DEEPER DIVES: The Biggest Mistake Logistics Providers Are Making

Good Morning,

First, as always, thank you for joining.

While peak season has everyone’s attention, it won’t be that long before the reality of 2025 sets.

Retailers and service providers will be back to the drawing board to make the next year better than the last.

If you only start planning once the year starts, you’re going to lose months of opportunity.

Today I’m going to talk about the biggest trend I’m seeing in logistics right now.

Here’s what this issue brings:

• Billions are being put down to make sure that the infrastructure for tomorrow is ready for a massive shift in product diversity. Smaller providers will need to change their sales offer in order to stay in business
  

Why Competing on Price Alone Will Doom Regional Logistics Players

How often do you feel like people are focusing on the wrong things?

There’s not a day that goes by that I don’t see an article, a post or a podcast talking about the “poor” performance or issues by the major service providers.

The inference is that they are failing and that there is a massive opportunity in the market for smaller upstarts to take a huge piece of the pie.

While there is opportunity out there, it doesn’t feel like there’s enough discussion around the long game.

What got me thinking about this was a comment I saw from a GXO executive who was celebrating their recent financials.

Here’s the quote

And here’s the breakdown behind that quote related to their results:

Financial Performance

• Revenue: Record high of $3.2 billion, up 28% year over year, with a 3% organic growth​​.

• Net Income: $35 million, down from $68 million in Q3 2023.

• Diluted EPS: $0.28, a decrease from $0.55 in the previous year​.

• Adjusted EBITDA: Increased to $223 million from $200 million in Q3 2023​​.

• Adjusted Diluted EPS: $0.79, compared to $0.69 a year ago​​.

• Free Cash Flow: $110 million, lower than $191 million from the same quarter last year​.

• Operating Cash Flow: $198 million, compared to $243 million in Q3 2023​​.

But there were two things from the GXO report that caught my attention

1. Over 50% of new business wins were driven by e-fulfillment

2. Net debt stands at $2.2 billion, with a total debt-to-net income ratio of 25.0x and a net leverage ratio of 2.9x

This says to me that there is a lot of demand from retailers and brands to continue to grow their operational capabilities (but despite all of the new activity in the market, continue to seek out large established players).

And secondly, with net debt at $2.2 billion and a debt-to-net income ratio of 25.0x, GXO is highly leveraged. If market conditions slow down and revenue or volumes decrease, the company’s ability to generate cash flow could be significantly impacted.

Put simply, they have too much skin the game to simply sit back and allow shifting market dynamics to lure customers away.

And it’s not just them.

The major providers that everyone loves to hate all have doubled down on where the market is going.

$16.9 Billion

$52.7 Billion

$6.2 Billion

$5.3 Billion…

That’s how much money Walmart, Amazon, FedEx and UPS have invested in the capital expenditures (CAPEX) in the last year.

What’s also interesting are the return rates from these companies.

Depending on how it’s measured, it will usually fall from 3 to 10 years.

Again, this re-enforces the fact that they have committed to business decisions to invest in their infrastructure - not only looking at the current performance, but where they see the market going.

This is why the price war game is going to end badly for a lot of regional players who been able to scoop up volume and customers by undercutting the market.

Too many people have have too much money to lose to simply allow their revenue streams to be eroded.

(Check out this article that shows that the fight for customers and generating more revenue is heating up: UPS, FedEx Discounts Reach ‘Unprecedented’ Levels to Attract SMBs)

What are the Trends They are Investing In?

Commerce is changing.

It’s undergoing a rapid transformation in the face of unlimited consumer choice.

Here are the trends that will shape logistics over the next 3 years:

• Unified Commerce

• Social Commerce

• Cross Border eCommerce

• Revenue Contributing Operations

I’ll give you some background on each of those, but before jumping into what each of those is, it’s important to understand what impact they will have on logistics.

Those four business trends will have providers needing to manage massive amounts of data, very quickly / in real time and with very little error in order to execute to meet consumer expectations with a wildly broadened out product base.

Too many providers are making service offers that still rely on traditional ways that product flows through systems.

While the core concept of getting goods to make isn’t going to change, it’s the volume, mix and product density per location or distribution site that will.

Unified Commerce

Unified commerce platforms act as a central hub that connects all systems and channels.

Instead of having multiple systems communicating directly with each other, they all connect to this central platform.

Unlike traditional omnichannel approaches where data might by period or interval, unified commerce platforms provide real-time data updates across all connected systems in real-time.

By centralizing data management, unified commerce platforms create a “single source of truth” for all business operations, including inventory, customer data, and transactions.

The key difference from traditional omnichannel approaches is that instead of having multiple point-to-point integrations between different systems, unified commerce creates a centralized ecosystem where all systems connect to and communicate through a single platform.

