Q&A: Mark Manduca, GXO Logistics Chief Investment Officer

As reported in LM on August 2, the long-awaited spin-off of GXO Logistics from Greenwich, Conn.-based freight transportation services provider XPO Logistics was made official, and the GXO stock officially began trading on the New York Stock Exchange. LM Group News Editor Jeff Berman had an opportunity to speak with GXO Logistics Chief Investment Officer Mark Manduca about the formal rollout of GXO, while Manduca was on the floor of the NYSE. Their conversation follows below. 

Logistics Management (LM): Now that things are official and GXO Logistics is officially a standalone company, where do things go from here now that the vision has become a reality?

Mark Manduca: There is this massive opportunity for us to really distinguish GXO Logistics as the unicorn in this space. For me, when I think about this business, I think about the amount of market share opportunity there is. As the pure play market leader, we handle 5% of market share. The market should not be as fragmented as it is, and, therefore, there is the opportunity to take market share from smaller players, and also to take market share inorganically through M&A. That really stirs in my mind on a regular basis. We think the next decade is going to be about consolidation in this industry. You can be one of the top two or three players and do exceptionally well, but I think there is going to be gravitation towards scale in this sector.

LM: In its early years, XPO really did a great job at growing through acquisition. Can you please provide some examples of the types of acquisitions GXO may be looking at in the future?

Manduca: First, we are looking to create shareholder value. How do we do that? We do that by trying to please, serve, and delight our customers. That is at the heart of what we do. If we think about inorganic growth in our industry, it is very simple. You want to go to places where you are good at it and not to places where you are bad at. It is all about making sure you have a focus on places where you can exploit your expertise. Where is our expertise? We are good at so many different verticals, and we have a consumer backbone. That backbone is underpinned by what we do in e-commerce. E-commerce makes up about 40% of our revenues, and we have a number of different unique strengths.

LM: What are some of those strengths?

Manduca: I would say that our reverse logistics network operations—and the way we please our customers in that regard—is a huge customer offering. One out of three items returned is at the cornerstone of the reverse logistics market. It is really a headache for customers. Anyone managing it in-house…of the $430 billion that exists for the addressable market, $130 billion is outsourced, with $300 billion still in-house. For that $300 billion, when you have to manage reverse logistics and one in three items coming back, it is a headache and you are pulling your hair out. The opportunity here is very simple. If you want to grow inorganically, you do two things. You always focus on where you are good at. That is e-commerce in Europe and North America, and within those markets if you wanted to maybe explore selected gaps and not just explore your strengths, Germany would probably be an area where there is potential and room to grow. Maybe that is organically or inorganically; it is definitely a market where we want to be bigger.  

LM: In a recent interview with GXO Logistics CEO Malcolm Wilson, he talked about warehouse automation, the ability to meet customers’ expectations, the importance of fulfillment, and other related things. What are the next steps in that regard, as to how GXO is looking to build things out?

Manduca: I think we are the leader in that field really. As an example, the Dickensian warehouse of old, going back 30 or 40 years, what you would have had is a fully unautomated warehouse, pretty much filled with old racking systems and boxes. Now, we are in a period of the warehouse of the future, and what has happened is, whereas today it is one out of three items being returned, back in the day, it was one out of ten. There was not that imminent desire to effectively outsource to a 3PL. You did not need the help as readily as you need it today. So, we are the “White Knight” in this space, in that we come in and integrate with you. We are a reputable partner and protect your reputation and what we will do is we will act as if we are your brand, and that is our dedicated service offering. This is 900 warehouses and 900 warehouses only. This is our sole and unconflicted focus. When you think about our business, what we are looking to do is automate where automation is required. About 30% of our warehouses in Europe are automated to some degree, and if you put that into context, are more around 5% of the industry level to automate their warehouses. When you get that first mover advantage and when you show the experience with one customer who is a first-time outsourcer, or someone who has outsourced the first two contracts, what you inevitably get is a flywheel. Because not only do you have the switching costs associated with being with one partner as a customer, the customer comes to you and sees how well you do reverse logistics, sees your scale and technology and your bargaining power with labor and real estate, it sees that flywheel action, and you are very rarely going to go elsewhere. So being able to display the robots, the co-bots, and labor activity tools is such an important process for us, but it is so much more important to be first at it as well and to do it well. There are two things there, we are leading and first, and we have some of the most amazing labor productivity tools and robotic automation within our networks, and that is just driving this J-curve in growth for our business, because customers are enjoying it and coming back and coming back again. It is like a never-ending buffet.

