TRENDS IN 3PLAMAZON / CUSTOMER LOGISTICS Market Estimates, Benchmarking,RELATIONSHIPS and Predictions NovemberJanuary 2019 2016 Phone: +1-800-525-3915 Website: www.3PLogistics.com Email: [email protected] ABOUT ARMSTRONG & ASSOCIATES, INC. Armstrong & Associates, Inc. (A&A) was established in 1980 to meet the needs of a newly deregulated domestic transportation market. Since then, through its leading Third-Party Logistics (3PL) market research and history of helping companies outsource logistics functions, A&A has become an internationally recognized key resource for 3PL market information and consulting. A&A’s mission is to have leading proprietary supply chain knowledge and market research not available anywhere else. As proof of our continued work in supporting our mission, A&A’s 3PL market research is frequently cited in media articles, publications, and securities filings by publicly traded 3PLs. In addition, A&A’s email newsletter currently has over 62,000 subscribers globally. A&A’s market research complements its consulting activities by providing continually updated data for analysis. Based upon its unsurpassed knowledge of the 3PL market and the operations of leading 3PLs, A&A has provided strategic planning consulting services to over 30 3PLs, supported 20 closed investment transactions, and provided advice to numerous companies looking to benchmark existing 3PL operations or outsource logistics functions. All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form by any means, electronic, mechanical, photocopied, recorded or otherwise, without the prior permission of the publisher, Armstrong & Associates, Inc. The facts of this report are believed to be correct at the time of publication but cannot be guaranteed. 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Contents Introduction 4 Market Overview 5 Parcel Market 6 Third-Party Logistics Market 7 Less-Than-Truckload Market 10 LTL Market Discussion and Growth 11 LTL and 3PLs 11 LTL and E-Commerce 11 International 12 E-Commerce Parcel and 3PL 13 E-Commerce Impact on Parcel Volumes 14 E-Commerce 3PL Market 16 Amazon Share of Market Summary 17 Benchmarking 18 Capital Expenditures 19 Warehousing and Fulfillment 21 Fulfillment and Sortation Space 22 Capital Expenditures 23 Facility Capabilities and Automation 25 Air 26 Fleet 26 Increasing Fleet Size 27 U.S. Hub Locations and Capacity 27 Capital Expenditures 28 E-Commerce and Air 29 Vehicles and Drivers 30 Third-Party Logistics Services and Assets 32 UPS 3PL Services 32 FedEx 3PL Services 32 Amazon as a 3PL 32 Predictions 34 Third-Party Logistics 35 Parcel & Ground Transportation 38 Warehousing & Facilities 41 Air & International 43 Technology 45 Challenges 46 ©2019 Armstrong & Associates 3 Introduction In becoming a global leader in e-commerce, Amazon has built significant logistics infrastructure and is competing with traditional logistics providers in warehousing and distribution. This report details e-commerce logistics, its major competitors and Amazon’s impact on transportation and warehouse management. After establishing the current state of the markets in which Amazon plays, our analysis shifts to predict potential growth strategies which Amazon could pursue to leverage its logistics infrastructure and increase its footprint as a logistics provider. ©2019 Armstrong & Associates 4 Market Overview ©2019 Armstrong & Associates 5 Parcel Market We estimate the value of the U.S. parcel market at $95–$100 billion, with an estimated $11 billion for the remainder of North America. U.S. revenues grew at a rate of 8.3% in 2017, with a 5-year Compound Annual Growth Rate (CAGR) of 6.7%– 7.9%. All signs point toward promising growth (8–10%) in 2018 and 2019. The market is dominated by UPS, FedEx, and the United States Postal Service (USPS). The remainder comprises national postal services (Canada Post and Correos de México), DHL, Amazon, and a number of small regional players. North America's $111 Billion Parcel Market - By Share of Revenue Other (DHL, Amazon, USPS Canada Post, Correos Mexico, 18% Regional) 11% FedEx 31% UPS 40% Source: Company Reports, A&A Analysis ©2019 Armstrong & Associates 6 supporting the parcel business. supporting parcel the and complementing role in asignificant play operations 3PL company’s Each market. 