U.S. 3PL revenues see significant annual declines, according to Armstrong report

Declines paced by two key third-party logistics (3PL) market segments led to annual 2023 United States 3PL revenue losses, according to a new report recently issued by Brookfield, Wisc. -based supply chain consultancy Armstrong & Associates.

The report, entitled “Divergence—Latest Third-Party Logistics Market Results and Outlook,” said that U.S. 3PL Market net revenues, which Armstrong defines as gross revenues less purchased transportation, fell 12.8%, from 2022 to 2023, to $129 billion, with overall gross revenues down 26.1% annually, and total U.S. 3PL Market revenue coming in at $299.5 billion, for 2023.

This annual decline is in stark contrast to recent years, with a 24% annual revenue increase in 2022 and a 48.1% gain in 2021, which is the highest annual growth rate since Armstrong started collecting this data in 1995, with 2000 and 2010 marked the second- and third-best growth years, with annual increases of 22.9% and 19%, respectively.

The report explained that the 3PL sector has not seen revenues at this level since prior to 2021, with 2021 representing the strongest. For 2023, in citing the report’s theme, Armstrong said there has been a divergence within the global 3PL market, with the sectors experiencing the biggest declines being non-asset-based international transportation management (ITM) and domestic transportation management (DTM) revenues falling from the surges seen during the pandemic to what it called the ongoing post-shutdown normalization. Conversely, it said that asset-based transportation, also known as Dedicated Contract Carriage (DCC) and Value-Added Warehousing and Distribution (VAWD) saw gains.

“Logistics costs (spends) and 3PL revenues increased extraordinarily during the 2020-2022 COVID-19 pandemic shutdown and post-shutdown periods,” the report observed. “With inventories rebuilt and severe COVID-19 cases waning, demand for 3PL services became more stable and manageable in the second half of 2022. Transportation rates began falling, and carrier capacity/supply normalized. The second half of 2022 was highlighted by tightening monetary policy through central banks’ quantitative tightening and increased interest rates to reduce demand and stave off long-term higher structural inflation. These anti-inflationary policies are ongoing. The negative impact on logistics costs and 3PL revenues in 2023 was significant when coupled with deflating transportation rates. For the U.S., the Federal Open Market Committee has done a commendable job, and it looks like it has engineered a ‘soft landing,’ with most economists taking a recession off the table.”

Total 2023 DTM gross revenue, at $123.6 billion, was down 22.4% annually in 2023, said Armstrong. DTM, which is made up of freight brokerage and managed transportation services, saw net revenue growth fall 25.8%, to $19.6 billion. Armstrong said revenues were impacted by consumers worried about inflation spending less, as well as shippers working down warehouse inventories, declining 2023 imports, and falling truckload rates and demand.

ITM gross revenues, at $74.0 billion, were off 49.3% annually, and net revenue, at $28.0 billion, was down 34.2%. The report noted that the ITM environment has dramatically changed since mid-2022, with ocean freight rates from Asia to the U.S. trending down to pre-pandemic levels.

It added that in the third quarter of 2022, ocean shipping rates and domestic transportation rates began disinflation in the U.S. as consumer demand moderated and supply chain operations stabilized, with China to U.S. and European ocean shipping rates have declined as much as 90% since the peak in early 2022.

DCC gross revenue, at $29.7 billion, eked out a 0.7% annual gain, and net revenue, at $29.6 billion, was up 1.4%. Armstrong attributed this gain to shippers wanting to lock in capacity in 2023, following what it called a turbulent 2021, as well as an increased ability to attract drivers through wage increases and better recruiting, and having the needed capital to invest in equipment.

VAWD gross revenue, at $68.1 billion, increased 1.6%, and net revenue, at $51.9 billion, headed up 4.1%. Most VAWD 3PLs had full warehouses in 2022 and, during the first quarter of 2023, were scrambling to find more, according to Armstrong. Total U.S. warehousing inventory space increased an estimated 14% from 2021 to 2023 to 12.2 billion square feet. VAWD 3PL space grew 14.2% to 2.7 billion square feet over the same timeframe, it said.

In an interview with LM, Evan Armstrong, president of Armstrong & Associates, told LM that in prior years, especially from 2021-2022, the 3PL sector was a beneficiary of high inflation.

“After the pandemic, we saw demand really come back strong,” he said. “Everybody started spending, so inventories got depleted and had to get replenished, which increased import activity. There was a lot of domestic, especially, dry van freight that was tied to getting those shelves restocked. There were significant increases in third party logistics and ‘21 and ‘22 and then last year things normalized.”

That normalization led to the 26.1% annual decline in total 3PL gross revenues, mainly driven by the decreases seen in both ITM and DTM.

But Armstrong noted that comes with the caveat that even with last year’s decline, 3PL revenues are higher than 2019-2020 levels, with things rebounding in 2024.

“For shippers, things like warehousing are normalizing, with warehousing growth intact and space that was completely full in 2021 and 2022 available,” he said. “It is now a good time for shippers to do an RFP, as some got themselves into pretty lopsided agreements in 2021 and 2022.”

Armstrong said that he would advise shippers to try and lock in three-to-five-year warehousing contracts, now that lease rates and capacity have seen some declines, even though e-commerce is still rapidly growing.

“On the transportation side, I would suggest trying to figure out things longer-term and make sure you have a good group of core carriers and also now is a good time to lock in rates on the freight forwarding side.”

And he added that economy is showing some signs of stability, with a solid job market, lower levels of inflation gains—with some of that driven by supply chain costs going down.

“I think we are going to be in pretty good shape heading into next year, both economically and from a supply chain perspective,” he said.

For 2024, Armstrong expects U.S. 3PL market revenue to come in at $311.9 billion.