Changing priorities ahead: The evolving face of the UK logistics sector

2011

Changing priorities ahead - The evolving face of the UK logistics sector

About this survey

In May 2011, Barclays Corporate and Grant Thornton commissioned research into the logistics sector (in this report that is businesses which concentrate on logistics, freight forwarding or haulage). The research had two strands: desk research by Barclays Corporate and Grant Thornton tracked the performance of the top 50 UK logistics companies over the past five years.

Research agency Critical then conducted telephone interviews about future trends with decisionmakers from 100 industry firms, with an average turnover of 58m. Answers were treated confidentially and have been reported in aggregate. Unless otherwise stated, all information in this report is taken from the findings of the above research.

The commentary provided by Barclays Bank PLC is intended to be used as information only. Whilst Barclays and its employees take every care to ensure that the content is accurate, Barclays will accept no responsibility or liability in respect of any errors, inaccuracies and losses which may arise from its use. Barclays Corporate is a trading name of Barclays Bank PLC and its subsidiaries. Barclays Bank PLC is registered in England and authorised and regulated by the Financial Services Authority. Registered number is 1026167 and its registered office is 1 Churchill Place, London E14 5HP. www.barclayscorporate.com

Contents 02 Foreword 04 A resilient UK sector 06 UK players slip down the logistics league 08 Industry insight 10 Looking to future change 12 Conclusion

Changing priorities ahead - The evolving face of the UK logistics sector

Foreword

only to shift adversely by 5%-to-10% to pull a profitable contract into loss. Another dark cloud, particularly for medium-sized companies, is the risk of being squeezed out between the emerging super logistics companies and the smaller, niche companies.
Solutions to industry challenges

At last, good news for the UK logistics industry. After suffering everything from spiralling fuel prices and global recession to volcanic ash and appalling winter weather, our research shows chinks of light are appearing.

In 2010, the UKs top 50 logistics firms enjoyed increases in both operating profit and margin. This momentum aided by cost savings programmes and more flexible working practices aimed at improving operational efficiency underlines the resilience of the sector.
An optimistic industry mood

Inevitably, though, any optimism for the future of the UK industry is tempered with caution: with logistics fortunes being yoked to the health of global trade, the industry will not feel secure until the wider economy returns to robust growth.
External risks

Reflecting this momentum, our survey reveals a more optimistic industry mood. In the next 12 months, the majority expect to see an increase in turnover and subsequent investment in their business. After an M&A slowdown over the last three years, more than a third intend to acquire this year, with almost 60% expecting logistics deal activity to pick up.
Overseas influence continues

The economic recovery is not the only risk factor outside the industrys control: rising fuel prices and fluctuating exchange rates are two other significant challenges. Our survey shows 30% of companies charge customers fuel surcharges, while 15% hedge: this suggests that more than half are swallowing fuel price rises. When it comes to foreign exchange, rates need

Our experience suggests that there can be solutions to such challenges. Strategic hedging, for example, can offer a bridge over fuel price rises and exchange rate volatility and provide invaluable visibility of costs and margin protection. Even firms with escalator agreements, which allow them to pass on fuel price rises to customers, can benefit. An interesting recent trend has been for companies to hedge fuel prices and then share savings with

their customers. In doing so, they save money for both parties and differentiate themselves by offering a value-added service. When it comes to countering a pincer squeeze between large and small competitors, the M&A route can be a good option for medium-sized companies, particularly currently, with valuations still attractive. Strategic consolidation can offer a way to achieve the type of economies of scale that enable mid-market firms to remain as competitive as the larger players. In todays tough markets, such strategic forward thinking can make a real difference.
Whatever your interest in the logistics sector, we hope you find this a thought-provoking report.

Non-UK companies have been the major acquirers in recent years, as they have looked to establish and further develop a foothold in the UK, which remains an important trading nation, and to benefit from its flexible labour laws. Our research shows this trend is continuing, with overseas firms now generating more than two thirds of UK logistics sector turnover.

Philip Bird Director, Corporate Finance, Grant Thornton UK LLP

Rob Riddleston Head of Transport and Logistics, Barclays Corporate

Changing priorities ahead - The evolving face of the UK logistics sector

A resilient UK sector

Many of the 100 industry players we interviewed also believe the sector has turned a corner. More than four out of five predict their firms will grow in 2011. The average rate of growth in turnover is forecast at 6%, although 17% anticipate growing by more than 10%.

