The spate of takeover and mergers in the third party logistics market have created some huge organisations, emphasising the difference in approach to the market.
December saw a new name emerge as TNT Logistics became Ceva following its sale in November to private equity group Apollo Management. Many will be looking to see what impact the loss of the TNT name will have on the company – particularly in the UK. Right from its birth, TNT was different to the other players in the UK market.
Alan Jones, who built the business in the UK, promoted a strong “can-do” culture. It might have got up the noses of competitors, but it helped build the business into a major force. In addition, there has always been a strong culture of promoting up through the ranks. As a consequence of all this, with many TNTers if you cut them they bleed orange.
Clearly, management has a task in ensuring a smooth transition to the new organisation and engendering the same spirit. Ensuring that the Ceva name is as respected and feared as the TNT name has been will be challenge.
The sale of TNT Logistics also opens up the debate about the optimum structure for a logistics business. Up until last year, the TNT strategy was very similar to that adopted by Deutsche Post – to be a complete service provider from mail to express parcels to freight forwarding and contract logistics.
However, parent company, TNT NV, found itself in a position where investors were questioning the strategy. While logistics might be a good solid business, it is not currently producing the same level of return on capital as the express and mail businesses. So it is not surprising that investors who want to maximise their returns were starting to ask hard questions about the wisdom of the strategy.
TNT got about 1.3 billion euros for the logistics business – one billion of which is being returned to shareholders through a share repurchase programme. It also gives the business money to invest in its continuing operations. It has bought Mercúrio – an express business in Brazil and is adding a couple of Boeing 747 freighters to its fleet to build its traffic between the Far East and Europe.
Chief executive Peter Bakker says: “With Mercúrio we acquire the leading domestic express network in the third of the four BRIC (Brazil, Russia, India, China) countries in the space of little over 12 months.”
Deutsche Post is sure to be looking very hard at what has happened at TNT. After all, in TNT, it has a re-invigorated and well-funded competitor in its most lucrative mail and express markets. And Ceva’s financial backers are looking for significant growth – all of which will increase the level of competition in the European market.
It is easy to forget that it is only a year since the £3.8 billion take-over of Exel by Deutsche Post World Net, and while it is relatively easy to merge contract logistics operations, it takes time to combine the freight forwarding networks.
In its report for the first nine months of 2006, Deutsche Post was able to report on a substantially larger business with sales of 16.5bn euros against 6.6bn euros. But while profits were up, return on sales was down from 3.7 per cent to 3.2 per cent.
Deutsche Post is responding to market challenges – it announced in September that it was making major structural changes with all the air and ocean freight and road transport business being bundled into the logistics division under John Allan.
And the Express division, which was previously divided into two board departments, was restructured to be managed by one board member, John Mullen.
Dr Peter Kruse, who up to then was responsible for express business in Europe, retired from the board and took on the role as the chief executive’s special representative.
Exel was the first logistics operator to combine contract logistics capabilities with the international reach air and sea freight forwarding. In bringing together those operations, John Allan made it clear that the business would be targeting the world’s largest companies. There is no doubt that the strategy has been effective making the group the leading player in the global market.
In January, for example, it was able to announce a 10-year multi-million pound contract with Saudi Aramco, the world’s largest producer of crude oil. The contract involved managing four major distribution centres, and 14 material service centres along with vehicles and 400 staff.
John Allan said: “Working with the world’s leading energy provider is a fantastic opportunity for us. This win is testament to the fact that we are the premier logistics provider to the oil and gas sector in the Middle East.”
In practice, of course, it would be hard for a company as huge as DHL Logistics to follow any other strategy. To maintain a respectable growth rate, it needs to win hundreds of millions of pounds worth of new business each year and that means going after big contracts with big customers.
The combined logistics/forwarding model appears to be paying dividends for Kuehne & Nagel which bought ACR (formerly Hays) for some £340m at the end of last year.
Many people reckoned that it paid too much for the business – after all Hays sold it little more than a year earlier for just £102m. However, Kuehne & Nagel now has the evidence of nine months trading to back its judgment – it has reported sales up 31.8 per cent and operating profit up 53.1 per cent for the period.
The integration of the ACR Group, along with 12 per cent organic growth, meant that sales in the contract logistics division was almost tripled. At the same time, operating profit was more than tripled with the margin rising from 4.5 to 4.9 per cent.
