While the leading players portray optimism over trading in 2005, for many mid-tier operators it has been another year of tough challenges and competitive pressures.
Exel heads the top tier of logistics providers, defined as reporting global logistics revenues above e5bn, comprising Schenker, NYK Logistics, Kuehne & Nagel and DPWN. Combined, these five heavyweights recorded logistics revenues of e39.2bn in 2004 – an increase of 17.1 per cent from 2003.
And the excitement might not be over for Exel this year, with a potential takeover by Deutsche Post in the wind, news of which can be found toward the end of this article.
Tier two logistics operators, defined as having revenues between e3bn and e5bn, are led by Logista. Together, the five tier two operators recorded revenues of e19.6bn in 2004 – almost exactly half the amount recorded by the five tier one providers. 2004 revenue growth in tier two was similarly lower, at 8.7 per cent.
Additionally, non-European companies such as BAX Global, Eagle Global Logistics, Expeditors, Nippon Express and UTi Worldwide Logistics have operations in Europe, predominantly in freight forwarding, that would place them in the table overleaf.
Logistics providers had a tough time maintaining margins in 2004. At least nine of the industry’s leading players failed to increase margins, with two of these also reporting a decline in revenue.
For Exel, contract logistics organic revenue increased by 8.9 per cent but margins declined to 2.8 per cent and overall margins to 2.9 per cent. TNT reported a healthy increase in logistics revenues in 2004, though margins remain below 2002 levels while at DPWN, margins increased as DHL Danzas Air & Ocean recorded revenue growth of 17.5 per cent and DHL Solutions, 9.9 per cent.
2004 saw Exel climb to the top of the European logistics industry, not only in terms of logistics revenues but also in contract logistics revenues and growth in the latter.
While the 2004 acquisition of UK number three in contract logistics, Tibbett & Britten, helped Exel achieve top spot in the growth rankings of contract logistics revenue, Ryder, Christian Salvesen, TDG and Premium Logistics, by contrast, all appear at the bottom of the 2004 growth chart of contract logistics revenues.
In contrast with its performance in Western Europe, Premium reported impressive growth (20 per cent) in its Eastern European operations (primarily in Hungary and Poland). Despite this, the company still lags other more established providers in that market, with Frans Maas, FM Logistic, Thiel Logistik and Maersk all reporting higher revenues in the region.
Gefco group revenue was a healthy e2,894m, recording a 5.5 per cent increase on 2003. Added to this, a 9.1 per cent increase in operating profit was achieved, as these from e143m to e156m.
Research undertaken by Analytiqa identifies that key concerns for manufacturers and retailers focus on day-to-day operational issues over mid or long-term strategic goals, which are uncertain and dependent on end-user markets. Warehousing, transport and service levels dominate their short-term thinking. IT systems are vital, but RFID is seen largely as a technology for the future, on hold until sufficient return on investment can be guaranteed.
Supply chain concerns of manufacturers and retailers include the desire to increase transport efficiency, the need to optimise resources and the need to improve operations in warehouses and distribution centres. A common thread amongst retailers and manufacturers is the need to track inventory levels and capacity in warehouse and distribution centre operations more effectively, while the more adept at assessing warehouse capacity requirements have undertaken or are considering consolidation of warehouse numbers on a regional, national and or Europe-wide basis.
In these areas, there will be an increasing emphasison gaining competitive advantage through technology, particularly the use of transport and warehouse management systems. However, as consolidation continues, 3PLs themselves face resource pressures to standardise technologies across their businesses, where one or more of a group’s IT systems require modernisation.
Reverse logistics is also getting increased exposure in Europe with the arrival of the WEEE Directive, which will force retailers to efficiently organise their returns process. Though delayed in the UK from January until June 2006, the directive offers opportunities for logistics providers to assist their customers, as reverse logistics can be a complicated task which involves many suppliers, all with unique procedures. With estimates suggesting that only one in five returned products finds it way back to a manufacturer, European retailers and logistics providers can look to their US counterparts for a lead. There, significant cost savings have been realised by linking the returns process to EPOS systems and introducing consolidation centres.
2004 was characterised by yet more consolidation and integration across a fragmented logistics industry, with TNT’s takeover of Wilson Logistics and UPS’ purchase of Menlo Worldwide Forwarding among the larger successful deals in addition to the aforementioned acquisition of Tibbett & Britten by Exel. Wilson rebranded to TNT Freight Management at the end of June.
Activity in the first half of 2005 suggests the trend toward consolidation and bolt-on acquisitions is set to continue. Across all sectors, from road transport, pallet networks and contract logistics to freight management, providers have sought to expand both their geographic service coverage to meet the globalisation of supply chains, and sector coverage, integrating services along the supply chain. This enables logistics providers to benefit from scale advantages and a greater breadth of expertise. This can be used to enhance the relationships and the credibility that 3PLs have with their existing customers and make their offering more attractive to new customers.
Mixed performances from Europe’s leading contract logistics providers show what a challenging and competitive year 2004 was. And 2005 is equally challenging, especially for tier two and three service providers among whom words of caution are commonplace. This caution is set against a backdrop of rising logistics costs and difficult trading across geographic markets. However, despite tough trading conditions, there are growth opportunities for efficient, well-run operators that are able to capitalise on market opportunities.
Rising logistics costs are attributable to higher fuel prices and longer, increasingly global and more complex supply chains in terms of greater value added services and degree of customisation.
