Broken dream

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It is an interesting time for logistics providers. The recent spate of mergers and acquisitions has slowed to give way to a period of internal analysis. Troubles at Salvesen indicated by the sale of its German subsidiary and the decision to merge its UK food and consumer operations with its UK industrial operations is an example of the cost control actions being taken to return certain operations to profit. Salvesen’s finance director left the company with shareholders calling for Edward Roderick to go.

Meanwhile, at the end of July, TDG announced that it could not achieve ‘profitable scale’ in France and Germany and withdrew from direct operations in France. The company has now established alliance agreements in those countries. Furthermore, TDG has taken steps to reduce its cost base in the UK and has got out of certain low value-added activities in Ireland. In May, Thiel Logistik announced an operating loss of €8.6 million for the first quarter of 2003 and implemented cost control measures to stem losses. Similarly, Geodis reported a quarter one decline in net sales of 3.8 per cent, a direct result of a fall in volumes within its client base.

Whilst these examples are evidence of tough trading conditions, could it be that the European logistics industry is a tough nut to crack and a ‘one-size fits all’ approach simply does not apply?

So, setting aside the hype and conjecture surrounding pan-European logistics, what is actually happening on the ground?

The notion of pan-European logistics is an ideal. The reality is very different. A crude analysis of a sample of logistics contracts announced over the last few years shows very few pan-European solutions. In fact, only three per cent of a sample of 146 contracts could be considered to be pan-European. Those contracts covering more than two countries in Europe accounted for 11 per cent, with the overwhelming majority, some 86 per cent, covering a national territory. A closer look at a few of these contracts highlights the reality of contract logistics in Europe:

Schenker is responsible for the complete warehouse management for Head’s European Distribution Centre (EDC) in Klaus, Vorarlberg, Austria.

Tibbett & Britten is responsible for Boots’ primary trunking and secondary store deliveries, as well as managing its distribution support functions, covering the UK and Ireland.

Darfeuille (Salvesen) distributes Michelin’s products from its St-Priest site near Lyon. Darfeuille will handle Michelin products destined for retail outlets and distributors in the Rhone-Alpes and Central region of France.

Exel awarded the management of House of Fraser’s NDC in Milton Keynes servicing all stores across the UK.

Exel’s Somerfield transportation contract focusing on the North West of England with Exel providing distribution services from a new regional distribution centre (RDC) located near St Helens, UK.

Tibbett & Britten’s management of Forum Sport’s national distribution centre in Madrid and distribution to 15 branded outlets that form part of the Forum Sport chain.

While this is only a tiny selection, it provides an insight into the function-, product- and geographicallyspecific contracts being awarded. Plainly, the contracts awarded are a function of the supply chain organisation and outsourcing requirements of the client concerned.

For the moment, therefore, the term ‘pan-European logistics’ applies to the geographic presence of third-party logistics providers and not to the pan-European organisation of a supply chain on the part of a manufacturer or retailer. Two questions arise out of this: Is a company ready to hand over a total European supply chain to a single logistics provider and is there a logistics provider capable of handling an entire European supply chain of a single company?

It is a complex issue, and one that can only be resolved through a partnership approach. It will be several years before we see a majority of pan- European supply chains outsourced to a single logistics provider. In the meantime, it is worth analysing how logistics companies have developed and where they are currently across Europe.

There are few, if any, similar logistics companies. The differences lie in their history, their service portfolio, their geographical coverage and the industry sectors in which they specialise.

Mergers and acquisitions, the entrance of postal organisations, the development of contract logistics divisions by freight forwarders and differences in reporting make meaningful comparison difficult, but not impossible. If we analyse leading logistics providers based on all logistics revenues (not solely contract logistics), Deutsche Post World Net is the clear leader, with €9,153 million in revenues.

The largest player
The largest European logistics provider, based on contract logistics revenues, is Exel, followed by TNT Logistics, part of TPG. Exel generates €3,405.1 million (2002) in contract logistics revenues, of which 52 per cent is generated from the UK and Ireland. Some 14.5 per cent is generated in continental Europe.

TNT Logistics generates €3,389 million in contract logistics (2002), of which Europe accounts for 71.5 per cent. TNT Logistics, which breaks down its contract logistics revenues by sector, generates more than half its global contract logistics turnover from automotive and fmcg sectors. The largest industry sectors for Exel, which only breaks down its global turnover (including freight management), are consumer, retail and technology.

Exel generates half its revenue, €3,405.1 million, from contract logistics activities across the globe. The largest proportion of this contract logistics revenue is derived from the UK & Ireland, at €1,761.2 million, or 51.7 per cent. Continental Europe & Africa accounts for €493.7 million in revenues (14.5 per cent).

TNT Logistics, part of TPG, generated €3,389 million in contract logistics revenue in 2002, of which, 71.5 per cent was derived from Europe. In terms of TNT Logistics industry sector coverage, automotive is its largest business, accounting for 37.9 per cent of its total logistics revenues. FMCG accounts for 19.3 per cent, hi-tech and electronics (11.3 per cent), publishing and media (7 per cent), tyres (6.5 per cent) and ‘other’ sectors account for 18 per cent. On a warehousing space basis, Italy is TNT Logistics’ largest territory in Europe, with 1,352,615 square metres across 86 sites.

Business focus
Tibbett & Britten’s logistics revenue stood at €2,412.0 million in 2002, of which €973.9 million, or 40.4 per cent, is attributable to the UK and Ireland. Mainland Europe accounted for €358.2 million, or 14.9 per cent. Tibbett & Britten’s business is focused on food and beverage (43 per cent), consumer merchandise (34 per cent) and clothing (23 per cent).

