Group board member John Mullen was drafted in to take control of the American operations just over a year ago with the intention of bringing it back to profitability by the end of 2006. In February, DP’s chief financial officer Edgar Ernst said that 434 million euros of goodwill was written down for the Americas region. “We have made a fresh start in the US in financial and operational terms so that we are now well positioned to exploit the market opportunities on offer,” said Ernst.
Without the goodwill write-down, the result for the express division would have been just under the forecast of about 500 million euros. Of course, DP can rely on its domestic letters business which last year produced a profit of more than two billion euros and overall it produced an operating profit of 3.8 billion euros.
Meanwhile, over at UPS chairman Mike Eskew can look fondly on a mouth-watering set of figures for last year: sales up more than 16 per cent at almost $43 billion and operating profit up 23 per cent to more than $6 billion. “The year was one of significant growth, margin expansion and excellent cash flow,” said chief financial officer Scott Davis. “We will continue to invest in all three of our businesses and execute strategies in each segment that will enable us to capitalise on the growth in global commerce.”
TNT has also reported a strong performance in the express market with operating profit up more than 26 per cent at 474m euros and operating margin up from 7.6 per cent to 8.9 per cent. Mail has performed less strongly with operating margin down from 20.7 per cent to 19.5 per cent.
TNT is now involved in extricating itself from contract logistics. The French operations have already been sold off, and rumours abound about who might buy the rest – most of the betting seems to be on Far East shipping lines. Chief executive Peter Bakker described the performance of the network businesses as “very satisfying – a record margin in express with strong top line growth and mail achieving a great margin.”
FedEx chairman Fred Smith has been hard at work in China setting up a deal for FedEx to buy DTW’s 50 per cent share of the FedEx-DTW express joint venture and DTW’s domestic express network for US$400 million. The transaction is subject to government approvals and licensing. Smith said: “”This strategic investment in the long-term growth of China will broaden and deepen our relationship by improving access to important markets, fuelling economic development for years to come.”
China has just reported that exports in 2005 reached a record US$762 billion, a year-over-year increase of 28 per cent. Imports rose to US$660 billion, an increase of nearly 18 per cent over the previous year.
FedEx currently serves China with 23 frequencies per week and plans to add three more in March. It is now working on a US$150 million Asia Pacific hub in the southern China city of Guangzhou that will employ about 1,200 people.
FedEx has seen margins improve from 8.2 per cent to 9.8 per cent over the past year driven by “customer demand for our broad portfolio of transport services, a disciplined pricing approach by FedEx and strong productivity gains, according to Fred Smith.
The domestic express market has seen significant changes over the past year with takeovers, changes of strategy and, in some cases, changes of management.
Consolidation in the market has been driven by tough trading conditions – notably in the business to business express sector. Dick Stead, sales and marketing director of Parcelforce Worldwide, says: “With little growth in the B2B express delivery market, businesses will increasingly be looking to carriers who can provide the range of services to meet their needs and not base their decision making purely on price.
“Good information flow is important to senders – they want to be able to access accurate and up to date information on their consignment quickly and easily. Online tracking, as well as the ability to order collections, price consignments and get the range of product information on the internet, is essential for businesses that want the complete service package from their distribution partners for express delivery, underpinned by a high quality of service.”
In December, Business Post announced the departure of chief executive Paul Carvell as the group struggled to deal with the erosion of margins in its core express business.
New chief executive Guy Buswell made a number of significant changes to the management team designed to simplify and streamline the management of the group’s activities and provide greater focus to those areas requiring margin improvement. However, at the end of January the group warned that board expectations of margin improvements in the group’s parcels business, resulting from improved selling prices and lower costs, had not been achieved.
In September last year, the group said the reduced expectations of profit from normal trading reflected a sharp decline in the rate of growth of volumes in Express in response to deteriorating economic conditions.
“While daily volumes at the start of the year were eight per cent above those a year earlier, market conditions have progressively deteriorated to the point where daily volumes in August were below those last year. The rate of decline appears to have slowed in September, and express revenue for the first half is now expected to be 3 per cent above last year.”
Buswell has now adopted a strategic root and branch approach to the development of the business focusing on customer mix, service and cost control. This has included a review of the franchise network and identified that further one-off investment of £1.5m is required to secure its long term future.
The group now reckons that the additional costs relating to the franchise network will be around £4.5m.
The franchise concept has fallen out of favour at Initial City Link which last autumn decided to bring the whole business back in-house. It has 70 franchise territories of which it already controls and operates 25.
The business is very profitable and parent company Rentokil Initial said the move should deliver better returns for shareholders.
“Franchisees, who collectively have an estimated annual profit of £5 million, will be offered a fair price for their businesses and will be given plenty of time to plan the transition.
“The franchise model used by Initial City Link has been in place since the early 1990s largely unchanged and the franchisees have played an important part in its growth. However, thanks to recent investment in franchisor sales and marketing and a renewed focus on personnel, better growth is being experienced in Initial City Link’s controlled and operated branches than in those of the franchisees. When combined with the opportunity to develop the business and address the increasingly complex demands of customers, a decision to move towards owning the network makes strong commercial sense.
While market conditions were tough last year, UPS took the opportunity to take over Lynx. It completed the purchase in October and has been integrating it with its existing business under managing director Bill Caplan.
Nuneaton-based Lynx had sales of £170 million in 2004 from a broad suite of parcel delivery, logistics, spare parts logistics and mail services through a strong nationwide network and experienced workforce. The acquisition expands UPS’s capacity and accessibility throughout the UK and enables it to offer a broader base of customers access to its global delivery system.
Another operator changing hands was Tuffnells, the Sheffield-based carrier. After eight months of negotiations, a £33 million management buy-out was completed in May last year. The Bank of Scotland has taken a significant minority equity stake with the management retaining a majority shareholding in the business. Chief executive Lloyd Dunn said: “The reason I wanted to lead the management buy-out was simple, I love the company and totally believe in its future.”
Nightfreight went through a management buy-out the year before and since then has been investing in developing in the irregular dimension and weight sector of the market. Last year it invested some £2.4m.
“Our aim is to grow our business significantly by re-designing and re-engineering our product offering right across the business to ensure customers receive a top quality service that meets and beats their expectations,” said chief executive Rob Kelly.
Parceline, part of Geopost, has also been investing. In the second half of 2005, it spent some £20m moving seven of its 42 depots to larger purpose-built facilities. The replacement depots have increased capacity, enabling them to provide earlier deliveries and later cut-off times for collections. The investment marks the first stage of a three-year programme, which will see Parceline increase its depot square footage by 50 per cent by 2007. The carrier is also committed to building a second UK hub near its existing site in the West Midlands.
Fulfilment will drive home e-retailing success
The internet is beginning to have a serious impact on the retail world. Last year online shopping sales were valued at £14.5 billion. In the last Christmas period, half the UK population shopped online and spent £3.8 billion, that is 6.8 per cent of UK sales and up from £2.5 billion the previous year.
Dick Stead of Parcelforce reckons that 560 million consignments will be shipped to the UK’s 26 million internet shoppers during 2006. This is already a hugely competitive sector with dozens of companies competing for the traffic. The increased delivery choice being offered by retailers will continue so that consumers have greater control over the service they receive. There is evidence that consumers, particularly those ordering higher value goods, are willing to pay more for guaranteed, signed-for delivery.
Jonathan Smith managing director of Amtrak says the success of online sales has focussed everyone on the importance of fulfilment and how it really does determine the success of e-retailing.
“Meeting the high expectations of online customers is difficult when there is no direct customer contact. The buying experience has to be a good one and that extends well beyond hitting the ‘order now’ button. It is the success of fulfilment and the final delivery that ultimately determine whether the experience was good or bad.”
Some 80 per cent of Amtrak’s deliveries are to home addresses – Smith points out that often the only face the customer sees is the Amtrak driver.
“Retailers like Comet realise that they need a more responsive service to get goods to the doorstep quicker and that is particularly the case when dealing with web orders.
“However, it is not just about speed. What home customers also want are more convenient delivery times. After all, shops are now open many evenings and weekends. Shopping has become a lot more convenient and the retail industry has responded to a changing consumer market.”
However, he points out, the parcel industry has its roots firmly in the business to business market where the focus is on daytime, working day deliveries.
“Why should customers at home be expected to take time off work to wait for a parcel delivery? To avoid such inconvenience, they might as well drop into their electrical retailer open till 8pm or wait until the weekend!”
If e-retailing is to flourish, then the home customer needs to be offered delivery at convenient times, he argues. With home deliveries, we see evenings, not mornings, as the time for premium deliveries. It is also clear from computer and electrical customers like Tiny Computers that people are very happy to pay a small extra fee for a delivery at a convenient time such as in the evening.
“It is not just about time. It is also about flexibility and adaptability. Home deliveries are increasingly needed for all sorts of goods that were previously only available in the shops.”
Wine is a good example – it cannot be handled by traditional automated sorting systems, as bottles are breakable, so special handling systems are needed.
The same goes for other delicate goods such as flowers and fresh foods. And services need to be flexible in other ways. An example is unattended delivery, where goods can be left in an agreed safe place, and other non-working hours period such as Saturdays.
There are other complications, says Smith. “It typically takes between two and three attempts to deliver if people do not know a delivery is coming. Good communication with customers is vital.”
Amtrak aims to ensure that 90 per cent receive goods on the first delivery attempt because they know it is coming. It then makes another attempt the next day, where 8 per cent of the remaining 10 per cent get their delivery.
Deregulation of the domestic postal market is creating a honeypot for those lucky enough to have licences to compete. Business Post was the first private operator to offer services and, despite problems in other parts of the business, UK Mail has traded ahead of expectations. Initially it offered a service for sorted mail but has now moved on to providing an unsorted mail service.
In November last year, Geopost entered the domestic mail market, launching its ‘mailplus’ service designed specifically to deal with UK bulk mail for customers sending items such as statements, direct mail and invoices.
Letters are collected through the Parceline network and sorted automatically, rather than by hand.
A competitive pricing structure provides up to 10 per cent saving on existing Royal Mail rates and additional benefits include flexible pick-up times, day certainty on delivery through its two-day service, added security – with web tracking, account management and 100 per cent UK coverage.
In January, UPS launched Mail Logic in Europe, an international mail service that enables businesses to gather their international letters, flats or packets into one parcel – no sorting, metering or stamping is necessary. The move follows the UK launch a year earlier.
This growth has had an impact on Royal Mail which produced a 20.5 per cent increase in operating profit to £159 million for the first half of 2005-06 but warned that profits in its letters business had fallen as growth in addressed mail volumes went into reverse.