We need a game-changing service provider, which values innovation and quality service. And most importantly, the one that brings automation is not at the expense of the people.
Justin speaks with Mark Manduca, Chief Investment Officer of GXO Logistics, and Jeff Rinkov, CEO of Lee & Associates. They discussed GXO Logistics’ success and challenges in providing cutting-edge logistics solutions. Mark shares the reasons behind GXO’s competence in the industry. GXO has worked with multinational companies across the globe, including blue-chip market-leading businesses. Tune in to learn more about the trajectory of warehousing, logistics, and automation in the years to come.
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- Introducing Mark Manduca – 0:28
- Who is Jeff Rinkov? – 1:26
- How GXO started and what is its competitive advantage? – 2:59
- Supply chain reorientation – 5:10
- Hos GXO manages and mitigates inflationary pressures – 8:38
- Scale comes in many forms -12:52
- Value-added services – 15:00
- The warehouse automation wave – 15:44
- Warehousing is evolving: multistory game in other markets – 18:13
- Closely knit individuals and equitized culture – 19:17
- GXO acceleration and challenges – 21:38
Connect with Mark Manduca
Connect with Jeff Rinkov
Connect with Justin Smith
Justin Smith: There he is. He made it, welcome. So we’re here on the industrial insights podcast, we’re excited to have Mark Manduca, Chief Investment Officer of GXO Logistics and Jeff Rinkov, CEO of Lee & Associates. We’ll explore the challenges in today’s supply chain and then go over to GXOs success this year and part of the future business plan. Mark if you wouldn’t mind giving our audience some background to your time here with GXO.
Mark Manduca: Happy New Year, and thank you for the opportunity today, Justin. My name is Mark Manduca as you said. I am Chief Investment Officer of GXO Logistics, which is a global logistics company. It’s the largest pure play logistics warehouse provider in the world to amazing blue chip customers. We’re two thirds Europe, we’re one third North America. And we’re sitting at the crescendo as we talk about in the coming 30, 40 minutes. We’re sitting at the foothills really of some phenomenal growth. It’s a massive secular tailwind. In terms of my backgrounds your question, I was on the sale side for 10 years and then prior to that, four or five years at a hedge fund globally investment house. I’ve been covering the sector for a long period of time, but it’s great to be working at a corporate, particularly this corporate that is really creating.
Justin Smith: What a fantastic time. And then Jeff if you wouldn’t mind introducing yourself, that’d be great.
Jeff Rinkov: Thanks Justin. So Jeff Rinkov, CEO with Lee & Associates. I’ve been with Lee for 25 years. So I think I will always claim to be a recovering industrial broker. And so I was really fortunate growing up in the business, working for Lee my entire career. And working kind of at the confluence of roughly a billion, maybe now 2 billion square feet of industrial from central LA all the way to Ventura County and all the way out to the Inland Empire into the south bay. So I would also extend a really warm welcome to Mark and thank you to the opportunity because we’re really a fortunate service provider and we count you as a treasured client. So thank you to GXO or really XPO for the opportunity to be of service.
Justin Smith: And then last year we were fortunate to have a GXO and XPO interview, where we went over the changing environment and the implications of e-commerce. How it was causing retails to transform into more industrial space and more industrial use. And then we covered some of the capital investment into warehouse automation and in robotics and AI and the IT infrastructure. And so very thankful for your contribution. I feel like that was just an introduction to a lot of the capital investment that’s been going into the business. So I’m so excited to see how it’s taken off since then over the last year.
I’m hoping a great place to start would just be with the inception of GXO and kind of the rocket ship ride we’ve been on. Maybe you can just help us understand how that started and the current trajectory.
