Odd Lots - GXO's CIO on the Past, Present, and Future of Warehouses

Episode Date: July 26, 2021

You can't talk about supply chains without talking about warehouses. Basically everything we buy at some point eventually sits in a warehouse. But warehouses themselves are changing. Whereas at one point, they were simple and straightforward — goods come in before getting trucked to retail outlets — today they're massively complex, thanks to e-commerce and needing to deal with returns. On this episode, we speak with Mark Manduca, the CIO of the logistics firm GXO, about warehouses during the pandemic and what the future looks like.See omnystudio.com/listener for privacy information.

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Unfortunately, my co-host Tracy Alloway is off today, but I will continue on without her. So obviously, Tracy and I have been talking a lot about logistics, supply chains, and so forth. We know there's an extraordinary amount of disruption in the space lately. But there's still, I guess I would say, links in the supply chain that we have. haven't covered. So we've talked about shipping a lot. We've talked about trucking and so forth.

But there are still all kinds of, all kinds of links to the chain we haven't talked about. And of course, one of those links is warehouses. And so we've talked about, you know, there's this incredible boom and sort of like e-commerce demand for goods from China that's created issues with the shipping and the containers and the trucking. But of course, along the way, everything at some point stops in a warehouse. And warehouses, setting aside even the pandemic and all of the tensions now, this has just been a booming area. And people think about Amazon warehouses and the rise of e-commerce and warehouses in general,

because of all this, are expected to grow massively in the future. So we wanted to explore further this sort of current moment where there's all this bullishness on warehouses themselves with this current tank. that we see in supply chain disruptions. And I'm very excited. I think we have the best guest for it today. We're going to be speaking with Mark Manduka. He is the chief investment officer of GXO, which is spitting off from the big logistics

and transportation company XPO very soon. And he's going to be talking to us about this moment. So without further ado, Mark, thank you so much for joining us. Joe, thank you for that kind intro. Absolutely. Absolutely. What don't you start off actually by explaining GXO just a little bit because it's sort of confusing. I know it's part of XPO. It's on the verge of spinning off into its own publicly traded company. But what do you just tell us what GXO is for listeners and how that spin will work and the timing and all that?

Absolutely. So GXO is a warehousing company, as you eloquently explained at the start of the call. GXO has around 900 warehouses across 27 countries and we solve people's problems for them. And you mentioned a number of supply chain problems that exist in the market and I'm happy to talk about those on this call. The reality is that we fix what's in the warehouse. We take pallets, we distribute pallets, we manage your supply chain for you within the warehouse. And it's such an important part of someone's business. We've got some of the bluest blue chip customers in the world.

and we manage their back office, so to speak, to make sure that you can get the goods back into the front office. And that is, that's our bread and butter. Do you own the warehouses? So we lease the warehouses by and large. Got it. So what do you explain a little further? Like, what is the relationship with the customer? So, I mean, I gather the sort of relationship is different from one to another, but what is sort of a typical, you know, a client comes to GXO for,

what service, what is the sort of nature of that arrangement? Yeah, so when a customer moves to GXO, it's not a cost decision. It's actually a revenue decision. Okay. And what I mean by that is that logistics represents about 3% of a typical customer's cost base. But if you pick the wrong provider to provide you with third-party logistics, and for whatever reason, it doesn't work out, maybe the third-party logistics provider's too small, maybe they don't have the right balance sheet, maybe they're not global enough, maybe they don't have the right. technology stacks, then what happens is that ultimately about 100% of your revenues end up suffering. So this is not a cost decision anymore for customers. It's an absolute necessity. And this is exactly

why customers are increasingly demanding a best-in-class, scalable third-party logistics provider. You asked what we do. Well, in so many ways, the biggest portion of our business is e-commerce. And as you know, e-commerce has made the lives of our customers incredibly exciting, but also incredibly complicated. So in the old world, what you would find is that a thousand t-shirts would arrive on a pallet in a warehouse, and they would need to be organized in turn. And then you'd have two pallets ultimately that afternoon leaving the warehouse. They'd go to a brick-and-water type institution. So a thousand t-shirts arrive, and basically two boxes or two pallets will leave that afternoon. That's the old world. In the new world, what will happen is that a thousand

