Deflating the $10T Logistics Market Myth
Welcome back to the sixth edition of The LogTech Letter, a weekly look at a particular aspect of the impact technology is having on the world of global and domestic logistics. Today, I’m going to make things a little spicy by addressing something that definitely needs addressing.
As a reminder, this is the place to turn on Fridays for quick reflection on a dynamic, software category, or specific company that’s on my mind. You’ll also find a collection of links to stories, videos and podcasts from me, my colleagues at the Journal of Commerce, and other analysis I find interesting.
For those that don’t know me, I’m Eric Johnson, senior technology editor at the Journal of Commerce and JOC.com. I can be reached at eric.johnson@ihsmarkit.com or on Twitter at @LogTechEric.
It’s terrible for engagement to get people to open your newsletter and promptly ask them in the first sentence to do a Google search, but here goes. Go do a search for “$10 trillion logistics industry.” I’ll wait.
Interesting, right? The size of the market varies wildly depending on which link you click. It’s $5 trillion, no $8 trillion, no $12 trillion, no $15 trillion. What’s a few trillion between friends? Add in all the links that speculate about how big the market might become and it gets more wild. I’m reminded of how Gob in that one episode of Arrested Development kept throwing out different, and increasingly ridiculous, numbers for the value of the suit he was wearing.
“Worse that can happen is can I spill some on my $3,000 suit. Come on!”
“Oh, yeah. The guy in the $4,000 suit is holding the elevator for a guy who doesn’t make that in three months. Come on!”
“Oh. Why don’t I just take a whiz through this $5,000 suit?!”
The global logistics market is huge, and growing. But there’s really only one reason why anyone would care how big it actually is, and that’s investors wanting to capture some idea of the market into which they are investing. They want that sweet, sweet TAM (total addressable market). A founder at a startup isn’t intrinsically thinking, “global logistics is a $10 trillion market - just think if I capture 0.001% of it! That’s a $10 billion revenue company!” (Well, maybe some founders are thinking that). More likely, they’re thinking, there is this problem that needs to be solved, and how can I get the capital to build the thing I know will solve it?
But investors are definitely thinking about that TAM. And that’s why it’s cool for founders to throw a nice, round, eye-gouging number like $10 trillion out there. “It’s a massively fragmented market crying out for consolidation. It’s an antiquated market crying out for digitization. It’s a manually-oriented market crying out for automation. And it’s soooo big.” I’m not going to name names about which startups or early stage companies have specifically mentioned that number in press releases or tweets or industry pub rewrites, but let’s be honest, it’s all fantasy.
Let’s say, for argument’s sake, that, yes, global logistics is a $10 trillion market. The issue is that startups sell certain investors on the idea that a massive proportion of that market is potentially theirs for the taking. They’re not selling them on the 0.01% of the market scenario. Which is essentially like saying that it is theoretically possible for LeBron James to score all 125 points the Lakers score in a given game. Actually, it’s more like saying LeBron could score all the points that all NBA teams score on any given night (even in games he doesn’t play in), as well as some of the runs MLB teams score and some of the goals that NHL teams score despite not playing those sports.
I suppose the point is that a startup can pitch an investor on the idea that even a minute fraction of market share in such a large industry still constitutes a large volume of revenue - that seems more reasonable than any investor being hoodwinked by the idea that any single company can dominate the logistics market in the way on-demand players in other markets have.
But it’s also fair to ask whether that $10 trillion market claim (or variants of it) are anywhere close to reality. And by this, I mean, if $10 trillion is spent on global logistics in a given year, how much of that is actually revenue that is “gettable” by a software provider? And then how much of that gettable revenue must be divided up between the 5-10 core software categories that shippers, 3PLs, carriers in various modes, ports, customs agencies, and other entities each must use? The pie gets pretty small pretty quick.
Let’s look specifically at data services, because I think it’s fair to say that data is a space in logistics that can sit alongside (or be integrated into) existing systems rather than replace them. If you claim that logistics is a $10 trillion industry and advertise your data capability as being able to tap into a market of that size, you’re essentially intimating to investors that a massive part of that $10 trillion is gettable (ie could be influenced by your data product). Not true.
If your data product doesn’t cover every freight mode, geography, and commodity type, the market size shrinks really quickly. Does it inform rates, location and status of capacity, visibility of goods and equipment? Even if you have all of that covered, the size of the market that would actually buy your product is a small sliver of the entire global logistics market.
Where am I going with this? I think the $10 trillion logistics market figure is a trope that startups use to lure in investors with little understanding of the nuances of the market. It’s also fodder for the cottage industry of market forecasting, a way to try to tangibly describe the significance of a market we all know is vital, but that has always existed in the shadows.
As I’ve written in the past, it’s almost useless to describe the total size of a market with so many different aspects to it. It’s much more sensible to realize that, say, technology for forwarders or truck brokerages is a niche of a niche in a niche industry. It may be a sizable niche, but it’s a niche all the same.
So my advice is avoid all references to logistics having a $10 trillion TAM, and start thinking more critically about the market that is feasible - ie doing the much harder work of figuring out what that niche of a niche of a niche TAM is.
Here’s a roundup of pieces on JOC.com the past week from my colleagues and myself (note: there is a paywall):
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And here are some recent discussions, reports, and analysis I found interesting:
https://blog.chain.io/goodbye-ftp
https://www.linkedin.com/posts/zschreiber_logistics-cargo-freight-activity-6706560360914132992-8nyL/
Disclaimer: This newsletter is in no way affiliated with The Journal of Commerce or IHS Markit, and any opinions are mine only.
I have certainly felt the need to define TAM and, as you say, to make sure it is large. In terms of "how big is it really", I think its ~$3.2 trillion of which ~$2.8 trillion is in execution, $300 billion is in infrastructure, and $90 billion is in management (here I include 3PL gross margin to avoid double counting them in execution). Over 50% of execution is in road transport: ~$1.5 trillion per year.
Where in the world am I getting these figures from? Mostly from this excellent report by BCG which sizes and breaks into subcatageories the field of "logistics". https://www.bcg.com/publications/2016/corporate-development-finance-value-creation-strategy-transportation-and-logistics-in-a-changing-world
Right on Eric! So descriptive of the complexity of the industry. Thanks for the chuckle too - haven't had a good laugh in a while, never thought it would be about our beloved industry :)