Mark Manduca: Yeah, it’s very kind. So a couple of things we spun out from XPO, the conglomerate business. Which was an LTL business, workers business, last mile business and they contract logistics business. That contract logistics business was spun out on the second of August of 2021. We were then listed on the New York stock exchange on that day. And as you say, we’ve traded since then as a standalone public entity. This entity is effectively 900 warehouses, roughly 1,050 customers global, blue chip customers operating across those 27 countries that I referenced earlier. This is quite frankly in the minds of where I said earlier, this idea of category creation. In the minds of investors what we’re doing is, we’re creating a category. Something that really doesn’t exist in the market. If you want to get exposure to our massive secular tailwinds of automation, e-commerce, and outsourcing, which we’ll talk about. We’re really the large capture in town for you to invest in on a pure play basis. There is no large cap, pure play acid out there that you could invest in global equity markets that has our absolute singular focus that we have on this very exciting high growth industry. So that’s what we’ve been telling people in the last six months. As you say, since the spin, we’ve been very excited to be getting the message out there across that holy trinity of customers, teammates, and shareholders that we pride ourselves on in this business. And it’s a very exciting time to be us because rarely do we have those massive secular tailwinds. We have the scale, the technology, the counterparty, our balance sheet is very strong and also the overriding factor of being the singularly focused business. You bring all those forces together and you have a strong ESG rating like we do, and you have a very exciting platform for the next 20 years to capitalize on some phenomenal growth.
So that’s summarizes where we are at and the noise that we’ve been making in the market. These are very exciting times for an asset such as us. GXO is in the right place at the right time.
Justin Smith: And supply chain has never been in the spotlight like it has this past year. Where are we in the whole supply chain reorienting?
Mark Manduca: There’s a few things to be aware of when it comes to supply chain. One is that the problems aren’t going to solve themselves anytime soon. And the reason I say that is the global supply chain is such an intricately woven web. To believe that any one single thing is going to just fix it overnight, like a magic wand is just it’s fool hearted and slightly naive. What would most likely happen here is you’ll end up getting an appeasement of the freight market. I think sometime around Q1 and Q2. The reason I say that is the passenger aircraft will be flying again and that will allow effectively belly capacity to come back into the world supply chain. What I mean by that is the belly capacity and passenger planes make up about half of global cargo capacity. So it’s a very important part of that global supply chain. As that happens, pricing comes down, people shift from one form of transportation to another. In this case, container shipping moving to air freight, and that will effectively pause pricing to subside. That’s an age one phenomenon from an air freight standpoint, but it’s probably more like an age two phenomenon from a container shipping standpoint. Then further through the value trade, whether it’s the truck driving market or whether it’s just broadly more generally labor inflation that’s been taking place. We don’t see that changing anytime soon. We think labor inflation is here to stay. And it’s one of the many reasons why customers that come to us demand war technology. And this is people working against robots. This is people working with robots, hand in hand. And that’s really going to be the story, I think of 2022. It’s just going to take time, Justin.
Justin Smith: It’s wild to see, like with the port of Los Angeles and a lot of the ports across the country, this backlog that everybody’s seeing and the anecdotes you’ll hear of how long it takes for people to be served not just weeks but months. I’ve heard of even three or four months of people being log jammed out there.
Mark Manduca: Flip it on its head what you just said in terms of, you talked about the supplier and clearly suppliers’ constraints. If you look at the demand element, the consumer is absolutely roaring, like it’s the roaring twenties. Every data point you can point towards within Q4 from an industry standpoint point towards exceptionally strong e-commerce data is real demand. So while the ships are waiting out at the port, the reality is that the consumer is not waiting to get its goods. The choice is less, but the consumer still has this insatiable demand. You’re seeing it in the reverse logistics stage as well, extremely strong reverse data coming through. We’ve seen that from some of the, the record volumes already reported by some of our counterparts.
And then you overlay this with $2.7 trillion worth savings sitting on the balance sheet of the consumer roundabout, 15% of us GDP waiting to be deployed. This is a very exciting time indeed. So you’ve got these insatiable roaring twenties type demand on the one hand, which has obviously had an on-par industry-wide Q4 phenomenon alongside constrained supply. People say famine followed by feast. I actually think that there’s going to be feast followed by feast followed by backwards. This is going to be a very interesting time for consumer price inflation. I mean, it’s going to be an interesting time for consumer demand and mostly on the upside.
Justin Smith: And I think maybe Jeff, you can chime in a little bit of how that’s manifested in the industrial markets and the demand for space.
Jeff Rinkov: So, yes, that’s a great segue, Justin. So Mark, we’re seeing in high identity distribution markets a real increase in demand, decrease in vacancy rates and real acceleration in occupier costs from a leased rate or an acquisition standpoint. How is GXO either managing, mitigating, or hedging the inflationary pressures on the occupier side, and also things like energy and labor.