T-shirts arrive, and then a thousand separate boxes have to leave that afternoon. And that complication has just caused a volcano effect in most people's back offices, most people's supply chains, Joe. And that's effectively resulted in not only a 3x to 10x need for warehousing, it's also resulted in a demand for scalable players, multinational players, players that provide a good balance sheet, long-term relationships and technological advancements, and just that happens to be us. So I want to focus, obviously, on the warehouses, but just real quickly, can you just explain for listeners, GXO is part of XBO, like what is happening, like how it was formed within XBO, and then what is the, the plane going forward here? Yeah, easy. So GXO is,

is in effect around 40% of the revenues of XBO, which is the conglomerate, which is largely based around LTL, as you mentioned at the start of the call, as well as brokerage, and, of course, are warehousing business, and we're planning on spinning that out as the second of August, and therefore GXO will become its own entity. As spinoffs goes, some spinoffs are always good company, bad company, and that's not the case here at all. Once your listeners look at the numbers, look at the, look at the company, and hear what I have to say, you'll see that this is great company, spinning out, great company, XBO spinning out GXO. So it'll be a very exciting spin, I think, and the goal ultimately will be able to allow GXO to focus on its own strategic priorities

and ring-fence the business with its own capital structure going forward and ultimately play in its own field with its own decision-making. Now, we talked about trucking a few weeks ago, and one of the things that really stood out to me was just how incredibly fragmented the space was. And I actually, until that episode, I had no idea that there was essentially no, like, really dominant market leader in trucking. And so there's some insane stat about tens of thousands of new trucking companies having entered the market in just the last few months.

Of course, many of them quite small. What does the warehouse market look like in terms of size and fragmentation and how big is GXO within that market? Well, there's a few things to note. So we've got some phenomenal secular tailwinds in this market, unlike I think any other market that I've ever looked at, I've covered the transportation and they're just accept for the last 15 years. So from my perspective, we're in the right place at the right time,

whether that's e-commerce, automation, and outsourcing. In terms of your question about the total addressable market, the total addressable market is roughly around $430 billion. Remember, we're about an $8 billion revenue business. So to contextualize that as the biggest market player out there that is a pure play asset, that's being us, GXO. We've only got 5% of the market. So everything you've just said about fragmentation is very much the key.

case here, and we're waiting for a white night to emerge within this $430 billion market. Now, within that $430 billion, there's $130 billion that's already outsourced, and 300, i.e., to get you to 430, 300 billion that is still sitting in-house. And what I mean by that is companies running their own logistics networks. I like to start with all these things, like what the pre-pandemic normal looked like. And as much as you described, what is the sort of February 2020 or March 2019 world look like for a company like GXO, just so we can sort of get a sense of the changes and the new trajectory? Let's characterize that as old world, new world.

So in the old world, in the brick and mortar world, and that's not obviously just pre-pandemic, it's a long way for a pandemic. But in the old world, what you'd have is a Dickensian warehouse where cardboard boxes would rule the roost, and there would be very little automation. In fact, the industry is still outside of our good selves. There's very little automation if you look at some of our smaller peers within the space. The punchline here is very simple, and that is the Dickensian warehouse of old didn't have automation. It was largely focused on brick and water operations, and therefore what would happen is that there wouldn't be the same level of compliance. that there is today. And what I mean by that is not so much our own complexity with technology, but actually customer complexity. Very simply today, one in three items are

returned in an e-commerce world, whereas in the old days it would be more like one in 10 to give you a sense of that volcano that I talked about that is erupting on the balance sheets of so many of our customers. And therefore, the customers are seeing more complexity in regards to working capital. They're seeing more complexity in regards to their day-to-day operations. I mean, you can imagine if you all of a sudden have, you know, you send out 100 boxes and 10 boxes used to come back, and now all of a sudden 30 boxes are coming back. You end up pulling your hair out and end up crying for help. And that's ultimately where we step in as that white night that I talked about. In so doing, you've referenced a bunch

of interesting points post-pandemic. What's happened ultimately is that the industry has become a bit log-jammed elbow to elbow. Clearly, people have been buying stuff on. line rather than going to the cinema, having experiences. And in so doing, what's happened is that you've had a lot of the supply chain outside of the warehouse getting a bit log jammed. Now, there's a bunch of reasons for that. Most prominently, buying patents have changed. I referenced that. And the question you should ask, I guess, is when will consumers go back to pre-pandemic buying patterns? I hope you have the answer to that. That's the trillion-dollar question everybody wants to know.

So we better come up with an answer on this episode. We will endeavor together. We'll try. And then the other thing that's changed, obviously, is that flying patterns have changed. You'll know, of course, that the world's available cargo capacity. If you think about the amount of cargo capacity that we have in the world, half of it, half of it lies in the belly of passenger planes. And clearly without people flying as much as they're used to at the moment, that means

there's less supply, which means air freight rates have gone through the roof. And in so doing, people have shifted their mode of transport towards shipping. So that in turn has led to a logjam in the system, which is why you're seeing in part things going on in the port of Los Angeles. So that logjam ultimately needs to unwind itself at some point in the next six to 12 months. But all of these things, whether it's the truck driving point that you mentioned, whether it's the inflation that we're seeing at the worker level, whether it's the logjam that I talked about in the ports and the shortage of containers, all of this leads to one thing, which is that white night. You know, someone needs to help me run my business because I need to focus on whatever it is, selling T-shirts, selling shoes, making cookies, while my back office needs to be managed by someone else who has expertise, precision, scale, good balance sheet, technological advancement.