Another new name in the logistics market is DSV, the 4.4 billion euro business which is rebranding its DFDS Transport and Frans Maas divisions following the takeover of Frans Maas. The plan, says UK managing director Jens Bjorn Andersen, is to seek further acquisitions and mergers.
Deutsche Bahn, the German railways, has also been a major buyer. Last year it took over Bax Global in a £623m deal. Bax has now been merged into DB’s Schenker Logistics division.
The US challenge has tended to come from the likes of UPS and Ryder. UPS has focused on providing fourth party logistics solutions. Last year it won a substantial contract with Philips Electronics to operate its global service parts logistics. UPS was given the task of ensuring Philips Medical customers in 50 countries around the world received parts according to service level agreements.
Ryder has been strengthening its sales effort in the logistics market and recently appointed David Morris general manager – logistics business development leading a team of 10 which includes IT, logistics solutions design and business development professionals working across a number of industry sector-focused groups.
Last year saw the emergence of two major players from the Middle East. June saw the formal launch of KGL Logistics, a Kuwaiti group offering a full range of supply chain management services, including warehousing and distribution as well as air, ocean, road freight forwarding, stevedoring and customs clearance. It is part of the KGL Group which is active in a number of business areas from transport, port management, stevedoring, warehousing and distribution to passenger transport, overland trucking, municipal city cleaning and recycling, vehicle rental and leasing services.
Agility arrived in November. Agility is the new name for another Kuwaiti company, PWC Logistics which is best known in the UK for its GeoLogistics business (which used to be known as Lep).
Other group companies, include TransOceanic, and Trans-Link. Agility has 20,000 employees working at 450 offices in more than 100 countries. It has annual sales of US$4.5 billion and offers freight management and customised logistics services.
The launch of the Agility brand was the first phase of the plan to migrate from the existing names to Agility which is expected to be fully completed by 2008.
But perhaps the most interesting area to look at is the Far East. It was widely rumoured that TNT Logistics would be sold to a Far Eastern shipping line – and of course it is possible that it will go to a buyer from the region when Apollo decides to sell. While many in Europe see China as a cheap place for manufacturing, it is clear that the Chinese do not have such limited ambitions.
And of course, there are precedents. NYK, the giant Japanese shipping line has been developing its logistics operations in Europe for many years and NYK Logistics is now a substantial player in the UK. It still has a considerable amount of business with major Japanese manufacturers but it has also become significant force in the automotive sector.
Problems of procurement
TDG chief executive David Garman is lacerating in his comments on the way contract negotiations are increasingly conducted, arguing that by focusing purely on cutting costs companies miss out on more innovative solutions that can produce bigger savings.
Delivering the CILT’s Kinnock Lecture in November, Garman pointed out that over the past few years margins in third party logistics have halved from five to six per cent to two to three per cent. Contract lengths have been coming down from five years to three years and the decision making process has become much longer. Garman argues that in western Europe, the emphasis is too often simply on pushing costs down and there is a definite trend to more procurement-led purchasing of logistics.
“We have got to decide if we just want good resource managers because if we want added value and innovation then we need to change the rules of engagement.”
He argues that it is reasonable for a client to be demanding and drive a hard bargain but the relationship needs to move on and become collaborative.
Garman is keen to promote the concept of value-based outsourcing – this focuses on delivering best value rather than simply lowest cost. A typical value-based contract would be open book and have a contract length of five to 10 years with the focus on collaborative working and delivering strategic goals. Garman reckons that this can produce a client benefit of 10-20 per cent compared with less than 10 per cent for a traditional price-based contract.
The financial pressures on third party logistics providers mean that there are increasingly large areas which are unattractive to them – particularly if they have institutional shareholders to satisfy. For many years, basic transport and warehousing have been commodity services that cannot provide the return on capital that a publicly quoted company needs.
But Garman points out that the consumer goods market has become fairly unattractive. He describes some of the contracts on offer as simply “attritional”.
Instead TDG is focusing on developing more business in supply chain engineering. The most spectacular example of this is its work with Corus where it has taken over responsibility for managing all of the steel-maker’s transport operations. Critically, TDG does not own a single truck – its role is to manage a host of sub-contractors and improve the efficiency of the overall operation.