Mark Manduca: So there’s a couple of things we do for our customers. Let me just contextualize it. So, first of all, as a business globally, there’s 900 facilities totaling over the better part of 190 million square feet worth of warehouse space. So being a global player, working with amazing landlords and suppliers for warehouse. The way we help our customers is very simple. What we do is we basically take the tenants of your business, that you will be managing yourself. And what we try and do is we try and improve those tenants. Now that can be labor, as you referred to it can be the warehouse itself. It could be the technology that you’re deploying within the warehouse. And what’s really happening here is that we’re taking your rather rudimentary system. In some cases it’s more advanced, but we’re taking your widget, your warehouse in this case and turning it from mediocre to good. And in many cases from mediocre into great. What do I mean by that? Let’s give you some historical context. If you take a typical customer 20 years ago, this was a commodity industry. You would have in essence, a warehouse full of teammates pushing boxes around with their arms and their hands and their legs. And that would make lots and lots of sense because fundamentally this would be a difference between good and great would be a very small footstep. It would be effectively the difference between 50 picks per hour and 60 picks per hour. Little fleet has turned into a mammoth fleet over the last 20 years as we’ve seen technology deployed in the warehouses. So customers are coming to us and saying, I already have a warehouse. I already have people. In some cases, they don’t have a warehouse, and, in some cases, they want a Greenfield. But in a lot of cases, what they’re doing is they’re still paying the base costs. A pass through in essence of everything that they were doing on their own. What we’re doing, almost like a consultancy, like an advisory is we’re trying to make them the best version they are themselves. Trying to basically turn them as I mentioned, from that good into great type category. Therefore what we’re doing is we’re sourcing warehousing for them in a last mile basis, better. We’re helping them find part-time and agency work better so that they can source in terms of that labor market, which is clearly a struggle at the moment. We’re getting them phenomenal information like a consultancy would so that they know what their competitors within that business are charging. And all the time, what we’re doing is in effect is saying you’re paying for whatever you would have paid on your own. We’re improving the turnstile and making sure that it flows more smoothly. That drives efficiencies from a cost perspective. You then put technology overlay on that and the money you save on costs, but you also improve your throughput through your warehouse. And needless to say, that’s why first-time outsources are coming to us.
That’s why competitors of other 3PLs are seeing their customers come to the bigger players in the market. And that’s why we’re winning an increasing amount of wallet share with our existing customers. There’s a lot to be excited about here Jeff, in the sense that both our cost metrics and our revenue metrics getting forwards. Fundamentally our business is a pass through. We source things for our customers and make them great.
Jeff Rinkov: That’s phenomenal. Thank you. That’s very insightful. Thank you very much.
Justin Smith: And it seems like a scale is such a huge advantage. When I think of scale on a real estate perspective if Las Vegas is sold out of space or Prologis is sold out of distribution center space. If you already have that relationship and scale another market so that you can leverage it and be able to find opportunities before they’re publicly available. How else does scale play into the business?
Mark Manduca: It’s such an important point scale because it comes in so many forms, scaling the ability to hire labor, scaling the ability as you mentioned Justin to source real estate. Such an important portion of working with some of our amazing blue chip providers of real estate, some of the landlords, the biggest and the best in the world. And we’ve got preferred relationships in one specific case. Our ability therefore to get the first call and to find that warehouse in a position that suits the customer from a last mile perspective, is really something that we differentiate ourselves on. Scale can come in the form of ability to leverage our ESG powers. Scale can come with the ability to RFP from a technology standpoint, when it comes to hiring the biggest and the best equipment. Scale could come from a software standpoint. Be clear when you have those minor jumps back in the commoditized Charles Dickens world of 20 years ago, where effectively you’re working from good to great picks and extra 10 picks per hour. And you go into a world of FOMO where customers are competing against each other to get those massive leaps and bounds from 50 to 300 picks per hour. No one wants to be the guinea pig. They all want to have the best, the biggest and the most efficient equipment in the new warehouse. And what that means is that you see a consolidation in the top one, two or three in the market. Inevitably in this fragmented market, what’s going to happen to your point on scale Justin is that the big three will most likely take a significant amount of market share. We’re going to see a shift of this role, the fragmented wallet market to maybe the one, two and three in the market taking more and more share and win rates going up for those top three. And for the biggest pure play, you know what that means? GXO right place, right time.
Justin Smith: And with such a dedicated focus the pure play aspect to it.