That's where we have stepped in effectively. As sad as it sounds, we have benefited from the last 12 months because people have realized that they can't do it on their road. ask you, before I forget, you know, you mentioned something about your model, which is that you lease the warehouses. And I'm curious, like, I guess what prevents the rent, so to speak, from accruing largely to the warehouse owners? Because I imagine that actual, like, physical warehouse space is not infinite. That is a big advantage if you own it. What, uh, what, what gives you or your client, uh, sort of leverage to not give up all of the margin to the

warehouse to the people renting it to. So the question is very much a case of availability of real estate. And that's clearly a challenge at the moment, as you've seen from vacancy rates yourself and the stuff that you've been reporting on. You know, the industry has seen vacancy rates falling to single digits, particularly in Europe. Yeah. And I really believe that this highlights a strength of our services.

Not only does it point to increased usage of warehousing and logistics capabilities, but given our scale as the largest pure play and the second largest warehousing company globally, it leaves us relatively well-placed to secure leases for our customers. So we have obviously dedicated relationships with some of the exact same warehousing companies that you've mentioned. That therefore provides us with bargaining power logically. So if your decision is, I need a warehouse, either I'm going to do it on an in-house basis or I'm going to outsource it to a third-party logistics provider, You've already decided that you need a warehouse and you can have that close to the last mile or you can have it further away.

It doesn't change the demand for warehousing. But if you can have someone who has bargaining on labor, has the scalability to negotiate rents for you on a global basis, that does provide a value add. The dynamic of you either paying it directly to the to the Segros or the Pologis yourself or getting a third-party logistics provider to do it, it doesn't really change the price dynamics. But what it does do is we can provide potentially better bargaining power, which in turn provides arguably a lower price for the end customer. So using a third-party logistic provider is usable. I'm Francine Lacqua, an award-winning journalist. And I've got a new podcast, leaders with Francine Lacqua from Bloomberg podcasts. I've interviewed everyone from heads of state to fashion icons about the news of the moment.

But I've always been curious who are these people as leaders. I don't think there's one record. way to be a leader. Make decisions. A poor decision is always better than no decision. Listen to new episodes every other Monday. Follow leaders with Francine Lacroix wherever you get your podcasts. I don't know, like, I'm curious if you have a stat in the industry that answers this question. But, you know, obviously, I want to get into this more deeply, but automation is a huge theme. You mentioned it as one of the key tailwinds for your business. How would you compare, I don't know, is it humans per dollar moved per day or something like that?

Like, is there some or human wages per dollar per move per day by the warehouse? Like, can you sort of contextualize the degree to which the sort of like the old brick and mortar warehouse versus today's warehouse and how much more efficient a warehouse of today is versus what we think of the old-fashioned ones? So there's plenty of examples in the technology sphere of how technology has helped make warehouses more efficient. We put a number of stats within our Investor Day presentation last week, specifically talking about how the Dickensian warehouse of old has accelerated in so many ways

and become the warehouse of the future. And we've got plenty of examples across our network, whether it's advanced automation, whether it's improved efficiency, reducing the footprint, whether it's some of the cloud-based systems that we use or some of the intelligent robotics of how this saves money for, for our customers. And naturally, it results in customers coming to us because very few people have the

amount of dedicated automation implementation that we have across robotics and automated guided vehicles and vision technology and advanced sortation systems. Yeah. But if you look specifically at, say, a robotic arm, I'll answer your question right down the line. In the old days, a typical pick, let's call it, would be around 210 cases. per hour picking rate. With a robotic arm, you can do 4X that. So effectively, 800 cases per hour picking rate. So you can see explicitly how manual goes to automation and how the customer benefits,

and it generates dramatic productivity gains, as you can see, both for our customers and for us, and we'd obviously share in the economics of that. When it comes to thinking about other factual numbers out there that we can help you get a sense of how technology improves on the automation, side for our customers. Obviously, robotic de-stackers. A good example, you get in the old manual world versus the automation world, the 6x saving. Take an automated gantry, for example, you can get a 16x saving. If you think about the cases per hour that could be picked by gantry. So there's many examples. So when you think about an automated warehouse, what you find is, is you find different operations across the entire supply chain.

