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Spencer Levy
I'm Spencer Levy and this is The Weekly Take. On this episode, the inner workings of the supply chain, specifically the role of third party logistics, a.k.a. 3PL and the process known as reverse logistics.
Sid Brown
Our business is going to grow 20 percent this year, in a year when so many other businesses are challenged.
Spencer Levy
That’s Sid Brown, the CEO of NFI Industries, a nearly 90 year old family run business that is one of the largest third party logistics providers in North America. Sid joins us from his home near the NFI Company headquarters in Camden, New Jersey.
John Morris
The amount of institutional capital and pension funds and insurance funds that run into the space, there's actually not enough assets for people to buy right now.
Spencer Levy
And that's John Morris, who leads CBRE’s Retail and Logistics for the Americas as an executive managing director with more than 30 years in the field, he oversees a team of 1600 professionals from his home base in Chicago. We'll discuss infrastructure, shipping, trucking and rail. We'll explore the global nature of logistics business during the holidays and the impact of the pandemic. We'll talk about labor sustainability and if this essential industry is a science or an art. And of course, we'll look at how it all fits into the commercial real estate picture, the inside track on our supply chain and informed back and forth on forward logistics and reverse logistics. That's right. Now on The Weekly Take.
Welcome to The Weekly Take, and this week we're delighted to be talking about reverse logistics, we have Sid Brown, the CEO of NFI Industries. Sid, welcome.
Sid Brown
Thanks, Spencer. Really appreciate being on this with you. And I appreciate CBRE asking NFI to be a part of this podcast.
Spencer Levy
Well, thanks for joining us. And John Morris, our leader in our industrial and retail practice. John, thank you for joining us today.
John Morris
My friend, happy to be here. Happy to be with you and looking forward to talking about things going backwards in the supply chain.
Spencer Levy
Well, we will talk about it. And then also you can read about it in CBRE’s new Viewpoint, the 2020 stress test, which is a terrific report about the space, but speaking about the space, John, do us a favor and paint a picture for us. Most people don't even know what reverse logistics is. What is it?
John Morris
It's going backwards down the forward supply chain, Spencer. So manufacturing origin distribution to warehouse for distribution to maybe smaller in market warehouse facilities, most traditionally in the past to store, but certainly now to your house. Reverse supply chain is more challenging. It's that item that returned item and sometimes it goes backwards only to the store. Sometimes it needs to move backwards to a warehouse to be processed, sometimes backwards to the product goods company that marketed it, sometimes even to manufacturing. So a very disruptive, disjointed, currently less well understood reverse supply chain. And this Christmas, we think as much as a third or more of gifts we receive in a year where gift giving won't be events, it won't be vacations, it'll probably be almost completely goods and even some of them essentials. It's an environment this year that's going to be the most challenging ever. So the less well defined reverse supply chain going under that stress test this year is going to be a very interesting paradigm this holiday season.
Spencer Levy
So tell us what NFI Industries does and how it fits into the reverse logistics picture.
Sid Brown
So NFI really is a global supply chain solutions company with a real focus on North America. We have four service offerings that we focus on. The first service offering, which is the most relevant for this conversation today is our distribution, warehousing and cross talking and fulfillment operations. We operate over 50 million square feet of space in the US and Canada. Most of that is forward storage, but we do have a pretty substantial presence in the reverse logistics arena and that is growing. We also have a large dedicated fleet operation where we have over 3,000 trucks hitting the streets every day, delivering the goods for our customers, then we have a very port centric strategy where we handle, on average, about 10,000 containers a week coming into the ports, both east and west Coast. And then the fourth area we do is we provide freight brokerage services where we do not use our own assets, but we use assets of our carrier partners to move freight on either a contractual basis or a spot basis. On average, we handle about fifteen hundred to two thousand loads a day in that operations. And I'm proud to say that during COVID, fourteen thousand NFI employees came to work every day and performed a service for our customers that was beyond belief. And they are everyday heroes and we appreciate all that the NFI workforce has been able to accomplish over the last nine months.
