2022 U.S. 3PL revenues see strong gains, notes Armstrong report

Amid a fair amount of economic uncertainty heading into 2022, United States third-party logistics (3PL) net revenues were very strong. That was a key theme of a new report issued this week by Brookfield, Wisc. -based supply chain consultancy Armstrong & Associates.

The report, entitled “Transition—Soft Landing at a New Level: Latest Third-Party Logistics Market Results and Predictions for 2023,” stated that U.S. 3PL Market net revenues, which Armstrong defines as gross revenues less purchased transportation, saw a 24% annual increase to $148.1 billion, with overall gross revenues seeing an 18.3% annual increase, with total U.S. 3PL Market revenue coming in at $405.5 billion, for 2022.

Despite the strong growth rate, Armstrong said that the 24% annual revenue increase was essentially half of 2021’s 48.1% increase, adding that 2022 marked the fourth-best growth year on average, going back to when Armstrong started collecting this data in 1995. 2000 and 2010 marked the second and third best growth years, with annual increases of 22.9% and 19%, respectively.

In the report, Armstrong described 2022 as a “very good growth year” for the U.S. 3PL market, which was supported by the continued burgeoning inventories built up from the pandemic-related supply chain disruptions, coupled with 3PLs being able to efficiently decrease purchased transportation costs to carriers and also holding off significant price concessions to shippers.

“Domestic transportation demand remained tight in the first half of the year and then shipper demand and transportation rates started to trend down from the third quarter of 2022 into the first half of 2023 as shippers decreased imports and worked to draw down on-hand warehouse inventories,” said the Armstrong report. “The 3PL market is currently beginning to normalize to pre-COVID conditions. Economic negativity is waning as consumer spending in a tight labor market continues to provide tailwinds and overall inflation is declining partially due to more stable supply chains. Furthermore, it seems like the freight recession is coming to an end with spot truckload rates increasing as we move into holiday season. Shippers are now focused locking in good transportation rates and planning for 2024.”

Looking at the specific 3PL segments it tracks, which comprise the U.S. 3PL market, Armstrong said that domestic transportation management (DTM), which is made up of freight brokerage and managed transportation services, saw net revenue growth head up 33.8%, to $26.4 billion, with overall gross revenue up 14.4%, to $159 billion. Armstrong said this increase was paced by shippers continuing to pay contracted or agreed to rates to 3PLs, with 3PLs paying less for spot market truckload carrier capacity.

International Transportation Management (ITM) 2022 net revenue—at $42.6 billion—saw a 19.7% annual increase, with gross revenue—at $146.0 billion—up 19.3%, well below the 74.9% and 44.6% gains, for 2021 net and gross revenues, respectively, which was heavily spurred on by pandemic-related demand from shippers focusing on replenishing inventories to meet heavy consumer demand.

In addressing the ITM market, Armstrong said that things have seen a major swing, with a sharp decline in ocean freight rates, from Asia to the U.S., dropping to pre-pandemic levels, with ocean shipping and domestic transportation rates starting to “disinflate” in the third quarter of 2022, as consumer demand lessened and supply chain operations started to stabilize.

2022 Dedicated Contract Carriage net revenue saw a 27.4% annual increase, to $29.2 billion, with gross revenue up 27.7%, to $29.5 billion. Armstrong said that this asset-heavy 3PL segment’s growth was led by shippers looking to lock in capacity, following a “turbulent” 2021, as well as carriers drawing in driver candidates through wage increases and better recruiting, and capital used to invest in equipment.

Value-Added Warehousing & Distribution (VAWD) 2022 net revenue rose 21.1%, to $49.8 billion, and gross revenue headed up 22.7%, to $67.0 billion.  

Armstrong explained that the majority of VAWD 3PLs warehouses were full last year and were pressed to find additional space, coupled with warehousing inventory space heading up 10%, to 2.6 billion square-feet. What’s more, it noted that 2022 was the first year in which multi-client warehouse space, which made up 54% of U.S. warehouse space, topped dedicated space, and was paced by e-commerce fulfillment growth.

Armstrong & Associates President Evan Armstrong told LM in an interview that 2022 exceeded expectations.

“A lot of that was because everybody was talking about how things were going to fall apart over the second half of 2022, but it never did,” he said. “And then we got into 2023, and things kind of fell apart…because shippers just quit importing goods and worked to get their inventories down. There was also the freight recession, too, but it now looks like we are coming out of it. That really clobbered the freight forwarders like the ITM 3PLs, and consumer demand was a little lighter. On the domestic side, inbound transportation suffered, and rates kept going down, and bottomed out in June, and now we are kind of back on an upswing.”

When asked how the rest of 2023 may play out for the U.S. 3PL market, Armstrong said that he expects more normal growth going into the later part of the year, with rates transitioning back to a new kind of higher level, in terms of transportation costs. And warehousing has held firm, he said, because it looks like shippers are starting to replenish inventory and getting back to more normal operations on the warehousing side.

Even though 2022 revenue growth was essentially half of 2021’s, Armstrong said that in no way diminishes the value of shippers outsourcing logistics operations to 3PLs.

“There is still a lot of cost savings from outsourcing, but I think a lot of shippers are more interested in what their 3PL relationships look like,” he said. “They want to make sure they are covered if things do pick up on the demand side and they need more capacity, both in terms of transportation and warehousing. That's kind of why we've seen some of the pricing settle at a higher level than before the pandemic. But it's really about flexible supply chains and wanting to make sure you're covered in case something happens. People still recall what they went through during the pandemic.”

For 2023, the Armstrong report pegged U.S. 3PL net revenues to be down 5.1% annually, to $140.6 billion, with gross revenue down 18.0%, to $328.3 billion. DTM net revenue is estimated to be down 17.7%, to $21.8 billion, and ITM revenue is estimated to be down 25.2% annually, to $31.8 billion, with DCC and VAWD, each expected to be up 10%, at $32.2 billion, and $140.6 billion, respectively.