Okay. That offer, so you can take the adjustable heights of various gantry cranes across the warehouse, and that allows you to, in effect, moonlighting more efficiently through the warehouse floor. So obviously, though, I mean, you know, most of the attention to the warehouses, you know, there have been numerous stories about Amazon, for example. So despite, and the stories are always that the hiring is just absolutely for and that there's just an incredible demand still for actual people. So what is the, you know,

you describe all these efficiency gains and yet it doesn't seem like hiring needs have really slowed down for the industry. What does it look like for you? If you think about inflation that you're seeing in the system right now, there's, there is undoubtedly inflation. We're certainly seeing that across the markets that we operate in. And clearly it increases the global problem for customers, and this isn't just a phenomenon that's taking place in any particular market. As I mentioned, we're seeing it coast to coast in the US, and we're seeing it in the UK in specific terms. And labour inflation is clearly a problem that's here to stay for our customers. If you think about the silver lining in terms of inflation volatility, I think it goes back to my

key point, which is that it drives demand for those third-party logistics providers. And labour inflation obviously causes our customers to want more automation and more robotics as well. And clearly, as I mentioned, we're a global tech leader when it comes to automated warehouses. But it is a problem. I think it is here to stay. There is demand for labor. And so there should be in so many ways. We aspire to make sure our teammates are all, 100,000 teammates are all exceptionally well rewarded for their efforts. But it is something that we're very good at managing from a bargaining power perspective in a similar way to the way I describe Joe on the warehousing side of things. But just in terms of pure numbers, I guess, is what I'm trying to get at.

Like, how much hiring do you have to do? So even with all of the automation you described, what is the trajectory of the actual numbers of people that you've had to hire? Because, again, just going by the news reports from, say, Amazon, I'm sure they have, you know, incredible technology investments, but they still just have to keep, you know, they seem to be hiring people nonstop. Yeah. We ultimately will see the same trend in regards to the way.

we plan on expanding. I mean, our revenues are planning to expand next year at about 8 to 12 percent after some phenomenal growth already this year that we've already seen with a number of new customer wins. And with that, will obviously come its own fair share of being able to grow our warehousing footprint and thus our employee footprint. So, you know, teammates will continue to grow at GXO. We're a fast growth company over the next few years. And we intend to partake within that growth as an industry leader. Do you see a difference in labor market tightness globally because obviously there are a lot of economists debates about, well, why is it hard to hire? And some people point to unemployment insurance

and some people point to the persistence of the virus and the lack of child care and so forth. But you have a global footprint. And so I guess you can see sort of a natural experiment, so to speak, with different labor markets across a different set of policy and virus outcomes. how global is the tightness right now or the challenge of hiring? I would say the similarities in our two core markets, two thirds of our revenue is obviously Europe. One third is born in North America. When you think about those two markets, I would say that the similarities are there.

I would say that the U.S. is probably three months ahead of what we're seeing in the European market. Sorry, what do you mean by that? Labor wage inflation. Europe is lagging. What you're seeing in the U.S., what you have seen with all the articles that you referred to. is probably three months, three months lagging in the European. But ultimately what you're saying is this is not just a US, a US, this is definitely not just a US phenomenon, this challenge of hiring.

Under no circumstances, this is just a US phenomenon? In fact, the same applies for warehouse vacancy rates. We're seeing similar phenomenons within the European market as we are in the US market. That's really interesting. Go back to the automation question. obviously, you know, I assume, you know, your constant spending. How do you keep up, you know, again, going up against big tech giants? What is your edge, so to speak, and how much investment does it require on your part in terms of high-tech automation to be the status quo or be an industry leader in automated warehouses?

So let's flip the question on its head, Joe. if I was to ask you a number of how much do you think you talked about the big industry tech giants that in so many ways we're not going up against our major competition is actually more in the logistics sphere than it is in the tech sphere, so to speak. But if I was to say to you, how much do you think the industry overall is automated right now, would you pin it more at 10%, 20%, 30% right now in terms of total automation across all warehouses? I'm guessing by the way you framed the question. I'm guessing it's pretty low. still. Yeah, you're totally right. It's around 5% to give you a sense. So within that,

if you look at our European operation, we're about 30% automated. Can you actually explain that further? What does that mean, actually? I realize we haven't even, because any warehouse, even with plenty of robots, is going to have humans. So when you say a warehouse is 30% or when you say 30% automated, what does that actually mean to say, okay, this warehouse is, we call this automated? using any form of automation, whether that's hardware or software, to eliminate silos, to overcome space and labor constraints, to increase fulfillment speed and accuracy, and provide superior visibility and control at any point through the warehouse chain.

And therefore, what do you say that the industry is just 5%, you mean there's 95% of warehouses that are literally just people in boxes? Old school, I mean, people, not people in boxes. Sorry, yeah, yeah. People and boxes. People and boxes, yeah, sorry. That's really, so that is pretty striking. Are there industries that have yet, like, is there an industry pattern that's like, okay,

these types of industries have embraced it really fast, or are there certain types of goods that have not, that are less likely to be automated? Like, what are the patterns in terms of who has actually invested significantly in technology? I think Broadbrush, you would assume that the industry could over time get to around 50 to 60% automation. I think that that will take many, many years and possibly decades to get there. And it very much comes down to the demand from the customers. This is not us trying to enforce technology onto every and any solution. So it depends on customer demand, but clearly, as you can see from the numbers that I was giving you earlier,

about your set of pellets and cases and gantries. the reality is that we are clearly driving automation going forward. But are there any sectors that seem sort of, I mean, you mentioned 50, 60 percent, like what are the areas that aren't going to go that way? Or what are other industries in which that is a, it's a more difficult proposition to automate a warehouse than others? I see what you're saying. I think about other sectors outside of warehousing.

