GXO Logistics (GXO) is a $5bn market cap global leader in outsourced logistics and was spun off from XPO Logistics in 2021. GXO operates a capital-light business with recurring revenue from sticky contracts. This yields 30%+ ROIC in what seems to be a large, fragmented and growing market. As e-commerce penetration rates continue to rise, retailers are faced with increasingly complex supply chains to meet customer demands. 3PLs offer a logistics solution to help retailers scale efficiently. This is a roundup of our primary research on GXO since it has been operating as a standalone business.

Market Structure and Size

Third-party logistics (3PL) providers operate warehouses on behalf of their customers. A simple value chain structure would be as follows:

3PLs operate in a large and still fragmented market.

However, the TAM may be overestimated because companies who have never outsourced their supply chains are not prone to do so.

“For companies that haven't outsourced their supply chain, the success rate is very low, less than 10%. It's a significant hurdle to overcome…I don't see many insourced operations being outsourced for the first time. Out of the last 10 engagements I've been involved in, not one has been an insourced operation transitioning to outsourcing." - Former Vice President at GXO Logistics

Customers outsource their warehouse logistics operations for a couple of reasons:

1. Speed to market:

“In response to Covid, we needed to quickly decentralize inventory to strategic hubs across the United States. When you need a fast response and a fast startup, the business model is easier to implement using a third-party logistics provider, especially from a staffing perspective.” - Former Director at Nike

2. Increased e-commerce penetration that required retailers to shift from a wholesale/centralized model (i.e items going from a central warehouse to retail stores) to a DTC/decentralized/digital model (i.e items going from a central warehouse directly to the end customer):