The economic crisis caused by the COVID-19 pandemic has shone a spotlight on the critical value of global supply chains and the logistics companies that keep them moving. While the pandemic’s impact on the sector has been less severe than that on travel or transportation infrastructure players, market capitalization of logistics companies nevertheless declined by almost 3 percent between February and July. Logistics players rely on their global networks to achieve scale within a highly competitive and relatively low-margin industry. With trade demand plunging by as much as 22 percent in the second quarter and significant drops continuing in the third, many road-, air-, and ocean-transport companies are reporting large declines in volumes from the same periods last year.
Despite these challenges, the crisis presents opportunities for logistics firms to revisit their business models, enter new markets, and innovate around new service offerings. Our research suggests that the high level of external uncertainty—political, social, and epidemiological—will likely be with us well into 2021. Wise planners will prepare for a number of outcomes, including a continuation of the current volatility or a worsening downturn. In our view, however, they must also watch for the emergence of positive trends and be ready to shift quickly to a growth stance.
A through-cycle approach to growth has already been proven to be an important differentiator between long-term outperformers and their less successful peers. According to our earlier research, companies that outperformed during and after the 2008 financial crisis made bold moves during the downturn and ramped up their activities in the recovery. Our more recent analysis of corporate growth strategies shows that staying focused on growth throughout the economic cycle is critical not only for generating excess total returns to shareholders (TRS) but also for long-term survival.
These lessons seem to hold for the current crisis as well. Rather than prioritizing operating margins, the most resilient logistics players are using this difficult environment to position themselves for future growth while remaining flexible enough to respond to shifting conditions. The goal is to achieve “escape velocity” from the crisis when the time comes.
How logistics growth stars outperformed in the last crisis
To understand how our earlier cross-industry research on growth and resilience may apply to the conditions the logistics industry faces today, we analyzed the sector’s performance before, during, and after the last economic crisis, from 2003 to 2018, a time that saw growth, decline, and recovery phases. We then compared corporate performance during the last financial crisis (2007 to 2011) and the current COVID-19 downturn. The sample included 125 companies in shipping, contract logistics, freight forwarding, trucking, post and parcel delivery, and freight rail in North America, Europe, and Asia. Our objective was to identify the players that delivered higher-than-average growth in revenue and profitability, as well as higher TRS, and to understand how they accomplished this performance.
We found that 12 percent of the sample outperformed the industry on all three measures during the entire 15-year period.1 The group is dominated by players from North America and Asia that are active in trucking, freight forwarding, and contract logistics. These through-cycle outperformers registered an average compound annual growth rate (CAGR) in TRS of 7.9 percent, which is 2.3 times higher than the industry average. They also grew their economic profit by 3.5 percent compared to an industry-average decline of 1.7 percent (Exhibit 1).2
What did these companies do differently from the less successful players? Growth strategies tend to focus on four directions: growing the core business, undertaking geographic expansion, undertaking value-chain expansion, and moving into adjacent industries. During the last economic cycle, the logistics outperformers focused primarily on two of those four: investing more deeply in their core businesses by enhancing existing competencies, improving operational efficiency, and developing technological platforms; and venturing on geographical expansion enabled by M&A.
Kuehne + Nagel International, for example, sought to strengthen its core business in logistics services by expanding its IT capabilities early and more comprehensively than its peers. It developed a platform to connect and collaborate with its customers and manage its physical and digital supply chains globally. The systems, providing end-to-end visibility and real-time monitoring, rely on predictive analytics and artificial intelligence to improve monitoring and control of the goods in transport. To further strengthen its core business, the company implemented strict cost control across the organization, undertaking multiple cost-optimization initiatives that identified process, productivity, and quality assurance improvements. Kuehne + Nagel also invested in select high-margin verticals such as healthcare services, for which it established a global network of dedicated warehouses. These activities helped the company deliver average revenue and economic profit growth of roughly 10 percent between 2003 and 2018.
Sysco, another through-cycle outperformer, grew its core business by capitalizing on scale: serving the broadest assortment of clients and extending their delivery reach. To curb costs, the company streamlined its distribution network to make inventory management more efficient and order turnaround faster. It also simplified and standardized procedures to improve customer service and reduce costs, establishing a shared business-services function that centralizes administrative services. Sysco maintained steady progress on the IT front as well by investing in its e-commerce website. As a result, between 2003 and 2018, the company achieved steady revenue and economic profit growth.
Many through-cycle outperformers—particularly in the freight-forwarding subsector—made acquisitions during the financial crisis3 to lay the groundwork for growth in the recovery. We found that 53 percent of these companies conducted mergers or acquisitions versus 32 percent of the remaining players. Through-cycle outperformers were also more likely to take a programmatic approach to M&A compared to the rest of industry. They did 3.5 times as many deals, averaging 3.6 deals during the crisis as opposed to 1.1 for rest of the industry. However, their deals were slightly smaller than the industry average, with roughly 10 percent lower values than the average.
In particular, this group favored transactions that took them into adjacent industry segments, doing 23 percent more such deals than the industry average. While their main focus was their home region (especially among trucking companies), they also conducted 30 percent more deals in new geographies than the rest of the industry.
M&A was a key aspect of the approach pursued by one growth outperformer before, during, and after the last economic crisis. The logistics and transport company wanted to bolster its geographic expansion with the goal of becoming less dependent on its relatively small home market. It started by acquiring targets in neighboring countries and in time moved into more distant regions—a growth strategy that has enabled it to balance its revenues across various geographies. During the time period we studied, this player averaged annual revenue growth of 11 percent and economic profit growth of a whopping 24 percent.
It is worth noting that even growth outperformers tended to slow their capital expenditures during the downturn, reacting quickly to the unfavorable environment and adjusting their capital expenditure plans. However, most quickly ramped up investments as the recovery set in (Exhibit 2).
How past growth outperformers have fared during the COVID-19 crisis
While the logistics industry has been hit hard by the current crisis, those that outperformed during the last downturn are bouncing back faster than the overall sector. The through-cycle growth group registered approximately 400 basis points higher TRS than the rest of the industry (Exhibit 3). In fact, close to 75 percent of the outperformers achieved higher TRS than the sector average during the peak months of the COVID-19 pandemic.
Many of the through-cycle outperformers seem to be continuing the strategic directions they set before COVID-19 hit. For example, a freight-forwarding player that was already investing in technology to strengthen its core business doubled down on this strategy during the pandemic, acquiring a freight-booking platform to support its forwarding business for smaller shippers. A trucking outperformer similarly boosted its existing focus on operational efficiency and customer service by investing in a digital freight-marketplace platform and testing other technology-driven services.
The strategic moves of the through-cycle outperformers suggest that logistics players looking to come out strong into the recovery should prioritize the core business, seek geographic expansion opportunities, and use M&A as a platform for growth. Doubling down on the core business and boosting main competencies can help companies bolster their existing competitive advantages, improve economies of scale, or expand their operational networks. Developing digital platforms to connect with customers can deepen client relationships and create innovation-driven growth. Companies should also explore pockets of growth within the core, focusing on customer verticals with the biggest profit pools and shifting the portfolio mix to higher-margin and higher-growth offerings. Finally, the economic downturn may present potential targets for M&A, provided the acquirer’s own balance sheet is strong enough for such investments.
COVID-19 will have a significant and lasting impact on the economy, but trade volumes are expected to recover. Logistics outperformers in the next normal will likely be those with a long-term focus on enhancing their core competencies and optimizing performance while keeping an eye on M&A opportunities.
