Signals and Noise: What M&A Activity Means for Logistics Firms and why Footprint Matters.


Amazon, Wal-mart, XPO logistics, and other companies are actively growing and capturing market share through acquisition–which seems to dominate the headlines these days.

However, I’m doing my best not to give in by simply following the trends.

Mark Twain said, “Whenever you find yourself on the side of the majority, it is time to pause and reflect.

Like Mr. Twain and Nate Silver, I want to find the signal in the noise. I’ll hit you with some facts first and then attempt to tie it all together where I think the rubber meets the road for logistics firms in the US.

Here are some facts and figures to consider:

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  1. Sectors for distribution services and transportation have seen the largest increases in M&A activity over the last three (3) months compared to all other business sectors.
  2. M&A activity among logistics firms has been on the rise since 2014. In the short term, a rise in activity has been known to cause unsteadiness and rate fluctuation for transportation costs.
  3. Space availability in the US hit a historic low (8.2%) at the end of 2016.
  4. Warehouse operator profit margins continue to hover between 3 and 6 percent despite increasing labor costs and customer demands for enhanced technology; capital investment.
  5. Costs are high for shippers to re-purpose infrastructure to meet e-fulfillment demand.
    • Subsequently online retailers, shippers and logistics firms with scalable niche processes have become prime targets for acquisition.
    • Amazon and Whole Foods, Wal-Mart and Jet.com are good examples.  You also have logistics providers like XPO Logistics who have acquired 17 companies since 2012 (Con-way as the most recent).
  6. It is better to buy a company with a footprint that serves your strategy than try to recreate it.
    • If you read my very first post Innovate or Die… I illustrated that Amazon’s real estate footprint pales in comparison to the massive footprint of Wal-Mart, Target, DSW etc… and has a huge incentive to get out ahead of companies with a larger real estate footprint.  The Whole Foods acquisition is a key strategic move to keep Amazon at a distance from larger omnichannel retailers.
    • The Swift-Knight Merger is also a good example of companies leveraging their footprints to cover more ground.
  7. M&A/Alliance activity between established companies and tech firms is also on the rise (i.e. Unilever and Convoy).  This serves as a win/win for both groups since the large company can take advantage of the startup’s speed and flexibility; startup gains access to more capital and a network of resources that were once considered unavailable.

What does this mean for 3PLs from a real estate perspective?

As space availability continues to tighten up in second and third tier markets, rental rates will increase and I expect you will see logistics companies with a large owned footprint dominate bids for logistics contracts until there is a downward shift in the market.

Shipping is our business and business is good!

The 3PL industry is saturated with smaller mom and pop companies that lack the ability or desire to scale up or facilitate enhanced warehouse operations in order to meet customer demands.

Until the market loosens up, you will continue to see a consolidation among logistics firms.  Mom and pop operations will be acquired by mid-size 3PLs and those same mid-size 3PLs will continue to be gobbled up by larger firms.

Makes me think about a quote from Mad Max, Beyond ThunderdomeTwo men enter, one man leaves. But I digress.

Large real estate investment trusts (REITs) will sometimes buy vacant properties, forego certain opportunities and leave properties dark for long periods of time until they can get the right tenant or achieve the return they are looking for.

Unlike smaller portfolios, income streams from large asset volume allows the larger REITs to more easily survive a downturn and cover their nut.

Two businessmen looking at city scape

The 3PL world works in a similar fashion.  Companies like XPO, Geodis, Knight-Swift have the capital, footprint and horsepower that allows them to buy up companies in order to turn a profit on the assets when the market is right. It could also allow them to subsidise rental rates in markets where space is limited so they can capture/retain customer contracts.

Small and mid-size 3PLs have much less room for error.  Many small to mid-size 3PLs are beginning to focus on servicing specific industries or niche products which allows them to compete more effectively.

Additionally, as family owned logistics firms transition from the boomer generation, new leadership will be tempted to sell out when valuation is high to larger conglomerates/competitors.

Mid-size companies like Smart Warehousing (Kansas City) and Murphy Warehouse Company (Minneapolis) are consistently targeting acquisition of smaller firms with strong real estate assets that serve to strengthen their position.

Thanks for reading!


Resources:

  1. http://www.hydeparkcapital.com/wp-content/uploads/2016/04/Transportation-and-Logisitcs-March-2016.pdf
  2. https://www.factset.com/mergerstat_em/monthly/US_Flashwire_Monthly.pdf
  3. https://www.pwc.com/us/en/industry/transportation-logistics/publications/quarterly-deals-insights.html
  4. http://www.supplychaindive.com/news/XPO-merger-acquisition-target-Europe-North-America/445309/
  5. http://www.overdriveonline.com/analyst-swift-knight-merger-will-have-little-effect-on-driver-force-operations/
  6. https://www.forbes.com/sites/patrickwwatson/2017/07/05/the-whole-foods-and-amazon-merger-is-a-sign-of-the-major-trend-every-investor-should-be-aware-of/#1d74a5502673

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