Assets or liabilities?

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On the face of it, TDG’s annual results are nothing to write home about. Sales have risen slightly to £510m and operating profit is up slightly to £19.6m. So why are there smiles on the faces in Victoria Street – even if they are fairly cautious ones?

What those basic figures don’t reveal is a major shift in the nature of the business away from traditional contract distribution and towards supply chain management operations.

TDG has won some big contracts in the fourth party logistics area and chief executive David Garman (who dislikes the 4PL tag) reckons that this side of the business could be worth as much as £100m within a year.

It’s not that the margins are great in this sector of the market. TDG reckons it is making margins of between two and five per cent on its contract logistics operations but only one to two per cent on the supply chain re-engineering contracts.

What makes it so enticing is that the return on capital employed can be huge. In fact, in some operations, so few assets are owned by the operator that the return on the investment is verging on the infinite. Add a few such contracts to the traditional mix and the whole business starts to look a lot more attractive to the average city gent.

For a public limited company which has to satisfy the stock market, that is an increasingly important factor. Profits among the major logistics service suppliers have been squeezed very hard year on year in recent years. That in turn makes it more and more difficult to produce the sort of return on capital employed that an outside investor demands.

This sort of thinking clearly influenced TNT’s decision to sell its logistics business and focus on its express and mail operations.

Of course, getting assets off the balance sheet through leasing and contract has been important in the third party logistics world for years but the pressure is clearly increasing.

It is unlikely that the factors highlighted above are going to change any time soon. So it is clear that public companies in the third party logistics market are going to have to continue adapting to meet the changing business climate. That could also open up new opportunities for other operators.

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