Spencer Levy
Well, Sid, I think you said it right. There are so many everyday heroes that you don't hear about. Obviously, there's those on the front lines in health care where there are those that are shipping critical goods. There were those that are managing these facilities or those critical goods can get to those frontline workers. So terrific description. And I share your sentiments towards your workers. So, John, if I were to describe logistics, I would call it science. And the reason why I would call logistics science is because the technology is there to be able to measure where goods are going, how quickly through which mode. But reverse logistics is art at this point. While it's getting better from a scientific standpoint, it is certainly not there yet in terms of its efficiency. Would you agree with that characterization, John?
John Morris
So, Spencer, I think you're calling it art because it's not science and that's fair. If it's art, though, it's probably like Sydney Pollack and it's, you know, spots against the wall. It's really imprecise because it's a business that we don't have any forecast for the forward supply chain, heavily understood, data driven, led by experts for decades. That's a science. Right. And that uses all kinds of predictive analytics to know where something is going it needs to be and how it gets there through companies like Sid’s. But reverse supply chain is completely unforecast and unplanned. I would say we have more data that enables the science, but I think art is appropriate in that metaphor. And it's not the cleanest art right now. It's really, really challenging.
Sid Brown
Spencer, I just want to let you know that nobody has ever accused me of being a scientist or an artist. So I appreciate the level of competency that you've just attributed to the 3PL industry. And I'm going to keep a note that when other people kind of talk to me about what I do. So I appreciate that, Spencer.
Spencer Levy
You bet. John, of all the five major asset classes, I always said that industrial was the most dependent upon global trade globalization. And I would say that during the pandemic that actually came true in the short term, how did the pandemic impact logistics and reverse logistics? And in the long term, how do you look at these global trends and how they will impact the same?
John Morris
The first few months of the pandemic, I would say industrial was sort of unstable on its feet for some period of time. But it became evident even in the first 30 days that any setback to industrial real estate was going to be very short lived. The summer for the business was really strong. And here, as the year finishes out, it may end up being the biggest leasing year for industrial real estate ever in a year that's been tough for everyone it really seems the business has been a fundamental part of helping with the pandemic, trying to manage supply chains efficiently and effectively during such a period of disruption and labor challenges as part of health concerns. And within that, you know, year for industrial Spencer, it's been significantly about e-commerce as a percent of retail grew more this year than it did in the prior 10 years. So it's been quite a ramp for ecom. We all understand why we're all at home much of our days and shopping from our computer. I think longer term we get the question a lot: When does e-commerce plateau? I don't know if I'll be around to see that. I'm not sure that it ever plateaus. I think next year may be another big year with hundreds of millions of feet of new supply coming into the system. And finally, if you go back to your original comment, Spencer, my global colleagues and I, we get together once a month, early in the morning to talk about our markets, record markets in other parts of the world as well. So it's a global phenomenon. I appreciate your love for industrial, Spencer, I think 10 years ago, you know, we were just the folks with the muddy shoes walking around cement buildings, trying to figure out how to move trucks, I mean that in all kindness and love said it's amazing how we're Hollywood now. We're pretty important people.
Sid Brown
We actually get some respect when we walk in a room now and we say we're industrial users or builders. And, you know, I just want to kind of say, John, it's so true that industrial has just boomed the last couple of years and vacancy rates in some markets are really at all time. Lows are pretty low. And what's really remarkable is the amount of increase in rents that have taken place in certain markets. And it's almost ironic that you can get more money for warehouse space on a per square foot basis than office space in certain markets today. And who would have thought that? But one of the biggest things that is presenting a problem for folks like ourselves, that our users or developers or space is there's a shortage of labor out there to actually operate. And when we're talking about reverse logistics, which is a very complex part of the supply chain, it is very labor intensive. And so therefore, it puts further pressure on the users to be able to figure out where they should locate their facilities based on labor availability. And sometimes it will cost a little bit more from a transportation standpoint simply because they'll get a better availability and source and supply and cost of labor.
