The Business of Moving Parts

Investable Trends & Opportunities within Global Logistics

There is no industry more responsible for sustaining the living, breathing, and growing world economy, than the logistics industry.

Few if any other industries operate on such a global scale, impact as many corners of the world, or are more ingrained in how we function as a society — and yet, few people actually grasp the true volume, scale, or complexity of the logistics ecosystem.

The reason for this is no secret.

Despite the fact that operators in logistics oversee the transportation, documentation, inventorying, warehousing, sorting, packing, and — among many other subprocesses — ultimate delivery of goods around the world, most consumers only ever interact with one small leg of this complex system: last-mile delivery, or the journey of ordered goods from a regional warehouse, to their doorstep. But logistics encompasses so much more.

In aggregate, the industry supervises the movement of approximately $11.7T worth of goods across the globe annually, servicing a growing market projected to reach $15.5T by 2024.

What makes logistics so compelling though, is how integral it is to our lives and yet how slow to embrace technology and innovation it has been compared to many other world industries over the past twenty years.

But now all that is changing.

Roughly $16B of the total $18B that has been invested in logistics startups over the last decade has been invested in the past five years or less, per CBInsights. Nascent technologies are rapidly coming online, presenting considerable opportunities for both legacy incumbents, startups, and investors alike to fundamentally change the way the industry operates.

It would take a much larger report to cover all these changes taking place, so the aim here will instead be to segment this massive industry into five key subsectors — (1) Freight Forwarding, (2) Logistics Services & Analytics, (3) E-Commerce Logistics, (4) Warehousing, and (5) Last-Mile Delivery — exploring the forces that have shaped each in recent history, examining their impacts, and speculating on how they might evolve in the future.

Then, using those examinations as a jumping off point, we’ll discuss a few broader predictions for the logistics industry at large, and where there may yet be an opportunity for venture investment.

Freight Forwarding

Operators in this sector arrange for the transportation of freight between shippers and carriers, brokering safe passage for goods by air, sea, rail, and ground while also dealing with customs, packaging, labeling, and process documentation on behalf of the manufacturers and purchasers/distributors of goods. Though at first glance, the industry seems dominated by large, multinational firms such as UPS and DHL, within this highly fragmented and minimally concentrated sector, the top four market players only account for ~10% of total industry revenue, leaving plenty of room for SME’s to carve out opportunities in this massive, growing space.

Additionally over the last decade, a rise in global trade and consumer spending has spurred overall economic activity, increasing the need for freight forwarding services and allowing more market entrants to capture a bigger piece of a growing pie.

Today however, the freight forwarding sector finds itself at a pivotal moment.

Increasing tech penetration has led to the commoditization of many freight forwarding services, forcing intense competition on factors such as price, quality of service, efficiency, and technical sophistication. Such market shifts have spurred larger incumbent operators to build out their offerings and compete across the service spectrum, leaning on their vast, worldwide networks to negotiate lower rates and expand beyond the reach of their smaller competitors.

To counterbalance these disadvantages, smaller, more nimble entrants — such as Flexport and Freightos, notably — have moved into the industry with technology-first business models that allow for customers to instantly compare rates on shipments and automate previously manual processes that created friction or inefficiency.

Other startups are also driving a blockchain revolution in freight forwarding by improving the exchange of event data, ensuring smooth workflows, and reducing costs and inefficiencies in general. Some, like FreightWaves, have led this charge by helping to found organizations such as the Blockchain In Transport Alliance to drive adoption of the tech in the industry.

Although it’s one of the smaller logistics subsectors, freight forwarding still generated a whopping $138B in 2018 alone, a ~6.5% y/y increase, per IBIS World. Going forward, the sector is expected to continue expanding at an annualized rate of 4.1% through 2023 to ~$169B, with a corresponding +9.2% increase in the number of industry operators vying for that growing market share.

What remains to be seen, is how exactly this sector’s landscape will change in the face of all this rapid growth, innovation, and digitization.

While larger incumbents have heard customer demands to digitize, implementation thus far has been slow and driven by strategic acquisitions — something which explains the uptick in sector M&A activity of 41 deals totaling $493M over the past five years, per CB Insights. Meanwhile, digital-first forwarding startups, attempting to capture growing market share, have attracted $3.3B in VC funding from 2012 to 2017.

Logistics Services & Analytics

While freight forwarders do much of the heavy lifting of connecting the parties who build, ship, and deliver goods, logistics services and analytics (LS&A) firms are charged with tracking these different processes at any given moment; dealing with tasks such as the consolidation of consignments, trade document preparation, packing, crating, and otherwise preparation of goods for transportation throughout the logistics cycle.

