The past year might not have seen the frantic round of takeovers and mergers in the third party logistics business that has been apparent in recent years, but some significant trends have emerged. There is now a group of giant multi-national players which have invested heavily to gain critical mass and their investors now expect them to provide the returns that the investment demands.
But there is little or no sign that pressure for lower rates from customers is going to recede and consequently strategies are being adjusted to meet these conflicting demands. Certain sectors of logistics activity are becoming uneconomic for big operators and this is opening up opportunities for some of the smaller players to move in.
A £150 million contract is big by any standard but perhaps the most interesting feature of DHL’s contract with MFI is the fact that it is investing more than £10 million of its own money in the operation, making it one of the biggest shared-risk partnerships that DHL has ever entered into with a customer.
The deal was described by Matthew Phelps, business director at DHL Exel Supply Chain, as “one of the most challenging projects that DHL has ever been involved in”.
The investment is being used to improve the information technology system which supports new, streamlined picking and packing processes in the warehouse, and also to develop additional warehouse space as MFI’s product range increases.
One of the complaints often heard about third party logistics providers is that they are too conservative and risk averse. Certainly, it poses the question: does this signal a change in the way operators compete for business? With contracts tending to get shorter, it is no surprise that 3PLs have tended to avoid risking large amounts of their own capital. If you only have a five year contract, how willing are you going be to stump up money that will take ten years to give a return?
However, it is reasonable to expect a bigger return if you take a greater risk. Perhaps this deal could signal a trend towards greater risk taking by 3PLs generally.
What is very apparent is that DHL parent Deutsche Post World Net is increasingly focusing on boosting returns for its shareholders. The decision to promote John Allan from head of the logistics business to chief financial officer sent an important signal that the group was serious about shareholder value. The group has set out a “Roadmap to Value” with the goal to improve cash generation and to increase payouts to shareholders. In particular it proposed the introduction of a value-based performance metric – EBIT after Asset Charge.
As DHL has demonstrated, competing in the global logistics market demands the ability to provide end to end control of the supply chain by bringing together logistics and freight forwarding operations. And this was the strategy followed by TNT before it decided to divest itself of its logistics operations. But rather than selling its forwarding and logistics businesses as a unit, it chose to split them, with the forwarding business going to Geodis.
This of course left the logistics business, now renamed Ceva, without a forwarding element. The solution was to buy another forwarder, Eagle Global Logistics. This has now been integrated and rebranded and the company has made it clear that its growth strategy relies of the fact that is now has two complementary divisions and it will focus on cross-selling and integrated solutions.
John Pattullo, who took over as chief executive in August, said: “We are a new company comprised of former TNT Logistics and EGL and we already behave as a single, integrated entity.”
Wincanton has also had to make new arrangements – its relationship with Kuehne + Nagel came to an end when the Swiss group bought ACR Logistics. Instead, Wincanton has signed a joint venture agreement with Kerry Logistics, the Hong Kong-based forwarder.
Wincanton has been on the lookout for acquisitions to fill gaps in its product offering and last month took over the container logistics business of Hanbury Davies. This is the second time Hanbury chief Glyn Davies has built a business and sold it to one of the industry giants. He sold his last business, Russell Davies to Securicor – itself now part of DHL.
The prospect of the 2012 Olympics coming to East London has boosted interest in logistics for the construction market. Wincanton took a lead in developing its activities in the area when it bought RDL in 2006 and it added to this last year with the £5.3m takeover of Swales Haulage.
After years of dogged independence fighting off bids from rivals such as TDG, the consolidation trend finally caught up with Christian Salvesen which became part of French group Norbert Dentressangle in December.
The takeover created a group with 29,200 employees located in 390 sites in 14 European countries and 2.9 billion euros in combined revenue in 2006.
Dentressangle has said little about how it intends to integrate the two businesses. However, it is sure to be looking hard at Salvesen’s loss-making UK transport business. A plan to revive this business was starting to show results when the takeover was announced but there was still work to be done.
Dentressangle has promised that detailed information on Christian Salvesen and its integration within the Norbert Dentressangle Group will be provided in the presentation of the group’s financial results on 26 March.
Kuehne + Nagel has tended to focus on organic growth following the takeover of ACR Logistics although this hasn’t stopped it making some smaller acquisitions on the continent.
Within the UK, it has made dramatic inroads into the drinks market with KN Drinks Logistics which it set up to take over Scottish & Newcastle’s operations. In February it had another big win with Anheuser Busch which makes Budweiser and Michelob. Following that deal it opened 168,700 sq ft regional distribution centre at Hams Hall in August bringing the number of RDCs within the KN Drinks Logistics dedicated network to five and the total number of operating facilities to 22.
In October, it picked up a ten year contract with Britvic Soft Drinks to carry out secondary distribution and vending machine replenishment services throughout the UK. And just a month later Dutch brewer Heineken awarded KN Drinks Logistics a contract to carry out imports from Europe and primary distribution in the UK.
