Growth Strategies and Trends in UK Contract Logistics

Analytiqa has conducted a major survey with 50 leading third-party logistics providers in the UK as the basis for its latest report, Growth Strategies and Trends in UK Contract Logistics an issue-based report looking at the major factors influencing the development of the UK contract logistics market.

The value of the UK logistics market amounted to 23.1 billion in 2003. Of this figure, Analytiqa believes that the contracted-out part of the market is valued at 9.2 billion. This represents an outsourcing rate of 39.8%. Analytiqas research findings show that the outsourced part of the market is growing at between 4.0% and 5.0% per year.

From a corporate perspective, Exel dominates the UK contract logistics industry with revenues amounting to 32.2% greater than that of second-placed Wincanton and more than double that of third-placed Tibbett & Britten (which it acquired in August 2004).

Whilst Exel and Wincanton are the only companies to earn more than 1.0 billion from UK contract logistics operations, there follows a second tier of companies, around six in number that earn more than 200.0 million per year from UK contract logistics. These are Christian Salvesen, TNT Logistics, Hays Logistics, TDG, DHL Freight and Gist. (Note: this group formerly included Tibbett & Britten). Bibby Distribution heads a third tier of companies that at present earn less than 120.0 million per year from contract logistics operations in the UK.

Table 1: UK Contract Logistics Turnover by Company, 2003

Company UK Contract Logistics Turnover (mn)

"New" Exel (Post T&B acquisition) (2) 2,001.7
Exel 1,376.9
Wincanton (3) 1,041.3
Tibbett & Britten 624.8
Christian Salvesen 447.1
TNT Logistics (1)(5) 377.3
Hays Logistics (3) 367.3
TDG 325.2
DHL Freight (3) 250.0
Gist (1)(3) 210.2
Bibby Distribution 116.7
NFT (1)(3) 116.2
Dart Group 112.1
NYK Logistics (M&R) 108.3
NYK Logistics (C&R) (3) 105.0
Caterpillar Logistics (1) 97.6
Culina Logistics (1)(3) 91.3
Malcolm Group (4) 74.3
Celsius First (1) 68.1
Gregory Distribution (3) 56.7
Baylis Distribution (1)(3) 33.1
Cert 31.0
Rhys Davies Freight Logistics 26.1
ACS&T (1)(3) 23.8
UPS (1) 23.6
Lane Group (1) 22.2
DTS Logistics (1)(3) 16.6

Note: (1) 2002 data. (2) Based on successful completion of acquisition. (3) Analytiqa estimates based on share of UK revenues. Data not available for: AAG Distribution; AutoLogic; Bernard Group; Davies Turner; DFDS Transport; Dodd's Group; Eddie Stobart; Fiege Merlin; Frans Maas; GEFCO; Hanbury Davies; HOYER UK; Interoute Transport; Kuehne & Nagel; Lloyd Fraser; Nightfreight; Nippon Express (UK); Ryder; Unipart Logistics. (4) The Logistics Services Division of Malcolm Group provides integrated logistics solutions, including warehousing, rail and road distribution and supply chain management. It was not possible to separate out pure contract data. (5) TNT Logistics (UK) Ltd.

Source: Analytiqa

Ranking the leading players by UK contract logistics 5-Year revenue growth gives the following list: 1-TNT Logistics, 2-NYK Logistics (C&R), 3-NYK Logistics (M&R), 4-UPS SCS, 5-NFT, 6-Bibby Distribution, 7-Dart Group, 8-Culina Logistics, 9-Gregory Distribution and 10-Malcolm Group.

Looking ahead, Analytiqa forecasts that the value of the logistics market in the UK is forecast to reach 25.6 billion in 2006, of which the contracted out part of the market is forecast to reach 10.6 billion. This represents an outsourcing rate of 41.4%.

Driving Growth in UK Logistics
From the findings of Analytiqas exclusive survey of 50 leading contract logistics providers in the UK, key issues facing the industry are consolidation, the Working Time Directive (WTD), Factory Gate Pricing, fuel prices, congestion and parking, driver shortages, outsourcing and the provision of services and systems to gain differentiation from competitors in a highly competitive marketplace.

In March 2005, the Sectoral Directive (2002/15/EC) of the WTD becomes law and applies to all mobile workers. The main provision of the Directive is to apply an average 48-hour working week over a four-month aggregate period. According to industry sources, assuming a status quo in the industry, the new legislation would require an 11.3% increase in the number of HGV drivers in the UK. This means that whilst some drivers will increase their hours, the WTD will require approximately 60,000 more drivers. It is forecast that as a result of the introduction of the WTD, there will be a 9.0% rise in HGV drivers wages.

The impact of the WTD is expected to have a greater operational and financial impact on smaller and medium size logistics companies, rather than larger logistics groups. Small and medium sized logistics providers are not able to absorb higher costs through large volumes and the increase in demand for drivers and HGVs will mean larger companies are better placed to secure finance for investment. A longer term impact of the WTD therefore, may be an increasing divide between the larger logistics companies and the smaller or medium-sized logistics provider.