The primary goal of this approach is to reduce the complexity and potential for errors that can occur in traditional omnichannel setups where information is moved between different systems directly.

Social Commerce

Social Commerce is the core of the attention economy. This model allows consumers to make direct purchases within social (media?) platforms.

What was initially thought of as a gimmick or fringe part of retailing has now turned into a multi-billion dollar opportunity and the number one way that brands are connecting with new customers and more deeply penetrating into their lives.

While most people might only be thinking about Tik Tok and Instagram, social commerce and curated consumer content is popping up everywhere. Major retailers like Walmart, Target, and Ulta Beauty are investing enormous amounts of money in social commerce to better connect with customers and increase sales.

As a result, “influencers” are now essential to the marketing strategy of many brands. Consider that Generation Z consumers are now 117% more likely to shop from influencers. With product recommendations and creating authentic connections with their audiences, influencers have become key touchpoints in the customer journey.

From a logistics perspective, this creator economy is going to significantly increase the complexity of handling and moving product efficiently.

3PLs already often struggle with their customer forecasts and swings in order volume. Those that have supported the early adopters of social commerce are regularly sharing the impact of these influencer and viral video sales.

I’ve been working with multiple providers over the last year. I can tell you that most warehouses processes, and pretty much all WMS systems are not ready for the speed at which new inventory will need to work through they system.

There isn’t enough expertise or thought when it comes to naming customer products, creating skus, setting up structures in the data to quickly find and segment information.

From a system side, the actual product and customer creation is often a cumbersome and multi-step process.

One of the major areas of tension between information and execution in an operations world is data and transaction management.

The better the system and the more accurate it can track, the more information and input it needs (ever hear someone tell you about how many inputs are needed in a large scale SAP system?).

From a transportation and delivery side, it will also mean a number of changes when it comes to tracking, tracing and handling product.

With more product comes a need for more variability. The ability to handle more labels, to provide real time updates with every touch and the ability to handle a wide range of data types and retailer / customer data in order to accurately update their systems.

In addition, connected systems will further increase the expectation that providers will be able to support changes in consumer information and make adjustments on the fly when it comes to fulfillment.

Not being able to change an address or update a delivery instruction isn’t going to cut it anymore.

The pressure for first time right will be paramount.

The reason that expectations will rise is a natural extension of an economy that becomes more about experience and the connection to a community versus simple transactions.

Think of it this way.

Everyone is going to want anything they can that will help them stand out. Just look at YouTube and Tik Tok.

No one wants to be average. No one wants to be ordinary or unremarkable. And if you are competing against everyone, retailers and brands will want any advantage they can in order to capture more sales.

Cross Border eCommerce

E-commerce continues to dominate China's air cargo export market and absorbing capacity to Europe and the US.

The overall market in 2024 has seen decent growth in general cargo (3%), complemented by a heavy surge in e-commerce business driven by new Chinese market entrants (Shein, Temu).

Total demand, measured in cargo tonne-kilometers (CTKs), rose by 9.4% in September 2024 compared to September 2023, marking the 14th consecutive month of growth. Capacity on the other hand (measured in available cargo tonne-kilometers ACTKs), increased by 6.4% in the same period.

The Asia-North America lane reported 7.6% demand growth with a 25% share and 11 consecutive months of growth. Within Europe, there was 18% demand growth with a 1.9% share and 10 consecutive months of double-digit growth.

The eCommerce air cargo boom is expected to continue into 2025 and beyond, driven by increasing online shopping and further digitalization in the logistics space. With Amazon and Walmart support more direct import business, and a plethora of service providers that are looking to differentiate themselves from domestic regionals, the need to be able to process items quickly from anywhere is a key value driver for securing more business.

Additional, the focus of unified commerce systems that are tearing down the ways between systems and geographies will continue to fuel retailer and brand expectations for full end-to-end services.

Revenue Contributing Operations

All of this is to make clear one thing.

Being a service provider who’s value is simply on executing the basic transactions is coming to an end.

If you stay positioned as only a cost center, the only way you will be able to stay alive is by continuing to lower prices to get attention.

But the problem with that, is that you can only cut so far.

At some point, there’s a floor that you can’t go lower.

This is why the biggest and most important work that I’m doing these days with my clients is helping them create more value.

The reality is that you are a far better partner when you can find ways to leverage your operations and execution to help brands sell more product - or (and maybe more importantly) get more attention from consumers.

This means that you are going to have to take more complexity.

That you will need to be willing to do more and support rapidly changing sales and marketing needs.

The question for you to leave today with - what are you doing with your business to make sure that you are in a position to do more for your customers tomorrow, than you do today?

That’s it for this week. Thanks for being here.