Welcome to The Roaring 20’s
Phase II of the Digital Supply Chain Rampage
Last week, I attended my 4th consecutive BGSA Supply Chain Conference in Palm Beach at the legendary Breakers Hotel. This is undoubtedly my favorite conference of the year, and hands down, the best possible way to start out the year if you are a true supply chain junkie, like me.
This incredible event is hosted by the legendary Ben Gordon. Ben is a Renaissance man of sorts in the supply chain world, morphing between CEO, entrepreneur, investment banker, world class investor, media mogul and of course, conference throwing extraordinaire.
Ben is well known for working on big deals in the supply chain sector including XPO and Grand Junction. He is also recognized as the go-to investor for outstanding entrepreneurs utilizing his deep knowledge and high powered relationships to take up and coming companies to the next level.
I had heard the rumors that Ben was an early advisor and investor for Brad Jacobs during the infancy of XPO. Mr. Jacobs, himself, confirmed this to the packed house of CEOs during his Key Note session last week noting that Ben was an early, avid supporter of Jacobs’ masterplan to build XPO, investing heavily in the now $90 +/- stock back when it was in the single digits.
After attending my first BGSA event back in 2017, I made a point to introduce myself to Ben and since that time, we’ve built a great relationship due to our mutual passion for outside the box ideas, big deals and all things supply chain.
As I flew home to Dallas after the 48 intense hours of conversing about the logistics sector, I felt optimistic and excited to be a part of the supply chain industry at the beginning of this new decade.
2019 was an outstanding year for supply chain public markets. Ben’s team at BGSA has created a supply chain specific index to track the industry’s performance. When compared to the S&P 500, the BGSA Index slightly underperformed the S&P at 26.2% vs 28.7% gains.
Furthermore, every segment within the supply chain went up, with Energy Transportation & Logistics going up 56.9%, Technology Distribution, up 54%, Supply Chain Technology & Software, up 53.8%, Less-Than-Truckload, up 46.6%, Railroads/ Rail Services, up 28.5%, Logistics, up 28%, Truckload, up 25.9%, Global Parcel/ Logistics, up 17.1% and Healthcare Distribution, up 11.2%.
Despite the extremely positive macro snapshot of the performance of these publicly traded companies in the supply chain sector, the micro assessment shows extremely wide gaps of inconsistency when comparing the different companies within each of the industry’s subsectors.
I know this all too well as it relates to the LTL sector, as I am a shareholder of YRCW stock which saw close to 20% drop as they finalized labor disputes with the Teamsters, restructured operating companies, changed CFO’s, rotated out board members all the while, struggling through the trucking recession. Other losers in LTL trucking included ArcBest and Roadrunner which were both rattled by even greater % losses than YRC.
Meanwhile, my valued client of 10 years, TFI International, led by logistics mastermind, Alain Bèdard, crushed it within the LTL subsector performing at 30% in 2019. Meanwhile, shareholders of Old Dominion and SAIA brought home the bacon at upwards of 50% and 65%, respectively.
BEWARE OF DOOM & GLOOM
Supply Chain leaders are all paying close attention to 2020 and this lead to an overall feel of cautious optimism while I conversed with multiple Chief Executives for logistics powerhouses from all over the world.
The Supply Chain sector could be perceived as being overpriced with the aforementioned BGSA Supply Chain Index being valued at record highs of 12.4x. Furthermore, as we continue to push further into the longest bull market in US history, economists are predicting a 33% risk of a recession in 2020. The freight recession is expected to continue with Cowen predicting a 35% drop in North America truck production.
I have noted in numerous previous articles and interviews that shippers and carriers alike are both behaving more conservatively than usual due to the pending presidential election, the heightened risk of potential tax increases as well as the continued China Trade War which is still not over despite finalizing Phase 1 of the deal on January 15, 2020.
Increased Government regulation such as AB5 in California which is demolishing the independent contractor landscape is likely spread to other Blue states like an outbreak of coronavirus. This and other government regulations will be extremely tough on the supply chain industry which is truly the backbone of global commerce.