There’s a lot to unpack there, but you can basically think of everything like this: LS&A is about keeping the trains running, not running the trains themselves.

Now, although LS&A generates the smallest amount of revenue among these five subsectors, all-tallied this figure still sits at a more-than-healthy $2.7B — growing 3.1% y/y for the past five years, per IBIS World. Furthermore, it’s expected the industry will grow another 2.2% y/y to $3B by 2023, driven in large part by increases in global trade and freight volumes, as well as downstream consumer demand.

Also, not dissimilar to other subsectors of logistics, a trend of legacy companies outsourcing operations coupled with growing complexities within supply-chains in general, has catapulted the LS&A sector into a tech renaissance of its own.

It’s likely this trend will continue, as consumers increasingly expect shorter delivery times, fewer shipping costs, and more transparency in tracking, meaning LS&A firms have had to incorporate electronic trade documentation platforms, AI /ML techniques, and automation solutions like those offered by startups in the space, such as Shipamax and Logixboard, in order to keep up.

However, a dark specter also looms on this subsector’s horizon.

To achieve economies of scale, both incumbent and digitally-native freight-forwarders have opted to vertically consolidate their services, meaning the LS&A subsector may find its market share eroded over time. If this consolidation continues, third-party LS&A firms will become key targets for acquisition. Thus, for an investor evaluating this space, the ability to appeal to larger customers through easy-to-use and easily-integrated platforms should be considered paramount.

ECommerce Logistics

While the primary growth driver for nearly all aspects of the logistics industry is downstream consumer demand, nowhere has this been more prevalent than in eCommerce logistics.

Though massive, industry-defining players such as Amazon and Alibaba have skewed the lines between pure eCommerce and logistical operations, broadly speaking, eCommerce logistics can be thought of as overseeing four stages in the life of an order:

1. Building and managing the technological solutions that help eCommerce retailers ensure consumers can discover and purchase goods
2. Running networks of fulfillment centers where merchandise is stocked, tracked, and maintained at a regional level in preparation for eventual delivery to local network hubs
3. Maintaining network hubs where orders are sorted and transferred to delivery centers
4. Supporting delivery centers in charge of last-mile delivery to consumers

Together, eCommerce logistics firms carry out one or more of these functions to ensure customers, shippers, and other third-party logistics (3PL) firms can enjoy better communication and improved efficiency in deliveries. This function is especially crucial as orders typically arrive in bulk and must be processed and inventoried before any singular item can be delivered to a consumer.

Happily for eCommerce logistics, eCommerce itself is one of the fastest growing segments of the global economy.

Driven by increasing disposable income and access to internet worldwide, eCommerce revenue jumped nearly 13% in the past 5 years, and is poised to increase by another 9% to a whopping $779B by 2023, per IBIS World. Such growth will allow eCommerce logistics firms to begin to serve new market niches as well as innovate around new technologies — notably AI, robotics, blockchain, and drones.

Though existing players, many of whom have invested heavily in these technologies, will benefit most from this industry growth, startups like ShipBob, Locus.sh, and Convey are also leveraging their own proprietary tech to provide logistics solutions to companies not named Amazon. The hope is these low-end disruptors will allow smaller eCommerce retailers to compete against giants in a burgeoning digital marketplace.

Warehousing

Each good passing through a supply-chain is, at one point or another, held up at a warehouse to await further instructions.

These facilities are critical for maintaining inventory and security of the goods in storage while providing distribution-related services including labeling, “breaking-bulk”, light assembly, order entry and fulfillment, packaging, price marking, and transportation arrangement.

Historically, sector performance has been closely tied to consumer spending, industrial production, and trade volume, but as the complexity of global supply-chains has risen, so too has the need for tech-enabled warehouse services. This trend has become especially prevalent, as freight forwarding companies and eCommerce retailers alike rely on third-party providers to support aspects of their operations they cannot build themselves.

As a result, global warehousing revenue is expected to climb to $1.4T by 2023, per IBIS World, and will experience an influx of startups providing integrated warehousing services to help meet these rising operational demands.

The biggest operational demand they’ll need to “science the hell” out of: Labor.

The sharp increase in the volume of small-but-frequent package deliveries in eCommerce has created a dramatic labor shortage within warehouses for “pick & pack” functions. To meet these challenges, warehouses are increasingly turning to automated solutions that are more adaptable, scalable, and suitable for their rapidly changing industry. Nevertheless, current offerings can only mitigate, not entirely solve these issues. However, with the rise of robotics and drones on the horizon, all that may soon change.