The UK logistics sector is emerging from the recession in resilient form, despite escalating fuel prices and sluggish growth.
In 2010, the combined operating profit of the 50 largest performing UK firms was 575m, 80m up on the previous year. Average operating margin rose to 2.6% from 2.1%, despite the year-on-year turnover being slightly down. The 2010 margin level was just 0.7% below the high point of the last five years: 2008s rate of 3.3%. The improvement in margin between 2009 and 2010 is particularly notable given the combined pressures of spiralling fuel and freight costs, rising inflation, low demand from depressed global markets and the harsh winter. With downward pressures on margins over the last five years, companies have sought improved cost-control, more flexible working practices and more focused investment, and have adapted to become asset-light operations. The 2010 figures show, for example, reductions in both employee numbers and the value of fixed assets, the latter reflecting the trend towards renting rather than owning vehicles and warehousing. Average salary, meanwhile, went up far less between 2009 and 2010 than over the previous four years. Countering rising fuel costs has, inevitably, been a major thrust. In 2010, the average pump price of diesel was 120 pence almost a third higher than the 2006 rate. To add to the pain, in 2010,
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Chart 1: Which of the following measures have your company implemented to counter rising fuel costs?

l OTHERS 2% l Hedging 15% l Fuel surcharge to customers 30% l Fixed rate deals from suppliers 34% l Switch supplier 59% l Improved vehicle capacity on return journeys 67% l Vehicle fuel monitoring technology 69% l Better driver training 74% l Improved vehicle efficiency 83%

Chart 2: Which areas do you think you will invest in over the coming 12 months?

l NONE 2% l Acquisition 34% l Premises 38% l Machinery 57% l Technology 72% l People 77% l Vehicles 77%

inflation reached a five-year high of 4.8% and GDP growth remained low at 1.8%. Our survey found that 87% have implemented measures to reduce spending on fuel. Most of these initiatives involved operational innovations: more than two thirds improved vehicle efficiency, introduced better driver training and used fuel monitoring technology. Interestingly, far fewer between 15% and 34% mitigated the actual cost of fuel by fixing rate deals with suppliers, arranging customer fuel

surcharges or hedging. The improved 2010 margins suggest the industry is recovering from the doldrums of the recession. Another hopeful sign and further proof of the industrys resilience is the reduced number of firm closures. According to the Freight Transport Association (FTA) there were around 15 fewer insolvencies last year than in 2008 and 2009, when more than 50 firms became insolvent. Many of the 100 industry players we interviewed also believe the sector has turned a corner. More than four out of

five predict their firms will grow in 2011. The average rate of growth in turnover is forecast at 6%, although 17% anticipate growing by more than 10%. After a period of belt tightening, almost all respondents are intending to invest in their businesses in the coming 12 months, with vehicles, technology and staff the main priorities. Of those interviewed, almost half say they intend to increase staff numbers this year, with less than one in 15 saying they will cut their workforces.

Changing priorities ahead - The evolving face of the UK logistics sector

UK players slip down the logistics league

The UK logistics sector has changed dramatically in the last five years, most markedly in its domination by foreign players.
In 2006, 54% of Britains largest 50 logistics firms representing 51% of combined sector turnover were still UK-owned. There were two UK publicly listed companies among the top three largest British logistics firms: Wincanton Plc and Christian Salvesen Plc. By 2010, UK firms represented just 31% of total turnover and only 48% of the largest 50 logistics companies were UK-owned. The largest foreign-owned company by turnover is now CEVA Logistics (formerly TNT Logistics), with German-owned Exel in second place. Wincanton is still the largest UK-owned firm, however, its 2.2bn 2010 turnover is less than half that of CEVA and is 500m behind Exel. The super logistics companies that have emerged from overseas seem to be pulling away from the local players. Mergers and acquisitions have played a large part in this changing picture, with non-UK firms buying up local companies to further strategic ambitions, expand their networks and capabilities into the important UK market, and benefit from flexible national labour laws. The last five years have seen a significant fall in the volume of M&A transactions in the sector. Over the 2006-to-2010 period, the total value of disclosed transactions fell from 875m to 293m. Despite this fall, overseas acquirers have continued to lead the way in the consolidation of the UK logistics sector. For example, Frances Norbert Dentressangle acquired TDG, one of the UKs largest logistics companies. The acquisition, which created Europes largest wholly owned transport fleet, followed NDs earlier acquisition of Christian Salvesen. Both of these acquisitions have enabled ND to offer a complete end-to-end logistics solution, with strengths in both freight forwarding and contract logistics.
UK logistics deals 2006-2010