The trucking recession is no joke, having left over 800 bankruptcies in its wake — including household name truckers, like New England Motor Freight and Celadon. 2019 left us with 24,000 trucks off the road — almost 10X from the 2,800 in 2018.
Let’s not forget Amazon. It is always tough to tell if Amazon is a blessing or a curse for the Supply Chain Sector. Nevertheless, they are most definitely owning it.
Bezos and Co. delivered 3.5B packages in 2019, making the Shipper/Carrier hybrid beast the largest logistics company on Earth. The Amazon Effect took a major toll on FedEx in 2019 and we should expect to see other companies continue to take a hit while trying to compete with this insane machine as it plows its way down the highways. The question is: Is Amazon heading towards $10K per share or an antitrust lawsuit? Time will tell but I always bet on Bezos.
BLUE SKIES & SUNSHINE
While we have a lot of red flags staring us in the face as we trounce into this new decade, we also have some promising news within the Supply Chain Sector as well.
The bottom line is that eCommerce and the Digital Supply Chain are still extremely early stage. There is still a ton of room for growth and innovation within the supply chain sector that I am confident will help our industry to remain very strong despite any of the previously mentioned predictions of Doom and Gloom.
The number 1 positive force to be reckoned with is the continued, consistent growth of eCommerce. On Black Monday alone, Amazon sold $9B in goods. That’s a pretty good day at work, eh?
The biggest winners in the Supply Chain Sector impacted by the eComm explosion include the industrial real estate market in general, and especially infill, micro warehouse centers being utilized by retailers like Amazon, Walmart, and Albertsons.
eCommerce fulfillment companies like Radial, Saddle Creek and RedStag have been killing it while investing heavily in automation, labor and industrial real estate to support the need to store more and more SKUs.
Last-mile logistics players like UPS, XPO, and TForce Final Mile are taking advantage of this $31B marketplace while trying to find as many dock doors as close to the rooftops as possible to ship goods direct to consumers.
Reverse logistics is at record levels with $95B in goods returned after the holidays! This is a 20% increase over 2018. 39% of these items were returned directly to stores. This creates a massive opportunity for retailers, logistics companies and startups to support this rapidly growing area of the supply chain.
To support all of this digital commerce, it is also nice to see the maturation of the supply chain technology market. While the 2010’s saw a somewhat immature tech landscaped focused on new ideas and venture capital money, the 2020’s are seeing increased appetite from private equity players with a focus on scale and cash flow versus innovation and the train wreck of “community adjusted EBITDA”.
The capital markets remain bullish within the supply chain sector with a projected $60B in deals expected by the BGSA team to take place in the Roaring 20’s — double that of the 2010’s. The record M&A activity and record lending levels that we are seeing is due to many contributing factors, including strong performances via 53 “Unicorns” over the course of the last decade lead by Didi Chuxing, Grab and DoorDash, among others.
In summary, the convergence of transportation and technologies has proven over time to create billion-dollar opportunities in the world of supply chain. This key performance indicator utilized by Ben Gordon and the Cambridge Capital team has proven true over the course of centuries as displayed by the fortunes built by the railroad for the Vanderbilts, Carnegies and Flaglers in the 19th Century. The invention of the shipping container in the 20th Century led to the boom of shipping and trucking empires like Maersk and JB Hunt in the 20th century. Today, it is no secret that the Digital Supply Chain is the new world that we are living in with new winners emerging lead by Amazon, Uber, XPO, Prologis and many, many more!
For more information on the BGSA conference, please click here. To learn more about trends in supply chain investment at Cambridge Capital and in the industry, please visit here. For more about Benjamin Gordon of BGSA and Cambridge Capital, who was a primary source for this article, click here. All charts and data provided by BGSA and Cambridge Capital unless otherwise noted.
Ward Richmond is a globally recognized Supply Chain Real Estate specialist and is an Executive Vice President at Colliers International and Chief Executive Officer at http://www.SupplyChainRealEstate.com.