LM: How are you viewing the 2021 Peak Season, given that things have changed so much over the last year?

Manduca: If you think about annual growth for our business, we are probably growing at around 30% this year, with next year expected to be around 20%. So…there is something secular going on here, and I am not sure Peak is a part of that. You see the early signs of peak sometimes around mid-summer, so we have already hit that “get ready” period so to speak. We are very upbeat as we head into Black Friday and Christmas and think it is going to be a bumper year, with significant year-over-year growth. And I doubt that all this talk of move forward volume and some type of slowdown is imminent. If anything, we are seeing an acceleration, not only in the number of customers we are winning and the desire to work with more throughput through our warehouses. We are extremely excited about not just the cyclical and not just the seasonal, but the secular growth opportunity going forward.  

LM: How are your customers viewing the launch of GXO Logistics?

Manduca: Customers are excited and some joined us [yesterday] at the NYSE. It is that kind of integrated relationship we have with them and are very much managing their reputation and 100% of their revenues. We are the last people to touch their product in the warehouse before it arrives at the consumer’s door. And, in so many ways, we view ourselves as part of them, and they are very proud for what was achieved today [on the NYSE]. And when it comes to how we think about our customers reacting, I think it is a force for good, quite frankly. People will see us as the largest dedicated service provider, or the largest pure play. We focus on this and only this. Having that dedicated and unconflicted partnership, where they know they can rely on us, is a rare breed type of asset that I think has been created here.

LM: What is GXO’s outlook for IT spend?

Manduca: It is very important for us. In the past, we spent around roughly half, or a little more, of our capex on all things’ automation and labor productivity tools. It is a significant portion of our capex. We are guiding this year for around $230-to-$250 million, with around two-thirds of that being spent on growth going forward, and one-third on maintenance. Our business is very much growth-focused and very much tilted towards really leading and investing in automation for our warehouses. It is what we do.

LM: When the many challenges facing the global supply chain get worked through, what will that mean from a service perspective?

Manduca: We have many customers struggling with the broader supply chain problems, while we are focusing on what is inside the box. What goes on outside the box is beyond our control and clearly what is happening at the moment across our ports, containers, driver shortages, inflation, and, to a certain degree, with demand for warehouses in the last mile causing price inflation and vacancy rates to fall. There are a few things out there that are clearly stirring and upsetting and obsessing for so many involved in global supply chains. What we are seeing is, to be clear, is that customers are coming to us as a direct result of all these negatives that exist in the market. It only increases from our vantage point. For the scalable types of providers like ours, it really comes to the foreground in times of trial and tribulation like we are seeing at the moment. It is a force, in many ways, to drive that outsourcing…which is going to grow significantly in the coming years. It is definitely creating a catalyst for people to make that outsourcing decision. One thing that has changed is buying power. If you think about the patterns of distribution in the market right now, there has been a secular tilt towards more e-commerce consumption. Will people every go back to buying what they did on a percentage basis in a store? I say no. When it comes to flying patterns, there are obviously far fewer planes in the air from a passenger perspective, while half of the world’s cargo travels within the belly of passenger planes. But with fewer passenger planes flying and less corporate demand for flights, then logically that output is going to result in pricing for airfreight going up and people moving from airfreight to container shipping, which is helping to cause this logjam. The question for people then is “when are you going to return to the cinema and start flying again?” When that happens, you will start removing this logjam that exists in the system.

LM: What will that mean from a global supply chain perspective?

Manduca: It will be very good for the global supply chain, as it will alleviate some of the pressures that exist at the moment. But it does not change the underlying trend, which is the desire and need for third-party logistics providers to provide help to customers whose lives have become more complex, due to things related to reverse logistics and other things at the macrolevel. We are in the right place, at the right time, and in the right vertical.