If you think about the industrial sector, which isn't a major portion of our book of business, because we are largely, as I mentioned, e-commerce and consumer technology-oriented, about 50% of our sales come from those lines of business. If you think about the small element of industrial business that we do within our overall mix, it is harder to automate within that, because in some cases you are dealing with very heavy hardware. E-commerce tends to be an area where automation is best suited. So too is the food and beverage market.

There's some logical, logical savings that we've made there for customers. I think Nestle is a very good example of that over in Lester in the UK. But the industrial warehouses tend to have slightly less automation. And our competition clearly is more geared towards those industrial businesses. And therefore, that explains partly why you're seeing a differential between someone who's extremely e-commerce focused versus maybe more industrial and heavy industries of some of our competitors. Got it.

I see what you're saying. So let's talk a little bit more about labor. And we've established that labor markets are tight, both of the U.S. and Europe. You know, in past episodes, we've heard from people talking about different ways that they're trying to address that from a hiring perspective. Obviously, wages are one area, but also other aspects of flexibility. How are you thinking about this, both from a wage perspective, but also other strategies that, have worked in hiring? So we have a significant amount of our workforce that is variable in nature, and therefore we have the capability to flex workforce up and down, to allow all changes in volume

demand. So a lot of what you're pointing to is actually a revenue positive for both our industry and our customers. You know, we've seen extremely robust sales momentum with billions of customer agreements signed in the first four months of this year in 2021 alone. And these obviously include e-fulfillment services and a few tech wins that we've had as well, revenue being booked until 2032. So a lot of what you're saying in terms of demand tightness is actually a positive from a revenue standpoint. There is demand for our customer services and therefore there is demand for our services and in turn there is demand for labour, which makes up around $3 billion. Remember in the context of the $7 to $8 billion of revenue that I talked about, makes about $3 million of our

cost base. So when you think about the first point I would make is this is a strong pipeline, high growth industry that has a huge demand for not only our services, but our customers' offerings right now. And that's a good thing. The question then becomes is how do you reward the workforce and the teammates for providing that service? And the answer is you reward them very well. In turn, what you do is you also try and make the workplace safer, stronger, and a more fun place to work and a more automated place to work as well. This isn't a future of people versus robots. This is a people and robots working arm in arm, hand in hand together.

And that's really something that we're trying to proliferate through our warehouses. We're also trying to drive productivity savings of our labour by using smart tools, such as our smart system. So GXO Smart saves around 5 to 7% on labour productivity, and this can be anything from spotting, picking rate problems very quickly, all the way through to managing the analytics and the HR data and modeling and planning of any single warehouse. And we've had some amazing impacts with customers with our smart tool.

It's currently deployed around 60% of our GXO web sites at them. So using technology efficiently, using particularly robotics and our smart tools to optimize labor force through peaks and troughs, as you discussed. And particularly as we head into Black Friday and also that Christmas shopping period, we need to make sure that we're extremely intelligent about the way we manage productivity. And that's something that I think that we're best in class. How, you know, you mentioned Christmas. So let's just get to that question. How frustrating is Christmas going to be this year for shopper? I think what we're seeing is early signs of extremely strong demand as we move towards peak.

I don't think there's going to be frustration, so to speak. I think what we'll do in our part of the supply chain is make sure that we run an extremely slick operation to make sure the goods get back in store very quickly. If you look at some of the items that I mentioned earlier in regards to the one in three, you know, customers come to us because reverse logistics is such an integral part of their. e-commerce offering. And what we do best, I feel, is we get the product back into store quickly to remove that frustration that you talked about, Joe, and make sure that the consumer's life and the customer's life is an easy one. So if I'm a consumer and I'm doing my typical Christmas shopping, do I have to worry about ordering earlier this year than normal because of these supply chain disruptions that, as you said, maybe have another, I don't know, six to 12

months to go? I think that the supply chain disruptions will continue. I think that, that consumers have to be vigilant about the broader supply chain, maybe outside the warehouse. But I don't think it's going to impact consumers by weeks. I think it could be more by hours and days, so to speak, and provide a little bit of a bottleneck rather than a lot of the bottleneck. Okay, well, that's hopeful. You know, let's look at that broader logistics. Obviously, we're just talking about the warehouse, but you have to, you know, you're

dealing with trucking companies and shipping companies, et cetera. why has it been so long? Like we're here in mid-July, getting to be late July, 2021. How would you describe why we're still dealing with such extreme problems? And when I look at things like, say, global shipping rates,

whether it's from China or Asia to the U.S. and so forth, it's not getting, it's not easing. It seems to be just getting, in many cases, it's getting more expensive, getting worse. Why is it taking so long to adjust? And without me to answer a question with a question, I would pose the question to you, which is when was the last time that you went to a cinema? Right. It was December 2019. I saw uncut gyms in the theatre. And as a result, you've shifted your buying patterns towards buying things online rather than enjoying experiences.

