Most executives at third party logistics companies (3PLs) will admit theirs is not an easy business in which to grow and make a profit. In late 2005, Amsterdam-based TNT announced it would shed its logistics unit and concentrate on mail and express. U.S. giants, FedEx and UPS have also focused their investments on transport acquisitions, including the recent announcement by FedEx that it had acquired a British parcel operation.
Explaining the decision to sell TNT's 3PL operation to private equity firm Apollo Management LP, Peter van Laarhoven, director of corporate strategy for TNT, pointed to the large percentage of the logistics unit's business that is renewal and the margin pressures this creates. The unit was clearly not producing the kinds of growth or margins TNT was seeing in its other businesses.
Dave Kulik, CEO of Ceva Logistics, the company's new identity following its acquisition by Apollo, is proud of the 3PL's renewal numbers but admits to the challenge of growing the business. On average, says Kulik, Ceva has been able to maintain an 80% renewal rate with existing customers. Even when the company's future was in limbo between TNT's announcement and the disclosure of a buyer, Kulik said customer confidence, in the form of contract renewals, was over 80%. He is quick to point out that while he freely shares these numbers, he has not seen similar disclosures by other major 3PLs, leading him to comment, "if it was better than us, they'd publish it."
Now a $4 billion stand-alone logistics company, Kulik will continue to face the challenge of how to grow. For the sake of providing an example, he said, Ceva's contracts average just over three years, that means roughly one third or $1.3 billion of its business turns over each year. With an 80% renewal rate that leaves about $250 million worth of business that must be replaced. To grow the business another 5% to 8% per year, requires roughly another $300 million in new contracts or additional business from existing customers, leaving Ceva with a goal of finding over $500 million in new business every year.
As if that isn't challenge enough, Kulik points out that the 3PL business isn't an area where companies publish annual price increases and then try to hold onto those increases during contract negotiations. If anything, the 3PL segment is under pressure to decrease prices each year. While facing that reality, labor and other costs continue to rise, putting even more pressure on margins.
Ceva isn't alone in facing such challenges. They are issues for the whole 3PL industry segment, says Kulik. But as the largest free-standing 3PL in the world, Ceva will certainly be scrutinized for the effects of margin pressure, especially as some of the larger economies experience some slowdown in growth. But here again, Kulik sees opportunity.
Focusing on the manufacturing sector, he feels that manufacturers look for more outsourcing when the economy softens. With extended supply chains, Kulik says manufacturers are looking at ways to reduce inventory float, and he feels Ceva understands how to control and reduce inventories.
Technology is critical to the process and underlies Ceva's logistics service offering. Kulik admits that technology is both a powerful tool and a barrier to exit. The deeper Ceva can get into its supply chain relationship with a customer, the stronger the bond and, from Kulik's earlier comments, the higher the retention rate.
Now that its separated from TNT, Ceva also gains a little agility. While the 3PL had demonstrated to customers that it could be objective in selection of transport services, Kulik carefully avoids overplaying the discomfort it created for him facing a corporate head office when he was using competitors' transport services. As a lead logistics provider, he had to select on service and price, and in some lanes, TNT faced price competition.
Ceva is Apollo's only logistics business and, as such, it becomes the foundation for anything Apollo will build in the logistics sector. At TNT, mail and express were the core businesses and logistics was a peripheral business. Ceva's initial focus is on organic growth. As the world's largest pure-play logistics company, Kulik says, the company has the geographic footprint and is in the markets that make sense for Ceva. He sees some areas where Ceva could grow, but initially he only expects to see some small additions to bolster those areas and respond to market needs, not any major acquisitions.
Without some of the integration challenges of being acquired by a logistics operating company, Kulik sees his short-term challenges in establishing a brand identity for Ceva and adding a burgundy solution to the yellow and brown and purple and orange solutions already recognized in the 3PL market.