3PL $220billionNorth 5%ofthe American UPS andFedEx represent Together, U.S. inthe eleventh-largest andthe world inthe 3PL thirtieth-largest isthe 2017revenue, billion inglobal $3.0 with Systems), Chain/SupplyChain Networks/Supply FedEx FedEx (as Trade U.S. inthe third-largest andthe world inthe 3PL ninth-largest UPS (UPS ChainSolutions Supply SCS) isthe 2017revenue, $8.0billioninglobal With management. transportation and international management, value-added transportation domestic anddistribution, carriage, warehousing contract dedicated services include 3PL (3PLs). third-partyas providers logistics alsooperate Both delivery. parcel than more UPS andFedEx’s encompass models Third-Party Logistics Market Source: Company Reports, A&AAnalysis Reports, Source: Company C.H. Robinson, $14,869 Top U.S. 3PLs by Gross Logistics Revenue (US$ Million) Gross Logistics 3PLsby U.S. Revenue Top XPO Logistics, $9,506 UPS Supply Chain Solutions, $7,981 39%ofthe 3PLMarket) U.S. (Represents Expeditors, $6,921 J.B. Hunt (JBI, DCS & ICS), $6,828 7 Kuehne + Nagel (The Americas), $5,541 DHL Supply Chain North America, $4,390 Hub Group, $4,035 Burris Logistics, $3,396 Ryder Supply Chain Solutions, $3,066 FedEx TN/Supply Chain/SupplyChain Systems, $3,014 Total Quality Logistics, $2,934 ©2019 Armstrong & Associates The 3PL market consists of four segments, with revenues and growth rates shown below. 2017 revenue growth was solid, leading us into a steadily growing market (estimated 4.7%–5.1% annual net revenue growth) for the next few years. U.S. 3PL Market Growth by Segment 2017 Gross 2018E Gross 2017 Net % Change 2017 1995-2017 Net Revenue Revenue 3PL Segment Revenue vs. 2016 Net Revenue (Turnover) (Turnover) (US$ Billions) Revenue CAGR (US$ Billions) (US$ Billions) DTM 71.7 10.9 6.4% 11.1% 80.3 ITM 53.6 19.7 4.3% 11.3% 57.9 DCC 15.6 15.4 10.2% 7.0% 16.8 VAWD 40.1 31.1 2.5% 11.0% 41.3 Total* 181.0 77.1 5.0% 10.0% 196.3 *Total 2017 gross revenue (turnover) for the 3PL market in the U.S. is estimated at $184.3 billion. $3.3 billion is included for the contract logistics software segment. Total 2018 gross revenue (turnover) for the 3PL market in the U.S. is estimated at $199.7 billion. $3.4 billion is included for the contract logistics software segment. U.S. 3PL Market Segment Net Revenues (1995–2018E) and CAGRs (1995–2017) $35,000 1995–2017 CAGR: 11.0% $30,000 $25,000 11.3% $20,000 7.0% $15,000 (US$ Millions) 11.1% $10,000 $5,000 $0 Value-Added Warehousing & Distribution (VAWD) - Asset Based Dedicated Contract Carriage (DCC) - Asset Based International Transportation Management (ITM) - Non-Asset Based Domestic Transportation Management (DTM) - Non-Asset Based ©2019 Armstrong & Associates 8 UPS and FedEx play in most of these segments. UPS SCS is especially notable for its air freight forwarding managed volumes, while FedEx Trade Networks/Supply Chain/ SupplyChain Systems, with its 2015 acquisition of GENCO, is a leader in the value- added warehousing and distribution space. UPS Supply Chain Solutions and FedEx Trade Networks/Supply Chain/ SupplyChain Systems Comparison: Air and Ocean Freight Forwarding Volumes and Warehousing Space Air Freight Forwarding Ocean Freight Forwarding Warehousing Space (Global) (Global) (North America) Million Rank Metric Tons Rank Ocean TEUs Rank Square Feet UPS Supply Chain Solutions 6 935,300 19 600,000 14 17.3 FedEx Trade Networks/Supply 276,400 10,000 35.4 Chain/SupplyChain Systems 23 50+ 7 Source: Company Reports, A&A Analysis ©2019 Armstrong & Associates 9 concentrated. The top 25 firms account for about 55% of the market. for about55%of account 25firms top The concentrated. is market LTL the market, (TL) truckload full fragmented extremely the Unlike market. LTL $8.9billion,or14%ofthe for FedEx account UPS and $62.4billionin2017.Together, were market LTL U.S. the for costs Logistics A&AAnalysis Reports, Source: Company revenue. gross $2.6billionin with isnumberfive, Freight whileUPS revenue, $6.3billionin2017gross with U.S., inthe carrier LTL largest the is FedEx Freight carriers. less-than alsomajor FedEx andUPS (LTL) are truckload Market Less-Than-Truckload FedEx Freight, $6,341 XPO Logistics, $3,641 Old Dominion Freight Line, $3,304 YRC Freight, $3,033 UPS Freight, $2,596 Estes Express Lines, $2,476 ABF Freight System, $1,948 Top 25 U.S. LTL Carriers by Gross Revenue (US$ R+L Carriers, $1,580 Millions)(Represents 55%oftheU.S.LTLMarket) Saia Motor Freight Line, $1,379 Holland, $1,132 Southeastern Freight Lines, $1,116 Averitt Express, $769 10 Central Transport, $754 Dayton Freight Lines, $571 Pitt Ohio Transportation Group, $556 AAA Cooper, $554 Roadrunner Transportation, $447 Reddaway, $412 New England Motor Freight, $402 A. Duie Pyle, $310 New Penn Motor Express, $281 Central Freight Lines, $263 Daylight Transport, $229 Oak Harbor Freight Lines, $208 Ward Trucking, $166 ©2019 Armstrong & Associates LTL Market Discussion and Growth Less-than-truckload shipments are usually 150-10,000 pounds, and consist of multiple shipments on a single truck. LTL operates within a static network of terminals (a hub and spoke model) and therefore allows for little flexibility; activities include pickup, origin terminal crossdocking, destination terminal crossdocking, line-haul, and, if a hub is utilized for an intermediate sort, break bulk sorting.