That's true. And when you shift those back, the log jam will be uncalled. So it's my fault. I'm not pinning blame precisely on you, Joe, but it begins with you. It begins with me. All right. I'll go to the theater soon to see if I can start AI, to see if I can get some momentum behind that and change consumer behavior. I haven't going to restaurants again, to be fair. Well, when was the last time you took a flight?

I took one sometime. No, it has been a while, but I am taking one in a few weeks. So that, in turn, has caused an air freight spy. and therefore you've seen that modal shift that I talked about towards shipping and people deciding that actually the price is just too expensive, they won't even bother shipping it at all. Yeah, that is an interesting dynamic, this idea that because, so talk to us, what was about the sort of the pre-crisis mix of vessel shipping versus air cargo shipping? And how does that look today?

I'm definitely not an expert on all things, container shipping and air freight. But broadly, half of the world's capacity is carried in the belly of the plane. And therefore, air freight is obviously an integral portion of getting things just in time. Right. Because obviously you can get there in 24 hours. Air freight is booked on a very short notice. And what happens is in a container ship, clearly you can't do it overnight. So, for example, but typically the average container shipping life cycle will be about 60 days.

So people tend to ship very different things within both a container ship versus air cargo. Air cargo is really immediate demand, inventory shortage. And therefore, that has added to the complexity and the contortion within the system, as you can imagine. So back to you, when are you going to be flying again? That will remove the bottleneck. All right. I have a flight scheduled for August. You know, you mentioned just in time.

And I'm curious, like, is one of the things that this crisis exposed is that we live in this era of incredible efficiency, and it's pretty amazing, and I can order something sometimes and get it delivered that day or 24 hours later and so forth. But then there are costs when an extreme disruption hits, and obviously the pandemic was an extraordinary disruption, but we live in an era of climate disruption and it's reasonable to expect other things. Are there going to be permanent changes in your view to the way companies think about logistics or the way you're thinking about logistics to build in buffers or to build in other, yeah, buffers, I guess, so that we don't have this sort of extreme disruption like we got this time around.

I think this really triggers this idea of outsourcing. The outsourcing of the numbers I gave you at the start, the $130 billion of the market that's already been outsourced versus the $300 billion that's still yet to be outsourced. I think that this crisis, this pandemic in the last 24 months has really triggered people. people to reconsider their supply chain functions. And obviously, you know, they've historically been handled in-house. That's the 70% I referred to, i.e. the 300 versus the 430. And, you know, with expectations for speed and precision rising, I think supply chains are obviously going to become more complex. And that drives more business towards the party logistics providers like us.

So I think that that's going to be a big theme over not just the next, you know, three to six months. I don't view this as anything other than a secular trend over the next 10 years. And I think think that will expose some very strong underlying themes in the industry. You've touched on, obviously, the automation theme. You've touched on e-commerce as well. And a leading tech innovator like us that has a luchet customer base will have remarkably strong visibility in its business model as a result. Speaking of characterizing yourself as a tech innovator, you know, you mentioned, for example,

software that you developed to, you know, reduce the number of errors and so forth. How much is developed strictly in-house in terms of, you know, you know, you mentioned, for example, of you have your own engineers and coders and software team versus sort of a repackaged third-party technology that's sort of built in conjunction with, you know, some, you know, household software giant name that we might know. Yeah, so good, good points. A couple of things to be aware of. So on the proprietary software tool, which is obviously the smart software that I mentioned,

it is exactly that developed and house proprietary in nature. So that is something that customers come to us for for the five to seven percent savings that I mentioned. In regards to the robotic side, very exciting because although you would argue that the moat, so to speak, is relatively shallow, I would argue differently, which is that it's very rare to have a scale provider like us to stack a warehouse the way that we do that have the experience across so many different types of warehouses, the way that we stack a warehouse from a robotic standpoint. And I urge you to go and see, you know, so many of our operations, whether it's what we're doing in Indiana for some tech giants, or whether it's what we're doing over in Lesper, as I mentioned,

for Nestle, these are very much warehouses of the future with huge automation. I mean, we're going to have roughly 3,100 robots and advanced automation systems by the end of this year. So it's something our customers are demanding. So is it less about, say, developing the robots per se and more about the know-how of putting it all together, so to speak, within the context of the warehouse? not using robotics for the sake of using robotics. It's about that know-how. It's about that experience. You've done it before we've lived it.

