Global News Journal of Commerce Rankings: 3PLs struggle with post-pandemic sugar high

A year of muted cargo demand, especially relative to the historic highs of the pandemic, translated into sales struggles in 2023 for more than three-quarters of the world’s biggest third-party logistics providers (3PLs).

Only nine of the Journal of Commerce’s Top 40 3PLs grew revenue in 2023, as clear a sign as any that demand and rate levels came crashing back to Earth last year. The impacts of the Red Sea crisis, which emerged in the second half of December, came far too late to rescue any growth ambitions for most logistics companies.

Of the 31 that saw revenue decline in 2023, all but five saw it drop by at least 10%. And of the remaining 26, 16 saw revenue decline by more than 20%. Nine 3PLs saw revenue fall by more than 30%, including three of the top five, while three companies experienced a drop of more than 40%.

Another notable development was the fortunes of DB Schenker, which is in the midst of a sales process that analysts say could reach $20 billion. The German 3PL saw revenue decline 30.5% in 2023, but its profit was $1.2 billion, more than double its pre-pandemic profit in 2019.

In some ways, the overall declines in revenue for the world’s biggest 3PLs was no surprise, given the intense ramp up in revenue from 2020. Things couldn’t grow in that direction in perpetuity.

Kuehne+Nagel, the third largest 3PL on the list, is a case in point. The forwarder had 2020 revenue of $26.9 billion, which rose to $45.1 billion in 2022, a 67.7% increase in just two years. The company’s $29.7 billion turnover in 2023 was down 34.2% year over year but was more in line with the pre-pandemic trendline.

In light of the expected drop in revenue, Kuehne+Nagel CEO Stefan Paul, during the company’s March 1 earnings call, suggested that a key metric to judge the company was that its gross profit fell at half the rate of its revenue as the company focused on yield. It is also midway through a headcount reduction of 1,300 people globally.

“We see some stabilization of demand and we are well-positioned to maintain or expand our share of a recovering market,” Paul said. Pandemic-era volumes not ‘normal’ AKuehne+Nagel was hardly alone in navigating a testing market — one where absolute demand wasn’t exactly absent, but where managing shareholder and board expectations raised by the highly profitable pandemic years was always going to be a challenge.

“Many companies had pressure from boards, who saw the 2021 and 2022 volumes as normal, and they were not,” one 3PL CEO, who asked not to be identified, told the Journal of Commerce. “Volumes from all customers dropped, but we saw this most on the inbound from Asia. This was caused by the well-documented inventory issues in 2022 that meant bloated warehouses for most customers. We knew this was coming so no surprise really.”

The evergreen question of how 3PLs manage a downturn also came to the fore. Some view periods of weak demand and rates as a time to hunker down, get costs under control and survive until the next up cycle. Others see it as a time to expand market share by offering competitive — sometimes below market — rates that position them to have a larger customer base ahead of the next up cycle.

“Our strategy is simple: volume,” said an executive at another 3PL, who also did not want to be identified. “Volume over margin in a market where now many of the big boys are turning away from loss-making or low-margin business.”

The executive said in the 3PL business, “you can get volume, or you can get margin, but you can’t get both.”

“If you focus on margin, it is at the expense of volume,” the source said. “But if you focus on volume and you ‘work’ the business with strong negotiations, a tight operation and the right partners, eventually you get margin.”

Indeed, Kuehne+Nagel said in its earnings call that it is actively dropping cargo segments that don’t match its yield expectations, opening the door for other 3PLs seeking to grow volumes in the immediate term. ‘Buying business’ strategy not working Only four companies in the top 15 saw volumes increase — Amazon, CEVA Logistics, GXO and Rhenus Logistics. Collectively, those four companies grew revenue by $28.2 billion while the other 11 in the top 15 ceded $66.1 billion in revenue in 2023.

One 3PL source who did not want to be identified told the Journal of Commerce that’s symptomatic of a shift in pricing power in ocean freight.

“Something very interesting happened in the ocean freight forwarding market that I have not seen before,” the source said. “Rates plummeted, and most forwarders adopted the tactic of ‘buying business.’ Historically this has been successful as the forwarders gain market share and then go back and re-price the lanes higher.

“But this time it isn’t working,” the source added. “Customers seem to be savvier and more informed about economics, and the argument from ocean carriers that ‘you are not as big as Walmart so you have to pay more’ isn’t flying. Now most forwarders are seeing cash flow issues as they work through the surplus gained in 2021-2022 to offset losses.”

Indeed, Caitlin Murphy, CEO of Global Gateway Logistics, said that 2023 brought 3PLs and their customers back into a more normal range on rates, even if geopolitical events threatened to bring “turbulence” back into the market.

“BCOs [beneficial cargo owners] were able to gain back percentage points in margin they may have lost due to shipping cost inflation in the years prior,” Murphy said. “Overall, 2023 brought back some normalcy to a very chaotic market.”

Managing headcount during the year, meanwhile, was a problem for virtually all 3PLs in the top 40. While Flexport (not on the top 40 list) garnered the most headlines for its series of layoffs in 2023, most 3PLs quietly addressed headcount.

Expeditors, for instance, said it let staff go in each quarter on the way to a 45.5% decline in revenue.

“Despite reducing headcount in each quarter of 2023 and bringing costs down both sequentially and year over year, expenses are still high when compared to our efficiency target and we are working to bring expenses down further,” Expeditors CFO Bradley Powell said in a Feb. 20 statement accompanying the company’s full-year results. “Even though compensation, our largest and most variable expense, is 20% lower than the same quarter a year ago, just about everything else is more expensive. We are not as efficient as we need to be for the current environment of excess capacity, weak demand, soft rates and economic uncertainty.”

Journal of Commerce Top 40 Global Third-Party Logistics Providers (3PLs) Annual revenue, primarily from non-asset third-party logistics services, in millions of US dollars