This is the second article in a two-part series where Lincoln International explores the latest trends in the logistics and transportation industry—from exploding e-commerce to a growing importance of CO2 footprint reduction.

L&T e-commerce attracts the interest of private equity and venture capital investors

E-commerce drives demand for a wide spectrum of services, creating a complex network of critical tasks such as cross-border supply chain management and international freight forwarding, control and operation of warehouses and fulfillment centers, last-mile and express delivery as well as the efficient management and handling of returns. This connects brands to online marketplaces and provides other, often software-driven, customer experience and transparency solutions.

Besides attractive fundamentals with high long-term market growth rate projections, the prospect of increasing supply chain complexity in e-commerce and omnichannel logistics further adds to the allure of this segment. The latter appears counterintuitive, but growing complexity generally tends to favor pricing power of LSPs.

Unsurprisingly, these factors create a constant flow of mergers and acquisitions (M&A) activity driven by incumbents as well as private equity and venture capital funds. Incumbents have been motivated by the quests for scale, regional expansion and addition of specific capabilities (e.g. Fedex / ShopRunner or Affirm / Returnly).

Private equity and venture capital face ample opportunity in the wider logistics market, and the e-commerce logistics space in particular, given the high degree of fragmentation. The industry currently represents a somewhat fluid mix of incumbent players, mostly small- and mid-sized, which operate and compete alongside dynamic startups and high-growth newcomers who often leverage technology to disrupt and transform parts of the industry. In addition, efficient e-commerce logistics requires local fulfillment capabilities in order to achieve the level of customer experience required (e.g. same day or even shorter delivery and return time windows).

Creation of infrastructure and fulfillment services offers additional opportunity, especially for institutional investors backing entrepreneurs or wishing to invest in infrastructure to initially cover white space and subsequently consolidate on a national or even international level. Such strategies could be implemented in a combination of last-mile delivery technology players, warehouse robotics specialists (e.g. for micro-fulfillment technology) or real estate specialists. Recent substantial fund raisings by Shipbob (USD 200m in June)1, Getir (USD 550 million in June)2, Bringg (USD 100 million in June)3, Glovo (Euro 450 million series F in April), or Gorillas (Euro 290 million series B in March) underline the market’s appetite for the segment. Regional fulfillment network building further adds to the already vast supply of roll-up opportunities for financial investors, allowing private equity to apply its proven playbook of investing into platform assets with the right management teams to roll-up smaller players.

Digital business models continue to attract substantial funding

Digital business models in L&T have drawn significant investor attention over the last couple of years and continue to do so. In 2021 especially, there have been both increasing amounts of VC capital as well as strong M&A activity.

What impact do these digital business models have on the overall industry? Looking at a list of the top 25 global forwarding and contract logistics companies, there has not been much impact as the rankings have not changed due to the entrance of digital disruptors. It is worth noting that the toplines of major traditional third-party logistics (3PLs) now include growing shares of digital businesses from their own digital ecosystems; with C.H. Robinson mentioned as a frontrunner. European players such as DB Schenker, DHL, Geodis, K+N and Maersk have also followed this model. However, the large segment of traditional small- and mid-sized L&T players still have significant potential to adopt digital business models to become more customer-oriented and efficient, thus defending their market positions going forward.

A recent study by ADL differentiated digital business models into the three basic types—marketplaces, management software providers and service providers. Compared to overall industry revenue, digital supply chain business models still only represent a small fraction. However, digital business models are rapidly growing and are projected to outgrow the traditional L&T market growth rates of 4-6% by substantial margins. Flexport is a prime example of this digital service provider growth. Founded in 2013, the digital forwarder roughly tripled revenues from more than USD 400 million in 2018 to around USD 1.3 billion in 2020.

Management software is a digital business model that has been around for many years and refers to software enabling users to support the management of transactions across a defined portfolio of selected (contracted) partners, such as transport management systems (TMS). TMS providers have positioned themselves at the intersection of large shippers, carriers and forwarders. TMS and other management software automates the freight management process, effectively causing forwarders and carriers to become executors rather than freight managers. At the same time, it threatens their profit pool by increasing supply chain transparency for shippers.

The lower expected growth rates for the management software segment compared to other digital services providers reflect the relatively high degree of TMS penetration among the large 3PLs. Future growth will be driven by small- and mid-sized freight forwarders as this group will feel the most pressure to replace the still-predominant legacy systems. Many of these mid-sized 3PLs serve large global shippers with business relationships based on decades of hard work and high levels of customer service. It can be expected that these large global clients will become more demanding based on competitive technology offerings from the market leaders and digital startups.