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

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Unfortunately, my cohost 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 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 links in the chain we haven't talked about. And of course, one of those links is warehouses. And so we've talked about, there's been 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 of 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 tension 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 Manduca. He is the Chief Investment Officer of GXO, which is spinning 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.

Mark Manduca (2:03)

Joe, thank you for that kind intro.

Joe Weisenthal (2:05)

Absolutely. Why 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 why don't you just tell us what GXO is for listeners and how that spin will work and the timing and all that.

Mark Manduca (2:28)

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's our bread and butter.

Joe Weisenthal (3:11)

Do you own the warehouses?

Mark Manduca (3:14)

So we lease the warehouses, by and large.

Joe Weisenthal (3:16)

Got it. So why don't you explain a little further. What is the relationship with the customer? So I gather the sort of relationship is different from one to another, but what is sort of a typical, a client comes to GXO for what service? What is the sort of nature of that arrangement?

Mark Manduca (3:36)

Yeah, so when a customer moves to GXO, it's not a cost decision. It's actually a revenue decision. 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 is 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, 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 mortar type institution. So 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 it just, that happens to be us.