Autonomous mobile robots, like those used by Amazon, alongside collaborative robots (or “Cobots”) programmed to integrate with human staffers’ workflows, are emerging in warehouses across the country. Autonomous drones are also taking off — (like these from Corvus Robotics) — to track and locate inventory using a combination of computer vision and RFID scanners.

Also growing in popularity are IoT-based Warehouse Management Systems (WMS) and Warehouse Execution Systems (WES) — networks which can receive sensor inputs from across an operation, evaluate these inputs, and respond in real-time in order to achieve operational objectives. Paired with these systems are a suite of AI/ML tools designed to process this volume of data, as well as voice technology allowing humans to give and receive direct commands to-and-from a WMS, and machine-machine (M2M) tech allowing direct synchronization between the WMS and the network of machines it oversees.

Finally, in order to keep up with rising demand and rapid order fulfillment, warehousing companies are shifting their strategies towards smaller, regional warehouses that are closer to consumers in an effort to reduce delivery wait-times — something which leads incredibly nicely into our final subsector…

Last-Mile Delivery

Made up of both local delivery operators as well as larger national couriers, last-mile delivery brought in ~$100B in revenue in 2018, a figure expected to increase 5% y/y to $125B by 2023, per IBIS World.

As the terminal link in the logistics supply-chain, the business models in this subsector have each been shaped, like eCommerce and warehousing, by growing consumer demand for faster and faster delivery times — a promise last-mile delivery needs to… err… deliver on.

Unfortunately for market operators, this will be an uphill battle.

Today, the last-mile landscape is incredibly fragmented, with specialized operations servicing specific niches, (ie. healthcare supply transport), and larger industry players competing across many transport categories. To survive in the last-mile thunderdome, firms have lowered prices while simultaneously expanding their service offerings — putting smaller, localized, and less-specialized players at a particular disadvantage.

Moreover, both large warehousing businesses, as well as other major industry customers, are moving towards running their own last-mile delivery operations — cutting out incumbents like USPS, UPS, and FedEx in the process. Add to that hurdles such as environmental emission regulations that require updating fleets with more fuel-efficient vehicles, and it becomes plain to see that last-mile will face some expensive challenges over the next decade.

To meet these challenges initially, last-mile firms will lean on improved tracking systems, better analytics, and more intelligent order-routing. Later down the road, autonomous vehicle technology built by the likes of Nuro and Starship, among others, will become high-value acquisition targets and allow better-capitalized players to replace recurring wage costs with fixed capital investments.

Also poised to have a large impact on the future of last-mile delivery are drones, which could quickly and autonomously fulfill nearby orders in hours instead of days.

Though current regulation will keep this burgeoning sub-industry somewhat grounded in the near-term, startups such as Zipline are already proving the effectiveness and scalability of drone delivery technology for the industry on the whole. Helping the cause, McKinsey has predicted that autonomous vehicles and drones will deliver nearly 80% of all items in the near future — something which has not gone unnoticed by the likes of UPS, which, not to be outdone, has already begun testing out drone tech of its own.

Not all startups will play nicely with larger incumbents though. Many, such as Postmates, DoorDash, and Shadowfax, will directly compete with larger legacy operators, applying tech-first solutions to better solve pain points like urban delivery and pick-up, more efficiently.

With this in mind, it’s likely we’ll see an ongoing battle for market share as the last-mile industry consolidates around larger incumbents acquiring technology to improve their operations and the newer players raising immense amounts of capital just to compete on scale.

Key Considerations For Investment

Considering the sheer size and magnitude of the logistics industry, as well as the tailwinds discussed, it’s no surprise the category has been a recent hotbed for VC activity.

Taking a broad view, we examined the institutions which made ten or more logistics investments since January 2014. These results — accounting for all private, public, acquired, or merged startups taking Seed-Series E funding over the past five years — are below:

Now that you’ve seen who’s making all these investments, here’s what to think about if you’re going to make some of your own:

1. Reflecting the consumerization of enterprise technology, logistics management tools will focus on consumer value-add

Across the board, consumers increasingly demand their goods faster, more transparently, and at little-to-no delivery cost. Additionally, industry clients throughout the value-chain — from freight forwarders to eCommerce business operators — expect transactions with upstream suppliers and partners to share many of these same qualities.

To meet such expectations, players throughout global logistics will look to increase efficiency, reduce costs, and expand on the value-adding services they provide their customers by leveraging one or more of the following technologies.

Notably for investors though, an understanding of the mindset of this increasingly consumer-facing industry makes it seem likely the tech solutions that will have the most potential for adoption will be enterprise solutions that look, act, and feel like the consumer tools they’re helping to build.