John Morris
A couple of tradeoffs you're mentioning there. First is proximity and labor compared to the cost of transportation. If you move to a different location where you might find more labor, but then that trade off between labor and capital, where when labor is in short supply and less productive, we need more capital to take the place. That capital is expensive. Right? So I think in the past, the idea that this much capital would be invested in a category that wasn't as well known and wasn't as fundamentally necessary, limited the amount that the space was invested in. And as Spencer knows, this is now an institutionally viable, well known, well understood, freely traded liquid asset class. And that's been the biggest change over the last five years, is how the amount of institutional capital and pension funds and insurance funds that went into the space. There's actually not enough assets for people to buy right now. And Sid's company, who has known this space for decades, has been an investor in the space. They've seen the value of the space, both in terms of an operator and as an owner. It's just going to be interesting to see what happens, though, with labor. Sid's on to what has got to be the biggest risk factor in our space is people is labor.
Spencer Levy
So the sustainability of reverse logistics, given the challenges of labor, given the challenges of margins, how do you look at that?
Sid Brown
It starts with people and, you know, getting the right skill set on board, which means that you really have to, you know, try to get a group of skilled and unskilled folks depending on what you're doing in terms of processes. But right behind people, it's technology and investing in technology and looking at flexible solutions and looking at people that can become super users in a facility and making sure that you have the best technology in order to interface with the customer, with the end customer and with our shipper or supplier that we're doing business with and the people out on the floor using robots or some type of automation to eliminate labor where you can, as is really a big push. I meet with an innovation committee every month. And we talk about new things we're trying out and what we're investing in. And we never did any of that couple of years ago. And we're doing it on a consistent basis today. At the end of the day, when you're in the reverse logistics business, what you really want to do is come up with a proven value proposition to our customers and to the consumer that makes it easy, makes it affordable and maximizes the recovery of the good in terms of whether it goes back in stock, whether it gets repaired, whether it gets liquidated, whatever that might be. And that ease of doing business will drive the consumer to come back to that retailer more and more and more. So it's really put a big onus on us as a third party logistics company to work on coming up with creative solutions for our customers.
Spencer Levy
And John, I want to put on two of your hats here for a moment. You're both leader of industrial and retail. And I'm not going to disagree with you about the growth of e-commerce. And neither one of us knows how fast it's going to grow. We both know it's going to grow. But I think what we're actually going to see is a blurring of the lines between what is industrial and what is retail and maybe what we consider to be e-commerce today is actually bricks and mortar if somebody buys online and picks up in store. How do you see this merger of retail and industrial moving forward? And how might it impact reverse logistics?
John Morris
You’re right, we agree that there's a blurring of that space, 80 percent of customers indicate that they would rather return the item in the store. Now, that's not always possible, but that tells you that the customer still values the in-store experience, right? Another survey indicates that 96 percent of shoppers say if they have a satisfying reverse logistics experience they'll shop with that retailer again, so that to me says there's tremendous opportunity for that integration you're referencing for a supply chain that can manage not only the forward delivery and the fulfillment in any way the customer wants, but also that the reverse supply chain, with the help of companies like Sid’s can manage the process equally smoothly, equally efficiently and effectively. But that brick or mortar or online or whatever I choose as a consumer opportunity is really what is bringing those two businesses together. And I think the next 10 years we're going to see one of the biggest placements of investment capital innovation is in enabling the customer to do all of that from wherever they want. Much of that infrastructure Spencer is going to be outsourced. 3PLs can invest in the tech and the scale to make markets to be a market maker going forward and going backwards when you need help doing something and someone else can do it better and has the capital let them help you. And that's what 3PLs do in reverse logistics.
Sid Brown
John, just kind of reinforce. We are also a big owner and developer of industrial big box space. And in fact, we're adding to our portfolio this year. And so, you know, you take a look at North Jersey, New York, Southern California. We've been operating out in Southern California since 1992. And we now operate about 17 million square feet out there for our customers. And I'm astounded how it continues to grow, even despite how hard it is to do business in California. It's just that port and the imports that come through that port are just incredible. So you got to keep on going further out to find grounds. So now you're out 70 miles, 80 miles, all that inland stuff is going to continue to be very valuable.
Spencer Levy
Are there any other boom towns that you're looking at right now? Ones that you see would be a perfect place for more logistics and or reverse logistics activity?
