Shipping & Logistics 2021 – General Industry Overview
The Shipping and Logistics industry is in the mature phase of its life cycle, but will continue to grow in the coming years as the global economy expands further. According to IBISWorld, the industry is expected to increase at an annualized rate of 4.3% through 2025 (3PL), following a steep decline in 2020.
As a whole, the industry has displayed a concerted effort to improve operating efficiencies, and made acquisition and consolidation of smaller players the primary driver of growth.
In recent years, the trend of consolidation has increased due in large part to increasing external competition. As companies and individuals grow accustomed to on-demand culture, shipping and logistics firms are facing ever-growing pressure from customers to deliver high-quality goods and better services at lower costs to themselves and the environment.
Though the industry is currently encountering increased competition from new market entrants who use similar business models, the sector has experienced even greater pressure from vertical integration of the very firms that supply its demand: the manufacturing, wholesale, retail, and warehousing segments. It will continue to do so.
Increasingly, many customers are asking suppliers and manufacturers to deliver products only when needed: reducing on-hand inventory and freeing up capital to invest elsewhere. For both 3PL and vertically integrated operations, technological innovation has played a crucial role in developing competitive business strategies.
Recent surges in e-commerce sales have compelled an increase in demand for items that must be warehoused, packed, and delivered efficiently. As such, larger firms within the industry have sought to acquire tech start-ups that increase their technological advantage and cost efficiencies in the marketplace.
Suppliers and manufacturers must create or implement logistics software tools to optimize daily activities and handle the routing and storage of inventory to meet each customer’s delivery requirements.
Risks
According to major shipping and logistics firms, the main industry-specific risks are: general economic conditions, changing commodity prices, the capital-intensive nature of existing business models, increasing competition, changes in relationships with customers, and changes in technology.
General Economic Conditions & Changing Commodity Prices
The industry is particularly susceptible to changes in macro-economic market conditions. Demand for logistics services arises from the confidence and strength of clients’ businesses.
Because of this, shipping and logistics demand tends to wane before market contractions and experiences downward pressure for a short time after market recovery. Fuel prices are a major cost driver for the industry; the slightest changes in commodity prices can adversely affect each firm’s profitability.
Under the Biden administration, oil prices are expected to rise significantly due to structural underinvestment in oil and gas in favor of renewable energy. This will likely cut into companies’ profitability and constrain supply amid rising post-pandemic demand.
The slowing of growth in the Chinese economy, the Biden administration’s trade policy, and growing global pressure from customers and regulators to act on emissions will also affect the expansion and performance of the industry in coming years.
Capital-Intensive Business Models, Increasing Competition & Changing Customer Relationships
Many firms within the industry make significant investments into trailers, rental trucks, cargo ships, etc. These investment decisions are typically made based on short-term forecasts of customer demand.
These long-life investments can expose companies to economic and financial risks beyond their initial projections; an economic downturn or slowdowns can lead to significantly decreased profitability due to excess capacity and idle capital. As other retailers and firms have sought to vertically integrate logistics functions into their operations, traditional logistics firms who rely on a small number of customers might be forced to write down those investments.
Changes in Technology
When a company invests in new technologies, it risks the sinking of substantial resources into poor or immature technologies. Meanwhile, there is also a risk in postponing investments, causing a firm to miss opportunities to position itself advantageously in the market.
Tesla, Toyota, FedEx, and Ryder have all made investments in alternative-energy trucking solutions, and the USPS’s announced transition toward electric vehicles has the potential to change the face of the consumer-facing shipping industry.
Existing players will likely need to acquire or develop similar eco-friendly or cost-saving technologies in the near future in order to remain competitive.
Opportunities
The prime beneficiaries of the digitization and customer-centric trends of recent years are the firms who seek to gain market share through the purchase of smaller businesses, and who increase efficiency through the development or acquisition of tech start-ups.
The transition of companies toward providing vertically integrated logistics services has placed pressure on large industry players such as FedEx and US Xpress. These firms must increasingly expand their logistics offerings, leading to a continuation of expansion via acquisition.
Retailers and manufacturers looking to bring logistics in-house will need to acquire both the infrastructure and the technology to run processes efficiently. Both 3PL and in-house providers who use technology effectively to reduce costs via the automation of processes will succeed in tomorrow’s marketplace.
These firms need access to technological innovation to maintain a competitive edge. Sustainable innovations in technology could help firms manage their daily activities more efficiently, plan routes more effectively, win new customers, and reduce costs.
The shift toward sustainable energy poses a massive opportunity for early adopters to charge a premium, so they can increase their return on investment compared to those who wait.
As computing becomes more ubiquitous, companies will be able to realize economies of scale that result from the direct increase of computing power. Big data within the supply chain will create various opportunities; the gathering of data, analysis of existing information to solve problems, the ability to sense customer demand and respond quickly, developing proprietary IP, etc.
In 2017, market players increasingly turned to the utilization of blockchain to create such efficiencies. At its core, blockchain is a ledger technology that enables efficient and transparent exchange of data.
The early implementers of blockchain will be large companies with vertically integrated logistics operations that have a complex ecosystem to monitor interactions between various people and activities. A transparent ledger such as blockchain would improve an organization’s ability to track and trace shipments and serialize products.
The trends and risks within the shipping and logistics industry will foster a healthy M&A environment moving forward. In addition to traditional bolt-on acquisitions, 3PL and in-house providers need software companies that offer scalable platforms for crowd-sharing, technology routing, and smart warehousing solutions.
Investment banks that position themselves to provide advisory services designed to meet the industry’s need for consolidation and innovation are sure to do well.
Select Transactions
Kaden LeFevre contributed to this article.
Sources
- PricewaterhouseCoopers, Transportation & Logistics PwC, https://www.pwc.com/gx/en/industries/transportation-logistics.html (last visited Nov 9, 2017).
- IBISWorld, Freight Packing & Logistics Services in the US, http://clients1.ibisworld.com/reports/us/industry/default.aspx?entid=1211 (last visited Nov 9, 2017).
- Duff & Phelps, Freight & Logistics Industry: M&A Landscape, https://www.duffandphelps.com/assets/pdfs/publications/mergers-and-acquisitions/industry-insights/industrials/freight-and-logistics-industry-ma-landscape-june-2017.pdf (last visited Nov 9, 2017).
- Forbes, “Planes, Trains, Trucks and Ships”, https://www.forbes.com/sites/robinlewis/2016/04/01/planes-trains-trucks-and-ships/#73dd4b226d39 (last visited Nov 9, 2017).
- The Wall Street Journal, “Private Equity firms have a beef with tax bill but things could be worse”, https://www.wsj.com/articles/private-equity-firms-have-a-beef-with-tax-billbut-things-could-be-worse-1509701403 (last visited Nov 9, 2017).
- SEC, UPS 10k, https://www.sec.gov/Archives/edgar/data/1090727/000109072717000011/ups-12312016x10k.htm (last visited Nov 9, 2017).
- SEC, Ryder 10K, https://www.sec.gov/Archives/edgar/data/1166003/000162828017001912/xpo201610-k.htm#sBA91B005231052C28ECB886E809ED00E (last visited Nov 9, 2017).
- Bloomberg, “Amazon is Building Global Delivery Business to Take on Alibaba”, https://www.bloomberg.com/news/articles/2016-02-09/amazon-is-building-global-delivery-business-to-take-on-alibaba-ikfhpyes (last visited Nov 9, 2017).
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