Mark Manduca: Not only what you just said in terms of dedicated focus. Pure play aspect, no one wants to feel that you’re doing all things to all people when you’re serving the customer in something so important as managing their warehouse and managing the goods getting to the end customer. Remember in a lot of cases we’re doing value added services in scribing initials, on equipment within a warehouse, repackaging that equipment and then sending it off to the end consumer. We’re the last person to touch your goods. So that behavioral trend of making sure that performance is an absolute gold standard is so important in this industry and therefore to be a pure play and to be absolutely focused on one thing while we try and cross sell the customer into a million different things is one of the main reasons why brands choose us. Large cap, pure play scale, technological advantage, lots to be excited about in that very simple phrase that you use in the function of pure play.
Justin Smith: And in a warehouse automation, right? You guys have made such great strides there in thinking through what people usually would see in a warehouse. Where are we in the warehouse automation wave? It seems like robots as a service was kind of one of the last evolutions of making it more available for people in their warehouses. You’ve taken it to a next level. Maybe you can expand upon that a little bit.
Mark Manduca: Let’s contextualize where we are in the industry, Justin. So the reality is that we’re 30% automated across our footprint. There’s 900 warehouses that I talked about roughly 200 million square feet. The reality is that our competition, our industry is barely 5% automated. So the starting point here is, do you want to go with someone who’s not having their first rodeo, hence this gravitation towards big, getting bigger. When it comes to thinking about automation, it comes in so many different forms. Software proprietary solutions such as on GXO smart software, which allows labor productivity to be approved by the minutes and the second rather than by the day and the hour. Such an important tool that we deploy across 60% of our warehouses. Integrating solutions with the customer, taking their hardware integrating it with third party hardware, taking vessels to integrating it with our software. Making sure that this is a very close-knit brand managed solution that really provides the end result, which is delighting and pleasing the end market consumer. When it comes to thinking about software and hardware combined, it’s very easy just to be blasé of asking and say, oh, we’re just going to buy robot. Who can’t buy a robot? Anyone could buy a robot. Not true, we have examples of competition working with us very simply in a position whereby they take the same robot, they take the same software that comes with the robot. They don’t know where to put it in a warehouse. And as a result, what happens is inevitably they will ultimately see far fewer pick rates and it’s so important to know how to use it. How to put the scanners in the right place to ameliorate the position of the robot.
So what we’re trying to do here is turn good integrators I mentioned. Have the right warehouses with the right level of tech deployment for the right consumer solution. And that’s really what we’re focused on as a business. Trying to do all things to all people doesn’t work for having the acumen and experience, to know where things go in a warehouse and deploying that for the customer on a bespoke basis and making that customer feel very special indeed is what we specialize.
Justin Smith: I love it. Warehousing is evolving, right? As we think of like urban centers and multistory, and you’d think as people push inventory closer to population centers. Have you gotten into the multistory game in other markets? Or how do you see that changing?
Mark Manduca: We do have mezzanine flooring across some of our warehouses, particularly in Europe. So yes, that is something that is a focus we’re constantly focused on driving efficiency, particularly given it industry warehouse capacity is in the nineties in many cases. So driving efficiency through the warehouses, through automation, accurate clever schemes on the mezzanine flooring side, that’s definitely something that we’re focused on as a business. And remember, particularly as we move into this more metaverse type era, the reality is the demand for warehouses, particularly from an e-commerce perspective, it’s only going to go one way. The idea of going into a shop in 10, 20 years from now is going to be a very foreign concept is what some people would argue. And this idea of being on top of this trend at early and creating the category is where we’re sitting in the value chain. It’s a very exciting time. So yes, is the answer to your question.
Justin Smith: I don’t know Jeff, if you have any others, one thing I would think of, maybe it’s just as real estate is that we’re obviously real estate brokers. We’re in the industrial game. So we’re always working with teams on how do we improve our teamwork? How do we improve our process? How can we improve our technology adoption within the real estate process? How are you connected with your real estate department or how do you guys work on scale as a real estate is involved internally?