Sid Brown
We refer to the New York, New Jersey. I think what's really happened, a lot of that has actually kind of migrated over towards eastern Pennsylvania. So we're we've developed a pretty substantial campus in the Allentown area and continue to expand our presence in eastern Pennsylvania, along with our North Jersey viewpoint. I think Chicago continues to be a strong market, particularly as requirements for the Midwest continue to center around the intermodal hubs there in Chicago. We think that that market will continue to be strong. And then, you know, lastly, I'd say that we're pretty bullish on the Dallas Fort Worth area in terms of being a great marketplace. We're really excited to continue to expand our presence down there in Texas.
Spencer Levy
Well, thank you, Sid. And if I might give an unsolicited plug next time you're in Allentown, please go to Jaco's hot dogs. Oh, fantastic.
Sid Brown
I know Jaco's is right at the end of the street where our truck terminal is, and I've had a few Jaco's in my life Spencer, so I know exactly what you're talking about.
Spencer Levy
Let me pull the lens way back. Your family has been in this business for a long, long time. And I would like to know from your perspective, how do you get into this business and how has it evolved over the many years you've been involved in logistics and more recently, reverse logistics?
Sid Brown
NFI is a family run business. I am third generation company was started in 1932 by my grandfather, who I didn't know and nor my brothers. But my two brothers, Ike and Jeff are partners with me in the business and we started out in the trucking business and that was where we kind of where the roots got. And when I joined the business in 1983 full time after finishing grad school, we were doing seven hundred fifty thousand dollars a year in warehousing for trucking customers that needed overflow warehouse space and a couple of old dilapidated buildings in southern New Jersey. But that's the start that my dad, you know, had gone in a direction of, you know, warehousing and trying to, you know, start a multifaceted business. But we saw the opportunity to kind of grow the business, my brothers and I, in terms of looking at more than just being in the trucking business, know, I'm proud to say today that our business is one of the top three or four largest family run third party logistics companies in North America. Our business is going to grow twenty percent this year, in a year when so many other businesses are challenged. We've been very, very fortunate and lucky to be on the right side of COVID because our customers that we have been with for years and years and the new ones that we've been able to get have been very loyal and we've been very, very dedicated to making sure we can adapt to the changes that they're seeing in the marketplace.
Spencer Levy
So do you see your next generation going into the business as well?
Sid Brown
Yeah. I have two of my three children are in the business today and my older brother has three of his kids in the business and they started out, you know, at the lower level, they all had to work somewhere else for a few years before they had the opportunity to come into the business. They've all the five oldest have elected to come in, not because they were forced to, but because they wanted to. And they seem to have a real passion for the business.
John Morris
Before business travel really got shut down I had a chance to visit NFI’s new company headquarters in Camden, which is a market that's undergoing some wonderfully and probably needed gentrification now. NFI invested in Camden, doubled down on an HQ there, maybe when others might not have.
Spencer Levy
Sid, I would like to ask you your point of view on the environmental sustainability of your facilities, your trucks, and also any thoughts on the social side of the business.
Sid Brown
Let me just start on the environmental side and tell you that the Camden Project and I'll get into that in a second, but we are a leader in electrification of our trucks. Us and Pensky were the first two folks to operate class electric trucks. We're operating them in the port of L.A. And Penske was operating in Southern California. And we did that with Freightliner. And then we were one of the two originators of electric trucks with Volvo. And we've been running them now for over a year. And we are now employing, I think, 40 yard tractors that are electric yard tractors. All of this is centered out in Southern California. The grant program out there has made it attractive because the technology is so expensive right now that without some of these grants, it's not really practical. But the price of these things are beginning to come down. The viability of these are beginning to be shown. So I went out on a limb about a year ago and I said that I think by 2025 our fleet will be around 40 percent electrified. And I hope that at some point our fleet will be 100 percent electrified. We're also running zero emission natural gas trucks. So I'm a big believer that ultimately we need to do the right thing for the environment with our transportation footprint. Part of this is also geared toward solar. We have invested in solar fields, solar roof systems. Our former corporate headquarters was actually powered by solar. This new headquarters is a green building that we're in. The grand vision is someday we're going to have solar panels on our roof. In fact, we're working on it right now in Southern California to put the panels on the roof, the charging stations at the ground floor where the trucks will pull up at night to the warehouse. They'll charge up. You'll either pull from the grid during the day or you'll get it from the night either way. And you basically have a self-perpetuating energy system to power and distribute your product right there for both the building and whatever automations in that building and for the trucks that are running in that. And then as far as, you know, doing socially the right thing. Five years ago, Camden was a really bad place, just the highest crime rates in the country, the highest murder rates. I mean, just poverty. And, you know, through the hard work of the governor and some key politicians and a lot of the local politicians, we were able to kind of start the process of three pillars. One was you had to create a safe environment. So they basically redid the police force and the county took over the police force, invested in education and invested in job growth through tax incentives. And so we are committed to Camden. We are one of the larger employers now. And we're doing a lot of things around education there. And we got a lot more to do. But moving our headquarters was the first thing. So very excited about that.
