Armstrong said 2021 was a byproduct of rates being forced up high, with demand trending down to what would be considered more normal levels.

“In terms of rates coming down, it is more of a step process as shippers renegotiate contract rates,” he said. “Going into 2023, we expect rates to come down a little more as long as there is supply there. They are only going to decrease so much, though, as long as the price of fuel is still up. That gets reflected in the rates, too. There will probably be some growth in DTM next year, even as rates come down. Part of that is also the annual increase in demand for 3PL services by shippers who are continually outsourcing functions.”

That is what he called an underlying tailwind, which has been intact for more than 20 years and still continues and is driving the growth in DTM, VAWD, and DCC.

“We still have a driver shortage and a people shortage, in which you just cannot find enough people to hire nowadays, especially in freight brokerage operations, where there has been so much demand,” he said. “It is an area that tends to have a fair amount of turnover, depending on the company. That is why a lot of DTM companies and freight brokers are trying to automate as much as they can. We are seeing more of that on the freight brokerage side, especially for spot market truckload.”

On the VAWD side, Armstrong said that segment is in a pretty good position, as consumer spending has held up amid inflation and high gas prices.

But that comes with the caveat that if there is a slump and consumer spending trends down, warehousing firms will have fewer turns and will not earn as much in handling fees akin to the last couple of years.

“In terms of storage costs, they make money if stuff sits or if it moves,” he said. “You really want it to move in a predictable fashion, but either way the warehousing space is going to be pretty attractive over the next few years. And if you have modern cold storage space, that area is so tight. A lot of those warehouses around the cold chain are very old and inefficient, which has led to companies like Americold and Lineage being very acquisitive and acquiring a lot of the competition and regional players to concentrate that market. It makes sense from a supply side, as supply is tight, and it seems like there are fewer cold chain providers every day.”

For shippers that have not turned to 3PLs for help in smoothing out their supply chain operations, Armstrong explained the last few years have really served as a wake-up call, with more and more shippers realizing they have to communicate very well with the 3PLs they are working with, especially if they are collaborating on a true strategic basis, for things like sharing production plans and forecasts.

“That includes the whole demand planning side, as well as the pure technical execution side, too,” he said. “Hopefully, that does not change; it has been a good message,” he said. “Overall, for shippers, we are going to see rates on the domestic side come off of where they have been. I would not expect them to go back to where they were in 2019 by any means, especially with high fuel and the driver shortage.”

For international, he said things are expected to remain tight, with rates likely heading down into 2023, given China’s ongoing pandemic issues, coupled with its declining economic outlook, which could lead to a lot of variability in operations and scheduling, while also keeping rates from falling too far.  

Along with the aforementioned ITM 2022 estimate of 22.1% growth, to $149.5 billion, Armstrong’s other 2022 segment estimates included: DTM up 25.6%, to $174.6 billion; DCC up 19.1%, to $27.5 billion; and VAWD up 14.4%, to $62.5 billion. Total 2022 gross revenue was pegged at $418.1 billion, for a 21.9% annual gain.


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