Consolidation has been a key dynamic of the UK logistics sector in recent years, a trend most recently highlighted by Exels acquisition of Tibbett & Britten. The acquisition enhances Exel's position in contract logistics, particularly outside of the UK. It provides Exel with critical mass in a number of key markets and gives them access to customers in non-food retail, a key growth area for Exel.

Some second-tier players are stagnating with low profitability and poor growth rates, while the top tier continue to advance at a pace, thereby widening the gap.

Quote: Analytiqas Growth Strategies and Trends in UK Logistics Survey

In 2003, a combined Exel and Tibbett & Britten would have generated UK contract logistics revenues of over 2.0 billion. Operating profits on UK contract logistics operations would have risen to 52.4 million.

Table 2: Exel and Tibbett & Britten Combined UK Contract Logistics Revenue, 2000-2003

mn Revenue Growth Op. Profit Pre-Tax Profit Op. Margin

2003 2,001.7 9.8% 52.4 N/a 2.6%
2002 1,823.8 5.3% 44.9 N/a 2.5%
2001 1,731.8 -1.6% 73.3 N/a 4.2%
2000 1,760.6 82.3 N/a 4.7%

Source: Analytiqa / Company

Over the four year period between 2000-2003, operations at Tibbett & Britten would have contributed to around one-third of UK contract logistics revenues of an enlarged Group. The Company would also have contributed an increasing share of operating profits. At Exel, contract logistics revenues in the UK increased by 165.6 million in 2003, to reach 1.4 billion. Operating profits in contract logistics activities rose by 4.0 million, to reach 35.1 million.

Table 8: Exel and Tibbett & Britten: UK Contract Logistics Revenues, 1999-2003

mn Revenue Growth Op. Profit Pre-Tax Profit Op. Margin
2003 1,376.9 13.7% 35.1 N/a 2.5%
2002 1,211.3 3.7% 31.1 N/a 2.6%
2001 1,168.0 0.9% 56.1 N/a 4.8%
2000 1,157.8 N/a 64.8 N/a 5.6%

Tibbett & Britten
mn Revenue Growth Op. Profit Pre-Tax Profit Op. Margin
2003 624.8 2.0% 17.3 N/a 2.8%
2002 612.5 8.6% 13.8 N/a 2.3%
2001 563.8 -6.5% 17.2 N/a 3.1%
2000 602.8 10.8% 17.5 N/a 2.9%
1999 544.1 N/a 17.1 N/a 3.1%

Source: Analytiqa / Company

Factory Gate Pricing (FGP) is largely being driven by UK retailers as they attempt to drive costs out of their supply chains. Through taking responsibility for primary transportation, retailers aim to reduce the incidence of trucks running empty. Tesco is driving FGP in the UK, contacting a large number of suppliers to introduce the practice. As of March 2004, Tescos volumes moving through factory gate pricing stood at approximately 66.0% after having negotiated FGP contracts with more than 1,000 suppliers.

The contract distribution, or logistics, industry has been growing rapidly due to the growth in outsourcing. It is a prime driver of growth within the third-party logistics industry and is the reason why leading logistics companies have grown rapidly from national medium-sized warehousing and distribution providers into global multi-service professional companies. The UK is at the forefront of this trend, with other countries in Europe developing rapidly.

The cost of fuel is a major issue for the road haulage and logistics industry in the UK. For an average truck fleet of 80 vehicles, each time 1p is put on diesel prices, annual costs rise by approximately 37,000.

For an industry that is already running on thin margins, the additional burden of higher fuel prices could see some companies go out of business. Whilst some observers have stated that these costs should simply be passed onto the customer, competition is tight in the UK logistics industry and customers will switch to a larger transport provider that can benefit from economies of scale. This would compound the current trend within the logistics industry of the smaller provider losing out to their larger competitors.

The UK logistics industry is a mature market, with similarly matched logistics providers offering essentially the same services at broadly comparable prices. It becomes increasingly difficult to provide additional services to differentiate from the competition. Key differentiators include:

Ability to offer extended supply chain services on a geographic basis;

The ability recruit, train and retain high calibre staff;

The ability to manage change within an organisation;

The ability to provide skilled systems expertise;

The ability to draw on international best-practice experience;

Innovative solutions, a can-do attitude, culture and commercial acumen;

Value-added services and continual service improvement;

Customer service;

End-to-end supply chain capability;

Creative solution design;

Comprehensive sector knowledge.

Leading the UK Contract Logistics Market

As part of Analytiqas exclusive survey, Analytiqa asked more than 50 logistics companies to assess their peers. The question Irrespective of sales / turnover, which of your peers do you believe is the UK market leader? provided a conclusive response. Exel is considered to be the clear market leader in UK contract logistics.

Sample survey quotes taken from a variety of respondents:
Exel [due to its] size, sector spread, capabilities. They are clear market leader, as illustrated in three-year growth in turnover and EBIT.
Exel, because of their huge infrastructure.
Exel The size and scope of operations allow Exel to offer a complete end-to-end supply chain solution whether through global partners or internal resource. With continuing moves to global sourcing from major retailers and manufacturers this capability is proving a winning formula.
Exel is clearly the leader given its scale, geographic coverage, sector focus and broad range of solutions from freight forwarding and contract logistics all the way to complex end-to-end supply chain management.

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