Here are some that do:

• Autonomous Tech & Robotics — By reducing the need and cost of human labor while increasing speed and efficiency, this tech will act as a plug-and-play solution for many industry operators, particularly in warehousing. Self-driving cars will also proliferate, integrating with additional tech to radically shift the way last-mile delivery occurs.
• Drones — By improving the ability to track inventory and expedite the delivery of goods, businesses will have new workhorses that alleviate many currently arduous processes within their operations.
• IoT and Data Analytics — By providing a more complete snapshot of their entire operation and ecosystem, this tech will provide an out-of-box solution for businesses to solve inefficiencies, predict market challenges, improve customer experience, and develop an understanding around consumer behaviors.
• Blockchain — By injecting trust into logistics through the reduction of fraud, securing of data, improvement of tracking, creation of price transparency, and reduction in lost inventory, operators will have a tool to help them work more transparently with their partners and customers alike.
• 3D Printing — By changing the types of goods being shipped largely from finished and half-finished products to raw materials to be manufactured on-site, this tech will speed-up and decentralize production, leaving businesses with a far more customizable solution to build their operations around.

Lastly, when considering the above, it’s important to note the fact that the most successful tech solutions will first-and-foremost depend on the immediate needs of customers, as well as on the buyer’s willingness to embrace change. Thus, logistics investors should focus closely on customer feedback and discovery to assess whether the start-up’s solution is just a nice-to-have, or truly a need-to-have.

2. Market entrants into the logistics industry will shift from ‘asset-light’ to ‘asset-heavy’

To date, many startups entering the logistics industry have touted ‘asset light’ models with cheap, single-use case SaaS solutions that enable them to “land-and-expand”.

Now and into the future however, the industry is poised for a gradual shift from these ‘asset light’ solutions towards startups launching more ‘asset heavy’ solutions, as such options are quickly becoming more sophisticated, cheaper to produce, and deregulated.

Leading this shift will be startups integrating autonomous robotics, drones, self-driving vehicles, and other networked hardware. Additionally, traditional industry customers such as Amazon and Alibaba are increasingly making heavy infrastructure investments into vehicle fleets and warehouses in an effort to control all aspects of their own supply-chains — meaning legacy operators will have to either aggressively invest, or more likely, acquire to compete.

Therefore, investors should pay particular attention to plug-and-play solutions which will be prime targets for legacy operators in the very-near future.

3. Consolidation will increase, but so will collaboration

Currently, a key trend occurring in the logistics industry is consolidation by major market players as they leverage their resources to acquire smaller operations as well as tech startups. Going forward this trend will continue and grow more collaborative in nature.

Such will be facilitated through the Standardization of APIs, data sharing, and IoT sensor usage, things which will make it substantially easier for businesses to cooperate with one another — in sharing transportation fleets and warehouses and standardizing labeling and packaging, for example. Furthermore, by open-sourcing bits of their operations through the use of blockchain, transparency and fair pricing will become the norm.

Thus, for investors, it may be valuable to focus on technology that encourages such collaboration. Reason being, that while development and acceptance of new industry standards can take a long time, the growing pace of technology adoption in logistics makes now a perfect moment for such an ambitious endeavor.

Final Thoughts

There are a lot of moving parts within logistics. In a way, “moving parts” defines this industry itself.

Connecting these parts however, is an increasingly complicated, technologically-driven, and insatiably efficient machine. As such, when considering everything that goes into this machine, it can often be hard to appreciate it in totality.

This is why it’s worth repeating something we mentioned at the beginning of this article: that logistics, perhaps more so than any other major industry, is a truly global business.

Thus, as an investor, it’s important to take a worldview when examining logistics because opportunities for disruption and innovation abound, not just in the world’s commercial and technological epicenters, but also in regions less frequently showered with venture capital.

Opportunities like Kobo360, a seed-stage last-mile delivery application connecting truckers to companies with freight needs in Nigeria, or like NowPorts, a freight-forwarding startup using AI to improve the shipping process for logistics teams in Mexico, are each prime examples of why it’s necessary to remember to cast a wide gaze when examining this industry.

Moreover, when thinking about all these opportunities all over the world, it’s worth keeping in mind that everything in logistics is in some way connected and thus, localized market shocks reverberate globally.

A logistics analytics startup in India might influence tech implemented by UPS in America. Freight forwarding practices in Denmark will affect eCommerce businesses in South America. And despite your best efforts, there’s a good chance that one day, Amazon will still control absolutely, positively, everything.

(Probably)

Thanks for reading!

If you made it this far, feel free to toss a like in there, or comment below. Either one would be greatly appreciated.

Also special thanks to Jay Kapoor — who was tremendously supportive as this article came together.