international players on one hand and small, niche operators on the other. Liverpools Bibby Distribution Services, one of the UKs largest privately owned logistics companies, is one of the few UK businesses making acquisitions. Family-owned Bibby made three acquisitions in 2010: acquiring Midlands-based TM Logistics; certain contracts of the West Lothian headquartered MRS Distribution, and Biggleswades Taygroup. Bibby emphasises that acquisitions are a key part of its growth strategy and that it is actively

looking for further complementary opportunities. Our survey suggests that more UK businesses may look to acquire in the next 12 months. Just over one third say they intend to acquire this year, with more than half of respondents believing there will be an increase in deal activity in the sector. 97% of those looking to buy say they will acquire in the UK, while one in 10 of these potential buyers say they will purchase overseas, with Western Europe the main target market, followed by the Middle East and North Africa.

British logistics firms have historically been less ambitious in taking over foreign companies. An enduring low interest in overseas activity may explain why only one third of our industry interviewees say they have adapted their business plans in light of recent natural disasters and civil disturbances abroad. It also suggests that UK companies remain unlikely to replicate the expansion from overseas that we have seen in the UK, in foreign markets.

Chart 3: Do you think there will be an increase or decrease in M&A activity within your sector over the next 12 months?

Chart 4: You said that you expect your company to acquire other businesses in the next 12 months. Are these likely to be in the UK, overseas or both?

UK logistics turnover (m)*

2006

6,981 7,217 8,850 7,108 12,955 7,393 15,959 7,819 15,160 6,797
l Domestic-owned

l Major decrease 1% 900 800 700 Deal Value m 600 500 400 300 200 100 0 2006 2007 2008 2009 2010 40 35 Number of deals 30 25 20 15 10 5 0 l Minor decrease 4% l No change 36% l Minor increase 40% l Major increase 18% l Dont know 1%

l Total UK 33% l Total Overseas 10% l UK only 24% l Overseas only 1% l UK and Overseas 9% l No Acquisitions 66%

2007

2008

2009

2010

l Overseas-owned

l Deal Value m

l Deals

* Turnover is from UK companies and includes overseas subsidiaries turnover where included in consolidated accounts.

In early 2011, meanwhile, Nottinghambased RH Freight was acquired by Swiss freight forwarding giant Kuehne + Nagel, as part of its strategy to expand its European overland network. UK firms have proved more cautious in pursuing M&A opportunities. The lack of mid-market consolidation, despite still relatively attractive valuations and the benefits economies of scale would bring in the current economic environment, is particularly surprising. In todays increasingly global supply chain, size does matter. Going it alone leaves medium-sized companies vulnerable to being squeezed out by big,

Changing priorities ahead - The evolving face of the UK logistics sector

Industry insight

Norbert Dentressangle is one of the success stories of European logistics.

It began humbly enough in London in 1979, when the eponymous founder launched a cross-Channel fruit export business. Now, still 70% family-owned, Norbert Dentressangle is among the top three European logistic providers, with a 3.6bn turnover, 33,000 employees, operations in 20 countries and a global freight forwarding presence. It came out of the recession with vigour: acquiring Schneider Logistics freight forwarding business in November 2010, and, in March 2011 three years after buying one leading UK firm, Christian Salvesen it purchased another, TDG. Brian McDill, Norbert Dentressangles UK Logistics Operations and Solutions Director, says the firms swift response to the recession helps explain its current buoyancy. He says: We were affected by the recession and saw revenues drop, like every other business. But we reacted quickly and focused on being a lean, agile and flexible business with a unique operating model that assisted our ability to deal with this period. We controlled costs, limited capital expenditure and scaled to size: however, at the same time, we continued to invest in sales and marketing, to raise the profile of our brand.

