M&A Trends in the Value-Added Warehousing Market

Over the course of the last several years, M&A activity in the Value-Added Warehousing (“VAW”) sub-sector of the Transportation & Logistics (“T&L”) industry has ramped considerably. In this article, we reflect on some of the key factors that have helped drive this market interest and share perspectives on some important themes for industry participants, now and in the years ahead.

Secular Trends: Macroeconomic Factors on VAW

At a high-level, some buyers may view the Value-Added Warehousing space as uniquely positioned to possibly benefit from several potential long-term macroeconomic tailwinds.

Near Shoring / Re-Shoring:

• A combination of political pressures, supply chain risk management strategies and cost savings initiatives have created a powerful incentive to relocate production closer to the ultimate U.S. user. As a result, related outsourced services, such as VAW, are experiencing growth. According to GXO Logistics, each 1% of trade that moves to North America and Europe from another country represents a $1B increase in the total addressable marketplace for VAW services[1].

Commercial Channel Shifts:

• The shift of commerce from physical locations to online has changed the way products are stored, handled and distributed through both business-to-consumer (“B2C”) and business-to-business (“B2B”) channels. According to CBRE, replicating a brick & mortar retail distribution network with an e-commerce distribution strategy requires ~3x the amount of real estate[2]. Given this increased access to demand and larger relative footprint, e-commerce distribution strategies also require more personnel and more robust technology to manage additional SKU counts, often tipping the scales in favor of using an outsourced provider.

Outsourcing:

• Relative to performing warehouse services internally, using an outsourced provider can drive meaningful efficiencies for shippers. Third-party providers help their clients reduce costs by leveraging a trained and experienced workforce and sharing in procurement cost savings on items such as real estate, temporary labor staffing, racking and material handling equipment. Outsourcing also allows clients to refocus on core competencies, resulting in leaner, more streamlined operations. Outsourced providers’ technology solutions are often specialized for the warehousing task at hand and improve inventory management and turnover, as well as flex with changes in seasonal freight patterns. Better performing warehousing operations lead to improved customer service, driving the potential for improved retention and revenue growth for shipper clients. As of 2021, just 32% of the $456 billion global VAW TAM was outsourced to third party providers, with the balance handled internally by shippers[3]. In the years ahead, key industry participants expect this penetration rate to increase as the efficiencies associated with outsourcing become more apparent[4].

The combination of these factors is fueling growth in the VAW subsector of the T&L industry. In the 5 years leading up to Covid-19, the Value-Added Warehousing space grew at a 6% CAGR[5]
Through 2027, the global industry is forecast to grow at an 8% CAGR[6]. Given the potential organic growth, market interest levels could grow in the years ahead.

Sticky, Visible Business

Most VAW services are contracted with clients, oftentimes on a multi-year basis. Contract conventions vary by end-market and service, but in general, tend to provide for high-levels of revenue visibility as compared to other, more transactional types of logistics services, such as trucking, brokerage and freight forwarding. Levels of integration with clients tend to be high, with new project lead-times often being 6 months or more to accommodate for customized service preferences. This dynamic could result in significant switching costs, potentially leading to strong levels of client retention. Over the course of the most recent freight market downturn, Value-Added Warehousing models have exhibited strong levels of growth and margin stability relative to other T&L sub-sectors, as evidenced in Figures 1 and 2 below. This predictability and lack of cyclicality has helped drive strong recent buyer and lender interest.

Value-Added Warehousing: A Large, Fragmented Market

The North American total addressable market for VAW services is in excess of $250 billion[9]. This market is dominated by small, regional participants with few providers commanding a meaningful share of total industry revenue. This fragmentation could create significant competitive opportunities for those with scale. Small regional providers often lack the internal engineering processes to effectively design complex client projects. Smaller players are also less likely to have invested in sophisticated technological systems that allow for more robust analytics and customized reporting that clients are increasingly requiring. Finally, providers with scale are much better positioned to manage through the largest cost categories that present the greatest potential for margin compression: labor and real estate. In Figures 3 and 4, we highlight recent U.S. trends in hourly labor rates for warehouse employees and the average rate of increase at lease maturity for Prologis across its U.S. warehousing property portfolio, respectively.

For providers without a scaled human resources function (or negotiating power with staffing agencies) or relationships with national landlords, cost pressures have been acute in recent times[12].

Potential for M&A in the Value-Added Warehousing Sector

Sub-scale providers are often the perfect M&A targets for strategics pursuing a consolidation effort in the sector. The valuation discrepancy between a provider with scale (>$10m EBITDA) and a smaller provider (<$5m EBITDA) on an EV / EBITDA multiple basis can be substantial given the difference in risk. When executed effectively, M&A helps strategic acquirers enter new services or geographies, gain exposure to new customers and end markets, and bring on additional talent. Cost synergies for transformative transactions are potentially meaningful, but in bolt-on transactions tend to be more limited. That said, relative to other areas of logistics, integration risks are more limited given individual facility operations are semi-autonomous in nature.

Ability to Capture Efficiencies from Automation in VAW Market

Ongoing innovations in automation tools have helped to dramatically improve labor efficiencies for providers that are able to effectively implement and utilize such technologies. While costly, automation is becoming increasingly common, further deepening the potential competitive moats for those with scale. According to the International Federation of Robotics, the market for industrial robots more than doubled over the course of the last decade to 542,000 installations in 2024, driven by new user adoption[13]. As shown in Figure 5, large public providers are implementing automation technologies in situations where both the economic and use case are viable. In the years ahead, this penetration rate could grow materially as innovation comes to areas of the Value-Added Warehousing market where no solution exists today, such as bulk pallet storage and handling.

Key Diligence Areas: Understanding Risk in VAW Market

Despite this attractive backdrop, there are risks that are unique to the Value-Added Warehousing space that need to be properly reviewed and understood. High levels of customer concentration are common in the sector, so understanding a target’s relationship with its key customers is critical. Mismatches in facility lease terms with key customer contract maturity is another common area of focus in business diligence. Finally, given the duration of contracts are typically multi-year, understanding the mechanisms to offset areas of cost inflation that providers are likely to experience over the life of a client engagement, such as in labor or leases, are important for understanding contract economics.

Stephens VAW Experience

Over the course of the last ~15 years, Stephens has built a market leading Value-Added Warehousing and contract logistics practice, closing over 10 transactions in the sub-sector.

Stephens Investment Banking: Transportation & Logistics

For more information on Stephens’ capabilities and experience in the VAW sub-sector, please contact either of the authors below: