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A Turbulent Two Decades for the Logistics Industry – and More Change to Come

In this article, John Manners-Bell overviews changes in the logistics industry and speculates about the future

The global logistics industry is vast, both in terms of market size and the huge numbers of people employed in the sector. It is therefore surprising that its role in the development of the global economy is generally overlooked. Without the inexpensive and reliable transport of freight, manufacturers would not be able to tap into the cheap labour resources based in remote locations throughout the world. Nor would retailers be able to provide ever-increasing levels of service to their customers, ensuring shelves are always stocked whilst inventory is kept to a minimum.

In the last two decades the logistics industry has undergone a transformation, as a flurry of mergers and acquisition activity in the 1990s and 2000s led to the creation of a number of giant diversified transport-based groups. Deutsche Post-DHL and TNT were at the forefront of this trend, aggressively building logistics enterprises diverse in both geographies covered and services offered.

The origins of the acquisition frenzy of the 1990s and 2000s can be traced back to the implementation of certain elements of supply chain theory in the 1980s. At this time there was a sea-change in the way in which retailers and manufacturers viewed inventory. Just-in-Time manufacturing became the industry mantra resulting in smaller, more frequent movements of goods. Companies started to focus on the physical centralisation of stock, a goal facilitated by the growth of trade blocs such as the EU and NAFTA.

As a result of these changes to manufacturing strategy, transport became critical to supply chains and the lowly freight company became a major partner in ensuring that goods reached the intended recipient on time and in good condition. It is clear that the evolution of supply chain management resulted in much higher standards across the industry, and gave the major road freight operators the opportunity to develop their value proposition.

The intensity of the M&A activity came about due to a ‘perfect storm’ of market conditions. These included the demand for higher value, out-sourced logistics services by manufacturers and retailers; the availability of cheap private equity-sourced cash; the globalisation of the world’s economy and the liberalisation of the world’s postal markets and the rise of e-commerce.

Suddenly the perception of the sector was transformed from being a rather boring, commoditised, low margin jumble of transport and warehousing services, to that of a dynamic, value adding driver of the global economy.

Since the first major acquisition which kicked off the period of frenetic consolidation (that of TNT Express by the Dutch Post Office in 1996), there have been a variety of different trends which have influenced the strategies of the market leading companies. At this time (the mid-1990s), the ability to offer global ‘one stop shopping’ became an ambitious goal for major logistics companies in their attempt to differentiate their services from their competition.

At the same time the management concept of ‘out-sourcing’ was taking root. Logistics companies were able to take advantage of manufacturers’ and retailers’ desire to focus on their core competences and spin off the management of their distribution activities to Logistics Service Providers (LSPs). By greater engagement with their clients, logistics companies had the opportunity to offer more value, adding higher margin services (such as postponed manufacturing, call centres, inventory ownership etc).

At around the turn of the century, the internet or ‘dotcom’ boom was occurring, and this added a certain level of hysteria to the acquisition market. Logistics companies were quick to position themselves as the providers of the infrastructure enabling ‘clicks and mortar’ e-retailers to fulfil customer orders, both warehousing and transport. Inflated expectations arose and this translated into much higher prices which companies had to pay for even very ordinary acquisitions.

Despite the fact that it would be another decade before the dotcom expectations were realised, the pressure on companies’ management to expand through acquisition was remorseless. It is at this point in the timeline that the bottom fell out of the market with the bursting of the dotcom bubble. The resulting European recession of the early 2000s quickly led to a reverse in strategy as bullish volume forecasts proved to be unachievable and companies struggled to pay back the loans they had taken to make their acquisitions.

Although it would be too simplistic to conclude that at this point the investment community fell totally out of love with ‘contract logistics’ or ‘solutions’ as it is also called, this reversal for the sector coincided with the rise of the international freight forwarder.

Up to this point, freight forwarding had been widely viewed as a non-value adding ‘necessary evil’ for moving goods across borders and booking space on ships or aircraft. Business practices had not changed for many decades, if at all, since the 19th century. However, as globalisation gathered pace it became obvious that the freight forwarder, with links throughout the world (and especially in up and coming markets such as China) would become a critical element in supply chains.

The race was on to build owned networks of forwarding operations. Deutsche Post had acquired Danzas (and subsequently Exel which included MSAS); UPS bought Fritz and Menlo Worldwide Forwarding; Schenker (itself now part of Deutsche Bahn) bought Bax Global, to name just a few.

The pace of globalisation translated into big annual increases in international air and sea freight volumes. Forwarders’ counter cyclical business model (which allowed them to make better profit margins in a downturn, and better revenues in an upturn) was applauded. Their ‘asset light’ nature, managing rather than owning transport assets, provided high returns on capital expenditure. Suddenly forwarding was no longer the poor relation of the logistics world, playing second fiddle to more sophisticated, value adding logistics.

However, since the so-called ‘Great Recession’ of 2008/9, fears have developed in the investment community that the forwarding industry will never again regain its stellar growth trajectory. Wage inflation in China has made goods produced in the Far East less competitive and prompted some manufacturers to adopt near-sourcing strategies (sourcing goods from suppliers based closer to the major consumer markets of the West). Natural disasters have shown the fragility of extended supply chains, and risk is now being increasingly taken into account when looking at sourcing strategies. The age of cheap transport (on which globalisation is predicated) is coming to an end as oil costs are expected to move inexorably upwards. On top of this, the growth of Asia as a consumer market will lead to greater levels of regionalisation (as opposed to globalisation) with the fastest growing sector being intra-Asia movements of goods. This will lead to the dilution of forwarders’ yields.

What is clear is that after a turbulent period of transformation, there is no sign that change in the logistics industry is slowing down. A powerful mix of demand and supply side factors means that further re-structuring is probable. The shift of the economic balance of power towards Asia; increasing supply chain risk; the price of oil; further mergers and acquisitions; near-shoring/re-shoring and even 3D Printing are just some of the issues which logistics providers will need to contend with.