As a stable business with a strong balance sheet, as the recession ended, we were able to take the opportunity of going for growth. Having come through the recession strongly, Norbert Dentressangle has various strategies to contend with another major industry challenge rising oil prices. We have well developed fuel price mechanisms that are agreed with our customers and built into all contracts, so rises and reductions are passed on from the agreed base price. With diesel such a major business cost and price fluctuations entirely out of our control fuel price mechanisms are essential for protecting the business, says Mr McDill. The size of the group, meanwhile, gives it an enviable position when buying fuel. It complements this advantage with a range of fuel efficiency measures, including aerodynamic tractor units and trailers the majority of the fleet is Euro 4 or Euro 5, with a newly developed hybrid vehicle in trial and rigorous driver training programmes. However, like 85% of our survey

respondents, the company chooses not to hedge on fuel. Mr McDill believes that its flat structures and the autonomy given to country managers are intrinsic to his companys successful overseas expansion. We are a huge global business. The group is governed from France and listed on the Paris stock exchange but it has a very flat leadership structure. The country managers are local which means they understand their home industry and demographics. Looking ahead, Mr McDill is optimistic about the future of the UK logistics industry. However, he stresses that change will remain a constant and that it is the companies which can adapt that will prosper. The one thing we can be sure of is that tomorrow will be different from today. Our customers will always have changing needs and we have to be agile enough to change with them, he says.
Brian McDill, UK Sales and Business Development Director, Norbert Dentressangle

The rise of super logistics companies is creating a new industry ecosystem, with smaller players allied to larger firms and the middle market looking for a role, according to the Freight Transport Associations James Hookham.
Mr Hookham believes the retail drive for supply chain optimisation, with the associated pressure on margins, means that only major players with streamlined infrastructure, sophisticated IT and economies of scale can keep up. The industry is hollowing out, says Mr Hookham, the FTAs Policy & Communications Managing Director. Companies are now aspiring to be in the major league or else providing sub-contracting work to larger firms. This is creating a new ecosystem with small firms building relationships with the bigger players. The firms in the middle, who cannot keep up the investment in systems and people that serving the retail and FMCG sector requires, are gradually disappearing. Mr Hookham says the emergence of huge operators, like US private equity owned-CEVA and DHLs Supply Chain business (formerly Exel) owe much to history. Both have former state monopolies at their core: CEVA incorporates the former Dutch post offices TNT Logistics and Supply Chain, Deutsche Post. Their size, knowledge and financial security gave them an ideal base for strategic takeovers while, particularly in the early days, limited investor pressure meant they could play a long game, waiting for economies of scale to push up margins. He feels there should be no Little Englander regret for the loss of national ownership of UK companies. The

Who owns the UK logistics industry is immaterial as far as British businesses are concerned so long as it remains efficient and responsive and has access to the on-going capital to invest in high standards of technology, safety, sustainability and human resources.

The one thing we can be sure of is that tomorrow will be different from today. Our customers will always have changing needs and we have to be agile enough to change with them,

logistics industry is there to deliver a service to customers. Consolidation has enabled British businesses to maintain their competitiveness in world markets and allowed consumers to benefit from wider choice and reliability of supply. These are the success criteria by which logistics should be judged. Who owns the UK logistics industry is immaterial as far as British businesses are concerned so long as it remains efficient and responsive and has access to the on-going capital to invest in high standards of technology, safety, sustainability and human resources. According to Mr Hookham, apart from redundancies arising from the merging of back office functions, jobs are not automatically threatened by overseas acquisition. One of the features of logistics is that you cant outsource the journeys or the jobs. The ownership of the logistics business might reside overseas but the driving, handling and fleet management jobs, by definition, can only be done in the

UK because thats where the goods and vehicles are. He says that the UKs skill in core logistics management, honed during the supermarket supply chain optimisation programmes of the 1990s, means that logistics planners and strategists are particularly prized. Mr Hookham suggests that the high cost of fuel in the UK, compared with mainland Europe, puts many more jobs at risk than overseas acquisition. He says an EU plan to allow foreign-registered vehicles to make unlimited journeys in the UK, while running on lower taxed fuel purchased abroad, will only exacerbate this risk.

James Hookham, Policy & Communications Managing Director, Freight Transport Association

Changing priorities ahead - The evolving face of the UK logistics sector

Looking to future change

The UK logistics market is on the brink of significant change, according to our survey. Changing mode patterns, increased local and global sourcing, and a rise in logistics outsourcing are some of the predicted scenarios.
More than half of our respondents believe sea transport will play a bigger part in UK logistics in the coming 12 months. Rail transport which suffered in the recession from a reduced construction industry demand for bulk freight services is tipped to rise by 46%. Road transport, which, according to the FTA returned to near pre-recession levels in 2010, is forecast to grow by more than one third. Air transport is tipped to fare the worst, with fewer respondents thinking its use will rise and more predicting it will fall than for sea, rail or road. (Interestingly, this lack of confidence does not reflect actual trends: according to the International Air Transport Association, global air cargo volumes grew by 18.5% in 2010.) The logistics footprint is also forecast to change. Almost half (49%) of our respondents believe the globalisation of the supply chain will increase, although almost as many (47%) believe it will remain

