The trans-global

Postal operators are well versed at competing among themselves, and some of
the larger companies have successfully taken on multinational express firms such as
UPS and FedEx. Operators, including Deutsche Post and TPG, have executed
strategies which have seen them catapulted onto the next level of competition,
becoming, as was their aim, global logistics companies.
The competitors in this industry are well known, the ‘big’ players have
established themselves on the world stage and Asia is currently proving the
battleground where those with the resources are flexing their corporate muscle. Joint
ventures, buyouts, and multi-million pound investments are flying about as companies
look to secure their own slice of this frantically growing marketplace.
None of this is particularly ground-breaking news; in fact the prediction of two
or three ‘key’ companies dictating the postal script is a notion that has been muted for
several years. However a new spectre of compettion is now threatening to emerge, one
that could force posts to look beyond their traditional boundaries and “comfort zone”
and think in a truly global way.
As other industries that have been subject to government control in Europe
begin to liberalise, they appear keen to compete in the logistics sector. Railway
companies, shipping firms, and to a lesser extent, air lines are looking to expand their
remits to include a market traditionally reserved for posts and smaller dedicated firms.
The acquisition of TNT by the Dutch post office in 1996. market a watershed in
the recent history of the European logistics industry. However, althought the then KPN
was the first to embark on a major acquisition strategy, it was German rival Deutsche
Post which really revolutionised the sector. Today both companies are market leaders in
segments within the diverse logistics industry, although overall Deutsche Post has
developed a position as undisputed leader.
In order to understand the reason why companies from a wide range of different
backgrounds are focusing on the European logistics market, it is necessary to look at
the internal and external drivers that have influenced the industry’s development.

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A consolidating market
The last five years have seen unprecedented levels of merger and acquisition
activity. The strategies of freight forwarders such as Rockwood and LEP International
in the late 1990s were early, albeit ill-fated, attempts to build European and global
platforms. These attempts unraveled partly because they lacked the resources to carry
through the strategy. However, when the post offices diversified into the wider logistic
industry they brought with them seemingly unlimited resources. It is these that have
enabled them to sustain lengthy- and costly- acquisition and integration programmes.
The present market leaders have emerged from a range of backgrounds, and
have built integrated service offerings in order to capture the enhanced value that can
be attained through building scale operations and extensive portfolios. This has resulted
in one of the most marked impacts of consolidation: The merging of traditionally
separate logistics segments. The fundamental changes in the logistics industry have
been driven by a number of imperatives, these have been both demand and supply led.
The speed at which change has taken place over the last decade is a result of the mutual
benefit and opportunities these trends have created for both logistics service suppliers
and users.
Globalisation
This trend has been largely demand driven. Manufacturers and retailers have
increased both the level of global sourcing and the scope of the markets that they
supply. The rising levels of international trade, and the increasingly integrated nature
of supply chains has created a need for logistics companies that can offer sophisticated
services on a worldwide basis, including IT systems that can provide global visibility.
Liberalisation of markets
The liberalisation of the European transport and postal markets has been one of
the driving forces behind the high level of merger and acquisition activity in the last
few years. In the postal industry the threat of competitors entering what had previously
been monopolistic markets was the key reason for mail operators to diversify their
revenues. This has led the Dutch, German, and more latterly, British and French post
office to embark on extensive buying campaigns, which have added express parcels
networks and, in the case of TPG and Deutsche Post, extensive logistics operations to

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their portfolio.
The liberalization of the postal markets looks set to be followed by similar de-
regulation in Europe’s rail industry. This has prompted some state-owned railways to
prepare for a more competitive environment. ABX, a subsidiary of Belgium’s SNCB,
embarked on a highly ambitious programme, building an extensive Europe logistics
group. Deutsche Bahn, Germany’s railways, has recently acquired one of the world
biggest logistics companies, Schenker.
Product differentiation
Many segments within the logistics industry, such as road haulage and
warehousing, are commoditised or with low barriers to entry and exit, such as freight
forwarding. This has led to the market being typified at grass roots level by low
margins and high competition. The largest companies have sought to differentiate their
products and increase their margins by extending the complexity of the service that
they provide.
Service portfolio
Logistics companies are increasingly being asked to provide a range of service,
rather than just one element of transportation or warehousing etc. Using a smaller
number of logistics suppliers benefits the manufacturer or retailer by reducing the
amount of supplier administration required. It also allows them to leverage their buying
power to drive down costs. Acquisition is one way in which a logistics supplier can
expand its range of capabilities. This supplier rationalization will benefit the larger
logistics players because scale players are more likely to remain on short lists for
tendering. This reduces the level of competition and allows logistics companies to
access logistics budgets which were previously spread over a greater number of
suppliers.

Outsourcing
Outsourcing has been one of the prime catalysts for the change it the logistics
industry. It has provided the impetus for growth by creating a rapidly expanding market

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with higher margins than could previously be enjoyed by companies in commoditised
transport and warehousing. Manufacturers and retailers have sought to focus on their
core competences, and contract out other elements of their business.
In order to take advantage of this trend, logistics companies have sought to build
skills, capabilities and geographic scope. The fact that in some markets (such as in the
USA) it is estimated that only about 15 per cent of logistics activities are out – sourced,
shows that a huge potential still exists.
Approaches to growth
Traditionally there have been two ways in which companies have looked to
expand their presence in the marketplace.
Blockbuster deals
A number of European logistics companies have undertaken one or more
‘blockbuster’ deals to acquire immediate scale. TPG’s acquisition of TNT or DPWN’s
acquisition of Danzas and AEI are examples of these types of deals. They have then
proceeded to “in-fill” gaps in capabilities or geographies with a sequence of smaller
acquisitions such as in TPG’s case, Taylor Barnard (consumer goods logistics in the
UK) or Tecnologistica (high tech logistics in Italy).
The advantage of this approach is that it gives the company immediate scale and
market presence, providing a competitive advantage over smaller players. It also
reduces the level of merger and acquisition activity required in identifying, as well as
approaching, potential targets, negotiating with them and eventually integrating them
in to the parent company. It may also reduce cultural barriers if the scale acquisition is
form a similar business back ground. However even the larges scale players does not
have consistent depth of services across all geographies and segments. Therefore,
where as small, focused acquisitions can identify high-quality players that can be easily
integrated in to a larger company, scale acquisitions can leave buyers with on-going
management problems duo to weak or badly performing business units.