Mark Manduca: We’re constantly looking to scale with different partners. We’re constantly having intricate and detailed conversations, not just through the traditional players but trying to spread our weapons and innovative solutions for our customers. How often do I speak to the real estate department? Every day. Phenomenal team working globally to source the best real estate for our customers. As I mentioned quite shortly closer to the last mile, making sure the footprint is right and fit for purpose and making sure that we’re pleasing and delighting those customers. So the answer is, very closely knit individuals here. It’s a very equitized culture. We’re focused on that holy trinity, that I mentioned in terms of customers, teammates, and shareholders and every piece of the puzzle of GXO is working towards those three poignant outfits within our organization.
Justin Smith: I do remember from last year’s interview of the amount of distribution centers worked on per month was something like 30 or 40. So, if you imagine you’re working on that amount of property on a monthly basis, like you do get your process all worked through and there’s so much opportunity for just the velocity of transactions to have opportunities for improvement.
Mark Manduca: Totally agree. There’s constant improvements taking place, particularly for a new business. Your processes are constantly improving versus when you’re in a conglomerate, you don’t have that same focus on processes. So the exciting thing here is that the level of the total addressable market $440 billion worth of total addressable market at play for a company that barley has $8 billion of revenue and is the biggest pure players I mentioned.
So the excitement factor here, as you say in terms of improving processes, as we eat away at this time very quickly going forward is something at the forefront of what we’re trying to do. Collect the money for great service, make sure we please and delight customers and in so doing keep our workers safe in an incentivized environment and thus please our shareholders.
Jeff Rinkov: I did have a quick question, Mark, and thanks Justin. So if you go back to pre-pandemic and we all saw the trends away from brick and mortar, retail, and e-commerce obviously gained significant track. And as Justin mentioned at the outset, we’re now as a population talking about things like supply chain and logistics that were not part of the lexicon previously, but now we’re under so much focus and so much spotlight. How much acceleration has GXO seen? Are we two years, three years ahead and what are some of the challenges that you’ve encountered with the demand increase over the last 22 months or so?
Mark Manduca: So it’s easy to point to one thing and trying to explain that’s the reason why growth is happening the way it is, but in a contractual business the persistence of growth is always the thing that surprises people. When only is there that total addressable market, but the drivers that we have in terms of econ being only 20% penetrated foothills of the Himalayas? Outsourcing only 30% penetrated in that 430 billion dollar market, foothills of the Himalaya. And then of course, automation, 5% penetrated foothills of the Himalayas. This is literally just in its nascency. So wanting to believe that it was the supply chain problems that drove all these customers to us, or whether it was the pandemic of it being a home and ordering on e-commerce, there’s been a mindset shift over the last five to 10 years. People know that they have to work with the bluest of blue chip 3PLs. If they’re a blue chip customer and stand shoulder to shoulder to them. Not with a master and servant type relationship but with equality when it comes to bargaining power. At least what is going to drive business, not just has been driving business yesteryear, but also today, tomorrow and for the foreseeable future. There is 13 years plus worth of growth in these addressable markets and with these secular tailwinds. And I really don’t hesitate in saying 30 years. The compounding nature of some of these trends are going to be here to last. In terms of the bottlenecks, we’ve not mentioned labor I think very effectively through the crisis and that clearly has at some points had a labor availability issue. I think we’ve managed some of the commodity type issues that we had around racking extremely well for a global scalable company such as us. And the gazing factor is making sure that you balance the desires of the customer in terms of technology deployment versus what reality could actually do. And we want to make sure that we’re deploying a right type of technology at the right pick rate with the customer solutions. That’s always a balancing factor in any conversation, but the world is our oyster right now. Lots of growth ahead.
Jeff Rinkov: I think your, your narrative is very similar to other of our large customers, which there is so much of a flight to quality, whether it’s a flight to quality of the type of real estate of the location of real estate or in your case, the service provider, and their ability to level up with technology and labor and managed through structural issues. So congratulations.
Mark Manduca: Thank you Jeff. Couldn’t agree more with your point.
Justin Smith: I know you guys are busy. I think we really hit the nail on the head of just the understanding, like being at the start of something special and seeing it like the inception of it. It’s fantastic to see and to experience. So Mark Manduca Chief Investment Officer of GXO Logistics and Jeff Rinkov, CEO of Lee & Associates. I want to thank you guys for making yourselves available and contributing to the conversation here.
Mark Manduca: Justin and Jeff, thank you so much for your time today.
Jeff Rinkov: Thank you Mark and thanks to your team. And it was a pleasure to meet you hope to talk soon.
Justin Smith: Thank you. Bye bye.