Wincanton’s recent acquisition of the contract logistics business of P&O Trans European has propelled the company into the big league of logistics providers in Europe. Group revenues of €2,252.7 million place the company in the top five logistics providers in Europe. The UK and Ireland remains Wincanton’s largest territory, accounting for 62.3 per cent of revenue (based on combined figures of Wincanton and P&O Trans European), followed by Germany and Switzerland, accounting for 26.4 per cent. The acquisition has brought Wincanton one of the broadest ranges of industry sector presence in the industry, with balanced coverage of food retail (22 per cent), FMCG (21 per cent), petroleum (18 per cent), industrial (16 per cent), automotive (13 per cent) and general retail (10 per cent). The acquisition has also broadened its services to include freight management operations focussing on intermodal movements by both rail and river.

Deutsche Post World Net, with global revenues across express, mail, logistics and finance, generated revenues of €39,255 million. Its logistics business posted revenues of €9,152 million. Within this business, contract logistics accounts for €1,492 million, attributable to the ‘Solutions’ business unit. FMCG accounted for 36.9 per cent of this business unit, followed by electronics and telecommunications (33.6 per cent). The remainder is generated in automotive (6.2 per cent), pharmaceuticals and healthcare (4.4 per cent), textiles and fashion (15.8 per cent) and ‘other’ (3.2 per cent).

Thiel Logistik, with €1,491.4 million, has grown significantly through acquisition, although not without problems associated with the cost of integration. The majority of its revenues (67.7 per cent) are generated in Germany and Austria.

Broad European presence
Hays Logistics, recently put up for sale by its parent company, Hays PLC, has a broad European presence. Hays Logistics revenue stood at €1,271.0 million in 2002 and the company manages 2,958,000 square metres of warehousing space across Europe.

It is evident from these figures that there are huge differences in country and industry sector presence in Europe. Companies undergoing a supply chain outsourcing process are faced with a wide number of third-party logistics providers to choose from, each covering different industry sectors and countries. Furthermore, the rapid changes in corporate structure of logistics providers makes it difficult for outsourcing companies to keep track of who does what and where.

For example, in recent times, Salvesen has bid goodbye to Germany, TDG has established alliance operations in France and Germany to replace own operations, DPWN has acquired and integrated a number of companies in Europe as well as undergoing a re-branding exercise, Exel merged with Ocean and now combines global freight management with contract logistics, Gist is focusing providing supply chain management services and Hays PLC announced the sale of its logistics business. These are just a few examples of the rapid and ongoing structural changes within the industry.

The notion of pan-European logistics becomes even more confusing if central and eastern European countries are included. Europe is expanding rapidly with the accession of a number of central and eastern European countries. Currently, ten countries are on a fast track to become new members. There is growing interest in the region as a manufacturing and distribution location and modern logistics infrastructure and services are required to support new activities. Of a total of nearly $100 billion of foreign direct investment stock in the region, Poland accounts for 40 per cent, the Czech Republic 27 per cent and Hungary 24 per cent. Companies that have invested in Poland recently include NGK Insulators, Toyota and Hitachi.

In terms of logistics practices, Central and Eastern Europe will benefit from the increasing presence of large Western European and US logistics providers. Their experience will enable the local logistics industry to leapfrog years of development, through modern distribution practices supported by leading IT systems. However, significant investment is required in logistics infrastructure before distribution practices can match those of the West.

Taking one country, Spain, as an example, we can illustrate the differences between countries in Europe. Over the past decade, there has been a significant amount of consolidation in the Spanish logistics industry. However, even now the market is very fragmented. The attractiveness of the market, which is essentially due to a combination of a developing out-sourcing culture and a fragmented market, has seen the entry both of international logistics companies and Spanish investment organisations over the past decade.

Spanish gold
However, even in 2002, there were no companies generating more than €200 million in contract logistics revenues in Spain.

There are two assumptions, therefore, that can be made about the Spanish (contract) logistics industry. Firstly, the process of consolidation in the industry is at an early stage with more to follow and secondly, the structure of the industry is such that outsourcing to a single or a few logistics providers is nowhere near accepted practice.

The future of the Spanish logistics industry will be driven firstly (and crudely) by consolidation and secondly through the continued realisation of the benefits (both financial and operational) of outsourcing logistics activities. Compare this snapshot of the Spanish logistics industry to the state of the industry in the UK, where outsourcing is highly developed and where Exel has contract logistics revenues of more than €1.7 billion.

To summarise, Europe is not one entity, and pan-European logistics arguably only exists in terms of the presence of third-party logistics providers across a number of countries. Each country within Europe has different rates of outsourcing and third-party logistics providers are hugely diverse in terms of their geographic presence, their sector focus and their range of services. On the basis of industry and company statistics and on recent events, the term ‘pan-European logistics’ is not yet a valid one. With 86 per cent of logistics contracts (from a sample base) currently awarded on a national basis, it is difficult to see how this statistic is going to change over the next ten years. The European logistics industry is comparable to a patchwork quilt; while the parts are stitched together, the pattern does not match.

While the answer would appear to be expansion through acquisition, there are fundamental differences across the countries of Europe that will impede this pan-European development – and there has been mixed success even in the acquisition and integration of national logistics businesses over the last few years.

What is more likely is that the development of pan-European logistics will be driven over time by the supply chain requirements of larger retailers and manufacturers, requesting broader geographic services from fewer logistics providers.

Third-party logistics providers will eventually get there, but the provision of true pan-European logistics will likely come as a result of client demand rather than proactive development.

Paul Chapman is a consultant with Analytiqa, analysts in the logistics services sector. This feature draws on material from ‘Who’s who in European logistics: a statistical analysis’. He can be contacted at info@analytiqa.com

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