You've done it for this customer in that way. You've saved significant gain share, so you've given them continuous improvement over a five-year period. This is the experience factor. It drives the precision for the next contract. And that bargaining power and scalability across different customers is something the customers come to us for. You can get.

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Get the reporting and the context from Bloomberg's 3,000 journalists and analysts we're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. Let's just talk a little bit about the future. I mean, we've talked about, okay, so you've identified the big tailwinds, including e-commerce and automation. I got some sense about the total addressable market, how much is currently automated. What are the, you know, like how many warehouses are there today? How much, how fast does this going to grow?

How much room does just e-commerce itself have to grow in your view? How much time is left? I think two things are going to happen. So let's give you some very explicit numbers. The e-commerce market right now, if you wanted to break it down, you'd say entire retail as a pie chart, you'd say e-commerce represents in the markets that we serve in North America and Europe. Roughly around 20% is e-commerce and nature. So in terms of runway, you couldn't possibly find more runway between e-commerce, automation, and outsourcing.

These are very nascent themes. As much as we believe that e-commerce has been around for 25 years, we are still just getting started in regards to that theme over the course of the next century. So when you think about the growth trajectory there, we view e-commerce as growing broadly around 10% plus, and therefore for an industry in a business like ours that has 40 to 50% of its operation geared towards e-commerce, it's very much right place, right time,

and our customers are benefiting from that. When it comes to thinking about automation, I've given you my view in terms of what the runway could be for that, and that's obviously a compounding factor in terms of driving e-commerce going forwards. And the reason automation is important is that it helps us serve our customer within that e-commerce theme. It's particularly on the reverse logistics side where we're returning goods to the customer storefront. That is giving a differentiation to our model versus our other competitors. We can do it quicker, I believe.

We do it with precision, and customers come to us for that. And then obviously the outsourcing theme, I think, that that's been set to, accelerate, not just post the pandemic, but structurally as people reassess their own supply chains, as we talked about before. I don't think this is just the commerce element of our customer base. I think it's going to happen across our entire customer base, whether it's consumer packaged goods, whether it's consumer technology. Our blue-chip customers are all looking for viable 3PL players right now. So it's a very exciting time to be in this industry. And these aren't customers that are fly by night. These are customers, if you look at our top 20 customers, you know, they've partnered with

for 15 years or more. So when they start a partnership, the switching costs tend to be relatively high. Do you think is delivery by drone ever going to be a big thing? I think it's going to be an important part at some point. It hasn't had the penetration that I originally thought it would over the last five years. I think the technology still needs, still needs to be adapted for the world that we live in. And you know, you mentioned the warehouse capacity is extremely tight right now. what about actual just like physical like more how many more warehouses and the land available to them like how much footprint are we going to see how much more construction of warehouses are we going to see in north america and the u.s To give you a sense, we've got 900 warehouses, we've got about 5% of the outsource logistics market. To that extent, we're growing, as I mentioned, around 8 to 12% over the next 12 months, to give you a sense of the e-commerce and automation and outsourcing themes that I talked about earlier.

If you were to underpin that growth and say, if you were to extrapolate, say, the 16% that we've done over the last 20 years, you can get a sense for the demand of warehousing, or at least for the growth. creation of warehouses as we grow our customer base. And all of these themes have the potential to accelerate over the next decade, as I mentioned. So the demand is definitely there, in my view. Whether the space is there on the outskirts of major cities, I think it definitely is. When you get closer to the last mile, it becomes more and more complicated, and clearly the demand, as you know, for customers to get closer and closer to the last mile is ever more prevalent and therefore the need to work with people who have dedicated relationships such as us.

So, I mean, this is a problem like, you know, any building in, say, New York City, there's all kinds of issues that arise. There's cardboard boxes that pile up everywhere, major sorts of frustration. What might change? You know, if we think about, like, buying patterns, and I'm sure you think many years ahead, how might be e-commerce experience of getting shipped, whether it's 24-hour shipping or one-hour shipping or two hours shipping or whatever it is, how might it change for a, you know, this very intense competitive urban market out a few years of the future?

