The complete acquiring, storing, and transferring of materials to their final destination gets referred to as logistics. Part of logistics management involves identifying possible distributors and suppliers, as well as analyzing their effectiveness and accessibility. Logistics managers get referred to as logisticians. The logistics are related to how military personnel acquired, stored, and moved equipment and supplies. The term is becoming increasingly popular in the business world, especially among manufacturers, to describe how resources are handled and delivered around the supply chain.
With over 60 sub-segments encompassing modes of transportation, services, and assets, logistics is a deceptively complex industry. It’s also a sector that’s experienced a lot of merger and acquisition activity recently, with $2 billion invested in over 200 announced agreements. However, it gets also seen as a sector where financial returns are difficult to come through, owing to the following factors:
- Unclear regulations
Regulations have a substantial impact on many logistics sub-segments, according to David Goodnight of Austin, Texas. Consider cabotage restrictions and coastal shipping, the influence of Direct Port Delivery standards on Container Freight Stations, or the unpredictability of haulage tariffs and container rail (CFSs). Regulatory googlies can devastate returns for financial investors with 4-7 year investment horizons. Whether it’s warehouse setup, rail connectivity clearances, or customs approvals for Inland Container Depots, delays are typical (ICDs). Delays lead to postponed cash flows and a reduced internal rate of return (IRR). Investors should explore longer investment horizons (7-10 years) to limit the risk of such uncertainties, especially in asset-heavy sub-segments.
- Industry upheaval
In the previous five years, technology and business model advancements have impacted the logistics industry. Some examples of disruption include new transportation operating models, e-freight forwarding, and the “Uberization” of trucks. Legacy players must innovate and invest in technology to remain, which depletes cash flows and reduces profits, according to David Goodnight of Austin, Texas.
- Macroeconomic factors
The EXIM trade impacts industries such as container rail, ICDs, CFSs, freight forwarding, and customs clearance. Headwinds in power, oil and gas, and steel affect project logistics. When evaluating such enterprises, investors should be aware of such macroeconomic variables and possibly plan for longer investment horizons.
- Hyper-competition
Multiple businesses (sometimes hundreds) operate in the same region or target the same customers with me-too products in several logistics sub-segments, such as road transportation, freight forwarding, customs handling, and CFSs. Price wars, margin erosion, and cash depletion result as of this. But it’s not all doom and gloom. Investors must locate winners amid the herd, and there are some indicators to look for when doing so:
- Supporting innovation
One of three things must happen as logistics innovation: reduced prices, lower operating expenses, or a better customer experience. Investing in logistics companies that have created long-term competitive differentiators can be profitable.
- Experience in the field
Historically, logistics has been a functionally driven industry, but clients demand that their logistics vendors speak their industry language rather than simply selling space or vehicles. Because of its focus on the car, retail, electronics, and e-commerce industries, the 3PL (third-party logistics) industry has expanded profitably.
- Instead of services, we offer solutions.
Differentiation is aided by bundling assets and services. Two examples of such combinations are warehousing and transportation or 3PL and freight forwarding. A solution-oriented approach helps logistics organizations increase client loyalty (“one-stop-shops” are easier to handle) and increase margins.
- Opportunities for the next generation
Seven years ago, there were few e-commerce logistics companies; today, there are numerous that have provided investors with substantial profits. Investing early in sub-segments with demand-supply gaps, such as bulk or liquid rail transport/storage, inland canal shipping, or last-mile distribution, is a risky play that could pay off big.
- Environmental monitoring
Regulatory, macroeconomic, and customer demand changes can all impact the logistics business, both positively and negatively. E-commerce is changing express logistics, while GST is changing warehousing. Pearls can get found in several variations of well-known sub-segments.
In conclusion, poor returns are ill-informed investment decisions in logistics, as in any other industry. However, the prospects for growth and differentiation in logistics, as well as the need for capital, are enormous, and a cautious investment strategy can certainly be very beneficial for investors.