Under the terms of the contract, KN Drinks Logistics transports Heineken products from the breweries in the Netherlands to the UK via road and short-sea shipping. Products are stored in the KN Drinks Logistics hub at Hams Hall in the Midlands, and primary and off-trade deliveries will be carried out across the UK via the company’s shared-user distribution network. The contract also incorporates a reverse logistics operation, whereby KN Drinks Logistics manages the return of all empty kegs back to the point of origin in the Netherlands.
Last year, TDG set out a strategy focused on increasing the proportion of the group’s business in specialised sectors where it could compete not solely on price but also on capability, flexibility and service. And, at the half year, it said that this strategy has improved the quality and level of the group’s earnings.
“The increase in first half headline profits reflects the implementation of this strategy, with significant growth in our specialised target sectors, such as in chemicals and paper and packaging, supply chain management and freight forwarding.
In addition, the group was reorganised into a Chemicals division and Contract Logistics division enabling it to make more effective use of our resources.
The group was able to report net business wins of £32.3m – a comparable level to the previous year despite withdrawing from its £11.5m Kwik Save contract. TDG took on the Kwik Save contract after Somerfield sold the business. However, Kwik Save ran into trouble last year finally going into administration.
In some quarters NYK is seen mainly as a shipping line, but NYK Logistics has been building steadily into a major force in the market – and this has been reflected in the fact that chief executive Ian Veitch was promoted to the main NYK board last year.
It opened a 330,000 sq ft distribution centre in Wellingborough to house its activities on behalf of a major customer investing £1m in converting the former Somerfield distribution centre into a high quality, modern warehousing facility. It has also launched a dedicated centre of excellence for pharmaceutical storage and distribution.
One of the problems of being a large publicly quoted company in the logistics market is that investors are looking for a level of return that is as good as they can get from other industries – and there are sectors of the logistics market where that is becoming increasingly difficult.
In the shared user sector of the grocery market, companies like Boughey and Culina have been able to pick up business from their larger rivals who struggle to justify the margins available in this highly competitive sector.
Last month saw the merger of Culina and Baylis to create a £125m food and drink logistics business which will be known as Culina Logistics Limited. Chief executive Thomas van Mourik says the aim is to be the UK’s leading food and drink logistics specialist.
Van Mourik was originally chief executive of Culina, which was owned by Luxembourg-based TML-Invest, before he left to take over Baylis.
Then last summer, TML-Invest, the private investment vehicle of Theo Müller, announced it was investing a seven-figure sum in Baylis Logistics. TML-Invest will be part-owner of the new Culina.
Another growing business is Boughey Distribution which last year won a contract to provide logistics services to Typhoo Tea for the storage and distribution of its finished goods throughout the UK and overseas.
Boughey, which is part of NWF plc, specialises in storing ambient products for food suppliers and providing a consolidated delivery service to retailers RDCs.
The company, which was turning over some £25m a year, had been space-constrained at its Wardle headquarters for some time and a couple of years ago decided to implement a significant expansion plan investing some £19m to build three 100,000 sq ft warehouses on the site.
Boughey chose to install mobile racking in some of the warehouse space. This enables it to maximise storage capacity within each unit from a typical 12,000 pallets in 100,000 sq ft to an actual 19,000 pallets in each of the three units, thereby creating an additional 57,000 pallets at the Wardle site.
The combination of fixed APR and mobile racking offers a greater flexibility within the warehousing environment, enabling Boughey to both maximise capacity and manage slower moving stock lines.
Three aisles can be opened at any one time within each racking installation, taking 40 seconds to open or close each aisle.
At Bibby Distribution, Iain Speak stepped up to take over as chief executive from Theo de Pencier, who has become chief executive of the Freight Transport Association. Speak has been with the business since 1997, most recently in the role of chief operating officer. Bibby has chosen to develop European links through an alliance. The Logistics World Alliance was founded in March 2006 and member companies include Azkar, Spain and Portugal, Geis Germany, Czech Republic and Slovakia, Log Service Europe Italy, MGF Logistique France and Aditro Scandinavia and the Benelux countries. Members together employ around 18,000 employees and generate an annual turnover of more than 1.8 billion euros. The partners can make use of more than 2.2 million square metres of warehouse space. The headquarters of Logistics World Alliance is in Luxembourg.
In June LWA reached a partnership agreement with Elesco Europe – a centrally coordinated network of service companies that provide a complete repair and replacement parts service for entertainment electronics, building services, telecommunications and computer technology products.
In September, The Westbury Property Fund merged with Eddie Stobart Group, one of the most recognised brands in the UK, to form the newly named Stobart Group Limited.
The merger brings together two companies which see commercial and environmental benefits of combining road haulage and storage with rail freight and waterborne transport systems, thereby offering customers a truly integrated transport and logistics solution.
Westbury brings a port development site in Runcorn, a rail freight operating business and a rail terminal and warehousing business in Widnes.
Eddie Stobart has a well-invested fleet of more than 900 trucks and 1,500 trailers, each christened with its own, unique female name. The combined business also has more than three million square feet of storage space across a network of over 29 operating sites (including ten customer sites) across the UK and one in Belgium as well as its own rail division.
Its portfolio of customers includes Tesco, Coca-Cola, Johnson & Johnson and Sara Lee, and it employs more than 2,400 people across the UK.