So I think there's a few things you touched on there that really resonated with me as a company. And that is, you mentioned the cardboard box phenomenon. I think if there is going to be a change, I think what I'm seeing across a number of our customers right now is a real focus on environmental targets. I know your point was more geared towards the efficiency element, and I think that that will be sold over time as well. But I really see this in every contract that we write, the commitment to achieving some very bold environmental targets, not only sits with us as the customer provider, service provider, but also with our customers as well and their stakeholders. So we've put out some, I believe, very bold targets, and we're very focused on attaining those ESG targets and helping our customers in turn achieve those targets.

but that is something that's going to be at the cornerstone of everything that we're seeing in regards to e-commerce, making it, as you say, less packaged and more efficient. ESG is going to play a major role within that. Mark, I think that's a great place to leave it. I don't know. Is there any other key themes or things that we haven't touched on that you want to get across? Joe, you've been incredibly kind, and thank you for allowing me to talk about GXO. You can clearly see I'm very excited about the spin that is planned for the second rule.

August. I've joined a company, as you know, two months ago that is a rare breed growing in a secular, secular tailwinds, as we've discussed, across those three major themes and with strong revenue growth and strong EBITDA growth and amazing returns, and I hope we're going to do an amazing job for our stakeholders. You know, you've just reminded me of one last question I had. So you're new to the company. Your title is CIO, Chief Investment Officer. Can you explain what is the role of the CIO within a company like this? And how much is your future, like, predicated on buying more, buying out other, buying out competitors, buying out space, and sort of applying that know-how that you've built up to what you perceive as less efficient operations out

there? Great, great questions, Joe. So a couple of things I'd be aware of. So firstly, in terms of my role, I think I've got one of the coolest roles. It's a lot. It's, in the building, quite frankly, I get to work right next door arm in arm with our CFO, who's very judicious when it comes to capital in particular. It's got an amazing background in capital markets as well, and we get on extremely well as friends as well, which is always a nice thing in the workplace. When it comes to thinking about the role, very much focused on investment, whether that's external, internal, and that can involve everything from media through to podcasts, all the way

through to dealing day-to-day with investors. So there's definitely an investor-relations element to the role. As you said, there'll be an element of this which is also strategically orientated as well, whether that's M&A or otherwise, but basically servicing the purposes of the company, making sure that the spin is a success, making sure that the messaging is heard loud and clear, and working with the CFO to make sure that we create as much shareholder value on a sustainable basis as possible. When it comes to your question on M&A, go back to that point that I mentioned around the 5% of a $130 billion outsource logistics market. There's two ways you can think about this.

One is that as per our history, we've got a strong balance sheet, we've got a track record in successful M&A, and we obviously therefore sit in the perfect position as a consolidator in the market. As the right opportunities to present themselves come along, I have no doubt that we will look at everything, but it obviously has to attain certain targets in the context of our amazing organic growth potential that we have as a business. That's clearly that organic growth is clearly going to be the priority.

for our business. And in so many ways, if we're making a 28% return on invested capital, we have to believe that any deals that we do have to have a hurdle rate above that, otherwise you would just go and do organic growth. My senses with this, Joe, is what will happen is that there'll be a lot of inertia in the industry at the tail of the industry when it comes to contract bidding. And what you'll see is these contracts of our customers migrating towards the scale players over time. So whether it's the top two or top three players, we will see a wave of smaller customer contracts coming to us at the top of the piles. So in essence, I think the big will get bigger here.

Got it. Well, Mark, really appreciate you joining us. Good luck with the spin. And thanks for coming on, Outlaw. Joe, thanks for me so nice. Absolutely. Take care of Mark. Well, if Tracy were here, this is where we do our chat and our takeaways.

Obviously, she's not. So I have to monologue a little bit myself. But obviously, to me, what was interesting is obviously just how. how under, at least according to Mark, how under automated the space is, which surprised me. I wouldn't have guessed that there's still so much sort of pure, as he put it, Dickensian warehouses with humans and cardboard boxes moving around. Yeah, that obviously definitely surprised me. And also, of course, just this idea that until consumer buying or consumer consumption patterns

change, we're probably going to get this disruption. Like I've been looking at these charts of, say, shipping rates. from Asia to the U.S. and so forth that do not seem to go down. And I think Mark put it well, there's no real reason to think they're going to go down as long as consumption pattern is abnormal. And things, I guess, are normalizing in some sense. But it is true. It's been like over a year and a half since I've seen a movie. I've barely taken any flights. So even though I am going to say like restaurants more often, a lot isn't normalizing yet. And as such, you know, it's probably we're not going to see any real form of normalization in.

logistics, which I thought was made sense, but it's something I hadn't quite put together in that way. So without further ado, this has been another episode of the Oblodz podcast. I'm Joe Wisenthal. You can follow me on Twitter at the stalwart. Follow my co-host, Tracy Allaway, at Tracy Alloway. Follow our producer, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levy, at Francesca Today. And check out all of our podcast at Bloomberg, under the handle at podcasts. Thanks for listening. This is Tom Keene, inviting you to join us for the Bloomberg Surveillance Podcast. It's about making you smarter every business day. I'm Paul Sweeney. We bring you complete coverage of the U.S. market open. We cover stocks, bonds, commodities, even crypto,

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