Leading 3PLs are seizing the opportunity through (capex-intensive) tech solutions, often in return for longer contracts – which then enable them to take a longer-term, more strategic view on both growth and their property network.
Short term, 2024 is likely to be more challenging for 3PLs given today’s low-growth environment, but prospects should improve through the year and the medium-term outlook is positive.
Here’s why:
3PLs work across all sectors – and with so much change across supply chains has come significant opportunities to win new business. With many companies looking to solve complex supply chain challenges, as well as improve efficiency and explore ways to make their fulfilment operations more productive and resilient, many are deciding to outsource responsibility and tap into 3PL expertise.
A good example of this sector spread can be found in DHL’s 2023 results. Their supply chain division’s new business wins (EUR7.4bn total contract value) were split 28% retail/e-commerce customers; 22% consumer; 16% technology; and automotive/engineering 16%.
This is great news for 3PLs, who are winning both new customers and new types of work (for example, handling returns and providing solutions around repairs), rather than just competing for existing market share.
Tech is, of course, a transformative dynamic.
Leading 3PLs are increasing revenue from automated operations. Importantly, these contracts tend to be from global blue-chip customers, longer term in nature and potentially stickier. Additionally, these technologies are creating much-needed operational efficiencies in a tight labour market.
This isn’t just about full-scale automation, however. Adaptive technologies – like assisted picking robots, packing technologies and wearable devices – also continue to enhance warehouse operations by reducing manual activities and improving accuracy. They’re also typically more transferrable, with the potential to redeploy across contracts and sites.
All of which is contributing to bottom line growth.
Automated portfolios for GXO, for example, reported margins 200 bps above Group levels. GXO also increased the % of revenue from automated operations to 42% in 2023 (up from 37% in 2022).
So, what does this mean for logistics real estate?
First, 3PLs winning longer contracts mitigates some of the lease duration mismatch that can be a challenge, and improved margins are obviously great from a covenant standpoint. Both potentially increase the scope for owners and occupiers to invest collaboratively for the long term, e.g., in initiatives such as solar PV or greater energy resilience.
Second, given the level of investment required in technology and automation, leading 3PLs with greater access to capital are likely to become increasingly differentiated both financially and operationally. Importantly, a growing/maturing market with a wide variety of requirements means that leaders will comprise both global and niche players.
Third, the capex associated with large-scale automation or extensive technology adoption often means that consolidating into larger buildings/adopting campus style facilities makes financial and operational sense. A single larger building provides both scope for 3PLs to service multiple contracts – further mitigating duration risk – and easy access to additional space should 3PL customers experience significant sales growth.
Lastly, warehouses need to meet increased power and ESG requirements. High levels of power are required to run automation and technology (and potentially fleet electrification – another 3PL focus). The source needs to be reliable – and ideally renewable. Not least because 3PLs have their own (often ambitious) ESG targets and must meet the high expectations of their blue-chip customers.
It’s clear that 3PLs are in an exciting period of transformation. Leading 3PLs are taking a strategic view on their property network (that’s no longer just contract led) and growth ambitions. This will continue to be an important demand driver for logistics real estate.