Evolution strategies
An alternative to the ‘blockbuster’ scenario is the evolution model. The early
stages of an expansion strategy usually focuses around increasing presence in the home

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market, and consolidating market position in a care competence. When this has been
achieved, the company develops in to associated competences and markets in close
proximity or with similar attributes, through a range of alliances, joint ventures or
focused acquisitions. In this way, a portfolio of capabilities and markets can be built
without the risks involved in a scale acquisition in areas where the company has no
prior experience or skills. This approach is usually termed ‘bolt-on’ acquisition. In this
respect posts have a natural advantage over competitors in other logistics fields. They
already have market dominance in their own sectors due to the fact that in most cases
they have monopoly or near-monopoly positions. They therefore have no need to focus
on building or protecting their own core business and can diversify, using the profits
gained in their home market to fund the scale acquisitions.
Some companies have found that building a major global presence without solid
foundations carries high levels of risk. ABX Logistics and Thiel for example, have
experienced severe financial difficulties due to the underperformance of a acquired
companies. In addition they have not had the resources required to integrate the group
into a coherent entity, therefore unlocking the value of a global or European network.
One of the major risks involved in acquisition is the migration of key employees and
clients - this is especially the case with freight forwarding companies where client
loyalty often revolves around personal contacts rather than corporate relationships.
The competitive battleground
The logistics market has become hypercompetitive over the last few years as the
existing players have come under sustained pressure from new market entrants. The
European postal operators have been responsible for much of the acquisition activity in
this market, mainly because of liberalization. The monopolistic advantage they enjoy
will be transient, prompting them to diversify into other parts of the logistics industry is
a way of maximising their brand, presence and resources, as well as using the strong
cashflows they generate.
The extension of domestic parcels operations on a European basis is a natural
progression for postal operators to take advantage of the increased internationalisation
of goods flows. They have recognised their good position to exploit the trend towards
integrated, global supply chains by coordinating flows of goods, information and funds.

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DPWN has implemented by far the most ambitious expansion plan. By buying Danzas,
AEI and DHL, and subsequently a multitude of in-fill companies, it has constructed a
global mail, express and logistics company in just over five years. Other post offices
have tried to follow suit on amore modest basis. Royal Mail has acquired a European
network, General Parcel, for about Euro 750 million, and La Poste (through
subsidiary GeoPost) has taken a controlling interes in DPD.
European railways
The major post offices are not likely to have a clear run in the express and
logistics sectors. For much the same reasons as postal operators, European railways
have recently entered the logistics acquisition market. This is largely as a result of
liberalisation of markets which should see competition increase on a domestic and
international level. It is also an attempt to arrest the long term decline of rail as a model
choice. By acquiring freight for warders and logistics providers (which control a large
proportion of cargo volumes), railways can leverage their sizeable resources to ensure
that rail is not further marginalized. Doing this, railway companies will be able to
acquire customers directly via their subsidiaries, increasing their level of value add
(and hence improve margins). The risk of such a strategy is the alienation of existing
client forwarders which, following such a move, become de facto competitors.
Shipping lines
Many shipping lines were originally just as reticent in developing logistics
services as the post offices and railways. However in recent years they have developed
major logistics functions, which can provide clients with end-to-end solutions, rather
than port-to-port carriage alone. Maersk, NYK and P&O have built logistics lines that
provide services such consolidation at origin, and final distribution through Europe.
The major shipping lines have a considerable interest in developing logistics divisions.
They provide a key source of extra revenue with the potential for higher margins
through value-added activities. Shipping lines also have the necessary scale to compete
at the highest level with many being multibillion dollar enterprises.
The competitive future
The European logistics industry faces many challenges over the coming few
years. Many of the companies that had expanded aggressively have been forced to

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divest loss making subsidiaries. With the continued economic pressure, this situation is
likely to continue, with only the largest or best run companies able to sustain strong
growth. Low margins are one of the most serious problems that the industry has to
overcome. These are set to fall further as costs rise from increasing fuel prices, further
environmental regulation (such as road charging) and an increasingly inflexible labour
market due to European employment legislation (such as the Working Time Directive).
One vision for the future of the industry is the creation of a small number of
‘mega-carriers’, consisting of the leaders from each logistics segment. This would for
example include DPWN from the postal sector, Deutsche Bahn from rail, UPS from
parcels and express and Maersk from shipping. Each would undertake a wide variety of
logistics activities, competing against each other at several different levels and in a
wide variety of geographies. Many companies would be consumed by these leviathons,
as mergers and acquisitions are facilitated by continued market deregulation. Others
would either specialize in niche markets and geographies, or contract as wholesalers to
the first tier suppliers. Medium-sized companies would merge in an attempt to create
competitive scale. In this respect a similar situation could exist in the mail, express and
logistics industry as is widely predicted for the European airline market. In the latter
case some analysts believe that only three main European airline groups will exist in 10
year’s time.