Armstrong report presents positive outlook for U.S. 3PL market

A combination of strong market conditions, coupled with positive economic fundamentals helped pave the way for a strong 2017 for the United States third-party logistics (3PL) market, according to a recent report issued by Milwaukee-based supply chain consulting firm Armstrong & Associates.

The report, entitled “Bulls Lead: Third-Party Logistics Market Results and Trends for 2018,” estimated that 2017 net revenues for the U.S. 3PL market rose 5% to $77.1 billion, with gross revenues up 10.5% to $184.3 million. The gain in net revenues continues a pattern of single-digit annual growth.

Individual market segments for 2017 in the report showed: 

• Dedicated Contract Carriage (DCC) revenue increased 10.2%, well above its compound annual growth rate of 7% going back to 1995 and driven largely by tight over the road capacity and increasing rates;
• Domestic Transportation Management gross revenues were up 16% annually at $71.7 billion with net revenues up 6.4% to $10.9 billion, with Armstrong saying the difference in growth rates reflecting some gross margin compression related to the rapid rate of truckload capacity tightening in the third and fourth quarters of 2017 that required freight brokers to pay rate increases to carriers more quickly than they can negotiate increases with shippers;
• International Transportation Management (ITM) 2017 gross revenues were up 10.5% and paced by tight air freight capacity and, global e-commerce growth and economic strength, with net revenues, which Armstrong said were impacted by capacity pressure, up 4.3%; and
• Value-Added Warehousing and Distribution (VAWD) gross revenue and net revenue each up 2.5%, respectively, with margins impacted by tight warehouse capacity, with the segment’s growth rates in line with roughly 60% of U.S. GDP

Armstrong & Associates Chairman Dick Armstrong said in an interview that 2018 should be a continuation of 2017, with growth remaining intact.

“We think it is going to be a pretty good year, with the 2018 net revenue growth rate likely to come in around 5%, or around double GDP, and gross revenue should be closer to 10%,” he said. “It should be a good year overall.”

Looking at 2017, Armstrong said the U.S. 3PL DCC segment was the pacesetter, due in large part to tight over the road capacity, with a finite amount of drivers and trucks.

And he added that the 2017 10.2% increase in DCC revenues represents double the normal rate, observing there is no reason to expect that will not again be the case in 2018. But he cautioned that things could slow down by 2019, especially if there were to be a recession by then.

For both the DCC and DTM segments, many industry stakeholders continue to marvel at the elevated state of market conditions. Armstrong said that he likens the current state of affair to riding a nice wave.

“While DTM is doing well, the problem there is those providers still have to buy truck capacity, and companies like C.H. Robinson and down are having their gross margins squeezed because of the costs related to securing capacity,” he said. “But the segment is doing well overall, given the circumstances. There will not be higher margin growth until we get to a point where the capacity imbalance is corrected.

On the ITM side, while market conditions are largely solid, Armstrong said it is unlikely to see meaningful margin expansion from here, due to the fairly uncertain global trade environment.

“Our ITM exports have been good, but they could suffer due to what is happening,” he said. “ITM will be decent this year but not great, as the manipulations of the macro economy are not all that favorable.”

On a year-to-date basis for 2018, Armstrong said things are going “very well” for the U.S. 3PL market.