Tough market conditions in some European countries, such as France and The Netherlands will inevitably impact tier two and three operators to a greater extent than their tier one competitors. For Christian Salvesen it must be hoped recently appointed chairman Stewart Oades can help it turn the corner as negative growth of 4.5 per cent for 2004- 2005 comes after a similarly disappointing negative growth of 4.1 per cent for the year 2003-2004. A Christian Salvesen trading statement this July stated that ‘confidence is tempered with caution. Our markets are growing well but remain fiercely competitive.’
TDG has reason to be optimistic in the European contract logistics sector where it has recorded a healthy seven per cent growth, in contrast to its UK and Ireland operation where a slight negative growth of 0.05 per cent was recorded. The Dutch contract logistics sector showed almost no change with 2004 revenue of e74.6m. The withdrawal from several of its less profitable activities meant that the group’s operating margin remained at a constant 4.1 per cent in 2003 and 2004.
A TDG trading statement in June stated: ‘Trading in the first half has been in line with our expectations… Market conditions in The Netherlands remain difficult and…we are rationalising our operations to take out surplus capacity and to reduce overheads.’
Backed by Europe-wide and even global resources, tier one providers are not as dependent upon the performance of specific markets. As a result, the outlook for the larger service providers must be more optimistic. This is supported by recent trading statements from the industry leaders.
In July, DPWN stated that ‘the company is confident that logistics will continue to grow and exceed the prioryear earnings of e281m by five per cent to 10 per cent’. Similarly in an Exel trading statement in June, the company concludes: ‘Based on the trading performance to the end of May, we remain confident of delivering another year of strong growth in our business.’ Emphasising the optimism of the industry’s leading players, a Kuehne & Nagel statement in July announced: ‘Thanks to our global capabilities and operational efficiency we were able to expand market shares and increase our high level of profitability in the first half of 2005. For the second half of the year we expect the strong performance and the positive development of results to continue’.
There is no doubt the logistics industry has evolved tremendously in recent years, and it will continue to do so. Industry dynamics such as consolidation, integration, technology and globalisation continue to drive change and service improvements, and create growth opportunities. Managing these dynamics means major challenges lie ahead for logistics providers and their customers.
Finally, news of a potentially significant development in European development was emerging almost as this piece was being written.
Early in September, Exel received an approach from Deutsche Post AG which may or may not lead to a deal being made.
Discussions are at a preliminary stage and there can be no certainty as to their outcome.
Deutsche Post has spent heavily on acquisitions in the past 10 years, buying up more than 50 businesses and spending over e6bn in the past four years, as the company prepares to lose its monopoly on the delivery of letters in its home market of Germany in 2007.
Responding immediately to the Exel announcement, Deutsche Post AG’s shares fell by three per cent amid shareholder concerns the company might overpay for Exel, an asset-light company. Meanwhile, Exel’s share price rocketed by 17 per cent on hopes the news might encourage other potential suitors to enter negotiations.
Deutsche Post’s logistics activities are operated under the DHL Solutions, for contract logistics, and Danzas Air & Ocean, for freight forwarding, banners. These combine to make up Europe’s fifth biggest logistics provider, with 2004 revenues of e6.8bn.
A link with Exel would see the new company far ahead of second, third and fourth placed providers Schenker, NYK and Kuehne & Nagel. And Exel is well equipped to significantly enhance Deutsche Post’s logistics capability.
A merger of Exel’s contract logistics division with DHL Solutions would see combined revenues of around e2.2bn in a FMCG/consumer goods division alone, just short of third place in terms of European contract logistics.
Whilst Exel’s contract logistics revenues are almost three times those DHL Solutions, the freight forwarding revenues of DHL Danzas Air & Ocean are almost 50 per cent bigger that those of Exel. Although the two company’s logistics revenues in Asia are broadly similar in size, Exel will bring significantly greater business from the Americas to a combined entity.
The implications of a merger would be felt on a global scale, but the news is not all bad for other logistics providers. Creating not only the world’s biggest logistics operators, access to global express operations would provide an extremely powerful service offering.
That said, we regularly hear from customers that they prefer to work with experts at each stage of their supply chain, be these parcel carriers, contract logistics providers or freight forwarders. Additionally, access to senior management and the ability to work with a service provider of a similar size and management culture to themselves is a big draw for many manufacturers and retailers. This may be good news for domestic service providers, particularly across Europe, and mid-tier operators such as Christian Salvesen, TDG, and Norbert Dentressangle.
Exel has, for many months now, been the subject of speculation as a possible acquisition target for companies such as Kuehne & Nagel, FedEx and UPS. These companies may now declare an interest in Exel following the news that Deutsche Post has started discussions. Indeed, it has been reported that UPS have appointed Goldman Sachs to advise on its strategy.
The Deutsche Post approach and any subsequent approaches by the likes of UPS may also be viewed in the wider context of consolidation and acquisition which has characterised the industry in recent years. As supply chains become longer (as manufacturers and retailers take advantage of low cost locations around the world), logistics providers see opportunities in being able to meet their customer’s needs at each stage of the supply chain. A strong global presence is a key future source of competitive advantage to companies operating in the logistics and supply chain sector, with TNT’s takeover of Wilson Logistics (since re-branded as TNT Freight Management) and UPS’ purchase of Menlo Worldwide Forwarding among the larger successful recent deals.
Mark O’Bornick is director of research and analysis at Analytiqa, analysts in the logistics services sector. This feature draws on material from Who’s Who in European Logistics 2005 www.analytiqa.com