Chart 5: Over the next 12 months, do you think the use of different forms of transport by logistics companies will increase, decrease or remain the same?
Sea Transport

Chart 6: Which of the following is the biggest/ 2nd biggest/ 3rd biggest issue etc facing your sector in the next 12 months?
Cost inflation

51% 2% 38% 9% 46% 10% 37% 7% 35% 10% 55% 18% 29% 40% 13%
l Remain the same l Dont Know

Rail Transport

53% 25% 8% 8% 1% 24% 36% 16% 13% 3% 9% 11% 18% 12% 28% 8% 16% 17% 22% 17% 6% 8% 23% 17% 23% 4% 18% 28% 28%
l 4th issue l 5th issue

Increased price competition

Road Transport

Air Transport

Increasing demand

offers unalloyed opportunities. Just over half (53%) of our respondents believe customer outsourcing of logistics will increase in the next five years. This perception is perhaps not surprising given respondents downbeat assessment of how well UK companies manage supply chain logistics: just 14% think industry is very efficient at doing the job. Alongside such predictions of new developments, many of the concerns highlighted by respondents are familiar. Cost inflation is considered by more than half as the biggest issue facing the sector; while almost a quarter say their main worry is increased price competition. There is even greater unanimity on the perception of the UK Government: 82% think it is unsupportive of the logistics industry, with its unwillingness to introduce a cap on fuel duty as the main complaint. If the industrys evaluation of the government of the day is unsurprising reflecting, as it does, a long-held conviction that Westminster does not adequately value or understand logistics respondents perception of their own firms is more unexpected.

When asked what differentiates their company, respondents fight shy of citing value-adding qualities. They flag up the more commoditised aspects of their job: the what they do rather than the how they do it. Reliability of service, breadth and depth of service, speed and additional service provision are all mentioned as differentiators by more than 40% of respondents. High levels of customer care, quality of products/services, flexibility and innovative thinking aspects that, in most industries, are deemed to set companies apart trailed at between 2% and 11%. This could be plain speaking, pragmatism or a sign that the industry remains somewhat inward looking, having focused for several years on surviving the toughest recession for decades.

l Increase l Decrease

Decreasing demand

unchanged or decrease. Supply chain globalisation could, inevitably, bring both opportunities and threats to UK operators. International sourcing offers the potential for new and significant intermodal routes, however any evolution of global operators to meet demand could squeeze out smaller players. At the other end of the scale, more than four out of 10 companies believe rising fuel costs will lead to an increased sourcing of local produce so changing transport patterns. Indeed, 21% predict the increase will be significant.

Supply chain disruption

NO OTHERS

l 1st issue l 2nd issue l 3rd issue

While, as indicated, some of the predicted changes are possible threats, one a tipped rise in outsourcing

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Changing priorities ahead - The evolving face of the UK logistics sector

Conclusion

The state of the logistics industry has always been a litmus test for the health of the whole economy: the industrys wheels only stop turning when manufacturers cease producing and consumers stop buying. By proving that the wheels are turning again, the survey once more affirms the resilience of the UK logistics industry as, having adapted to the recession, it continues to overcome the many other hurdles thrust in its way. As the recession recedes, opportunities now exist to turn certain challenges into opportunities be it in business consolidation or by differentiating rates and service through strategic hedging. Such nimble tactics could make the difference between mere survival and real growth.

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Changing priorities ahead - The evolving face of the UK logistics sector

Contacts

For further information on any of the issues explored in this report contact:
Philip Bird Grant Thornton UK LLP T 020 7728 2071 E philip.bird@uk.gt.com Rob Riddleston Barclays Corporate T 020 7116 5214 E rob.riddleston@barclayscorporate.com

2011 Grant Thornton UK LLP. All rights reserved. Grant Thornton means Grant Thornton UK LLP, a limited liability partnership. Grant Thornton UK LLP is a member firm within Grant Thornton International Ltd (Grant Thornton International). Grant Thornton International and the member firms are not a worldwide partnership. Services are delivered by the member firms independently. This publication has been prepared only as a guide. No responsibility can be accepted by us for loss occasioned to any person acting or refraining from acting as a result of any material in this publication.

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