Spencer Levy
We're still in the teeth of the pandemic. The pandemic is likely to continue at least another six months until the vaccine takes hold. What does the future hold for logistics and reversal just after the pandemic?
John Morris
I think the future of reverse logistics first is it's a challenge and an opportunity that that gets a little more challenging in the in the near term. I think the capital coming into this space, the efficiency and effectiveness and scale that's developing, particularly in the 3PL space, begins to understand mitigation and effectiveness better and in the mid-term. And I think in the long term, there's new marketplaces, there's new providers, there's new software, and, you know, idyllically it's like one continuous supply chain, one evolving, never ending supply chain, if you will. We're a long way from that. But it's a business that develops more quickly in this age of tech than maybe other businesses have developed and matured. Not as much time between now and then as there was between, you know, Sid’s granddad. And we're Sid sits today so happens over maybe a couple of fewer decades than that.
Sid Brown
So I wish I was about 20 years younger because the landscape ahead just seems so exciting and so many opportunities. And I don't think people are going to return to the bricks and mortar like they did before. I think there'll be a slight return. I think people will go back. But I think fundamentally, structurally, people have gotten used to this idea of taking deliveries at home or, you know, wherever they take them at the office or they go order online and pick up a store. So consumer habits have definitely changed in the future. What that means is that we won't have this skyrocketing growth, but we're going to continue to see growth in online purchases. And for every online requirement, it's like three times the amount of warehouse space required than it is for bricks and mortar. So industrial space I see over the next, you know, three to five years is going to continue to be pretty damn strong. And it all revolves around people. So I believe that one of the things that hopefully is going to continue to happen is 15 years ago, there were hardly any supply chain programs in the universities in this country. Today, there's lots of them. There's going to be a lot more of them. And I think there's going to be a lot more folks coming into these programs today that are diverse. And we're going to have a real change and what this profile looks like going forward in terms of who's managing these businesses, who's seeking careers in these businesses. So I see that as a fundamental change from where it's been the last 20 years. And I'm excited about that. I'm proud of the fact that I got lucky. And I also had some strategic foresight to say, hey, you know where we were going a few years ago. I didn't think it would explode like it has, quite frankly. But we were in the right place at the right time. And sometimes it's really very fortunate to be lucky. But I also think we have excellent people that know how to execute. And I'm excited for the prospects for identifying the future.
Spencer Levy
Well, on behalf of The Weekly Take Sid Brown, the CEO of NFI Industries, Sid, terrific job today. Thank you so much for joining us.
Sid Brown
Thank you, Spencer. It's been a real pleasure being on a panel with a scientist or an artist in the form of John. And I just want to thank the entire CBRE network for all that they have done working with NFI and my brother Jeff and our team, our real estate team, and in terms of allowing us to grow and be really good partners together. So we appreciate that.
John Morris
Yeah, back at you Sid thank you.
Spencer Levy
Thank you very much. And John, thank you for being here as well. You were terrific guests. Thank you, John.
John Morris
Yeah. Thank you, Spencer. Great job. Thanks.
Spencer Levy
To learn more about today's topic, read CBRE’s new report on the sector. U.S. Industrial and logistics, reverse logistics stress test 2020. You can find it on our website along with more information on our show. Check out CBRE.com/TheWeeklyTake. We'd also love your feedback. So if you found us on Apple podcasts, Spotify or another platform, please subscribe rate and review us wherever you listen. Thanks for joining us. With the holidays upon us, we look forward to bringing you some special episodes over the next few weeks. So stay tuned for those until next time, I’m Spencer Levy. Be smart, be safe. Be well.
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