TDG is now one of just three publicly quoted third party logistics providers in the UK – a fact which appears to belie the importance of the sector. Like TDG, both Wincanton and Christian Salvesen are looking to expand in the higher margin sectors of the market.
Stuart Oades was brought in from Exel 18 months ago to revitalise Salvesen and can claim some notable successes. Results for the half year to September 2006, show that in the UK food and consumer business, revenue is up 14 per cent and the operating profit margin has improved from 3.2 per cent to 4.4 per cent on the back of new business wins and increased volumes in existing contracts.
However, Oades is still struggling with the transport business. This is the old Swift business which was always respected as a well-run network operation. However, it targeted the manufacturing sector which has been in decline in for years. Redefining it as the “Transport” rather than the “Industrial” division has opened up the opportunity to court other markets and the first half figures show that sales are indeed rising – up more than seven per cent.
The trouble is that the margins are declining with operating profit down from £2.1m to £2m. In the UK, the business is still losing money.
Oades says: “Effective asset utilisation remains the principal challenge for the UK Transport business, where we have been disappointed with the growth in our transport volumes.”
Wincanton has been working hard to improve its margins. Its results for the half year to September show that its underlying operating profit was up 6.3 per cent while sales were up just under six per cent.
Wincanton’s strategy has been to make itself a leader in specific market segments. For example, it is one of the biggest operators of automated warehousing in the UK. It has strong relationships with the major retailers recently becoming sole supplier to Somerfield.
It has been a leader in the development of reverse logistics particularly in advance of the electrical waste regulations (WEEE) that is now coming into force. The past year has seen two significant purchases. RDL Holdings is a leader in supply chain services for the building products and construction industries with customers including Ibstock, Hanson, Lafarge, Brett Landscaping, H&H Celcon, Forticrete and Omya.
Wincanton reckons it is well positioned to benefit from the trend away from in-house operations and regional providers as the major companies in the sector seek increased supply chain efficiency.
It has also taken a major step into the home delivery business with acquisition of Lane Group. Wincanton already had a number of existing home delivery customers such as B&Q and Comet while Lane’s Lane’s customer base included Homebase, Magnet, Electrolux and Bosch.
Retail managing director Martin Taylor points out: “The home delivery market is a growing one, estimated to be worth £37.1bn during 2005, driven by the growth in internet shopping and multi-channel retailing. However, this is a sector that is ripe for improvement as the demands on home delivery operations become increasingly complex.”
The competitiveness of the third party logistics market means that further consolidation among the major players is highly likely although some are still digesting recent acquisitions.
But there is no rule in the logistics market that says you have to be big to do a good job and there are plenty of examples of small players picking up business from under the noses of their larger rivals.
In fact, there is an argument for saying that the next few years could be a golden age for small and medium sized companies that can provide a high level of service. A privately owned company can make a handsome living on margins that would make the chief executive of a plc blench.
Bibby Distribution is a prime example of a company that has prospered by making a virtue of the fact that it is relatively small and family-owned. In fact, it has prospered so much that it is no longer a small company – sales are now more than £160 million.
Baylis Logistics has been around for more than 70 years, and in 2005 it saw sales reach £41m. But, following the buy-in by Thomas van Mourik, former managing director of Culina, it has set it sights on substantial growth and recently announced that Dale Fiddy, long-time associate of van Mourik at Culina, was joining as commercial director.
Linde’s takeover of BOC and decision to get rid of its materials handling division has also raised questions over how Gist fits into the group structure. However, reports from Germany suggest that Gist’s largest customer, Marks & Spencer would not look favourably on a sale.
But perhaps the most intriguing development has been the purchase of DDS (Corby) by Keswick Enterprises. DDS has been renamed Enterprise Logistics with Steve Brimfield at the helm.
Keswick Enterprises was set up in 2004 by former Tibbett & Britten chairman John Harvey after the company was taken over by Exel. The stated aim is “to invest in privately owned logistics and supply chain related businesses where there was an identified potential to add resources, experience and strategic direction and exploit synergies between operations”.
Harvey is a legendary figure in the industry – a reputation earned in part for the way that he built Tibbett & Britten from a tiny garment specialist to a world leader in logistics. Is he about to repeat the feat with Enterprise Logistics? It’s a tantalising thought.