Still waiting for shake-out to deliver on expectations

The logistics landscape has changed dramatically during the past decade. A previously fragmented business has seen convergence, thanks to globalisation and the advent of supply chain management.

Providers that once stuck to their niche markets of express, forwarding, contract logistics or shipping have come together to form the likes of UPS, DHL and AP Møller-Maersk.

So what were the drivers behind this frenzied activity; has consolidation lived up to expectations; and what next for the industry?

Some companies, such as Kuehne + Nagel, have used acquisition to extend their
service offering

Peter Ulber, chief operating officer for sea and air logistics at Kuehne + Nagel (KN), attributes consolidation in the industry to three factors. "First, organisations were seeking to acquire companies to add capabilities or services to their existing service offerings.

Secondly, some wanted to be acquired because they could not afford the enormous investments - in particular in technology - to develop new and necessary capabilities.

Thirdly, other organisations believed they needed to acquire companies to increase scope or size."

The capacious growth in global trade has led 3PLs to seek greater geographical coverage by buying into new markets. Alan Braithwaite, executive chairman of logistics consultancy LCP Consulting, says: "Logistics companies have done this in response to their perception that customers are working globally, and want wide geographical service coverage from sector experts."

DB Schenker gained greater access and capability in North America through its acquisition of BAX Global. It also obtained greater scale and carrier leverage, as did many of the earlier forwarder mergers, promising the opportunity of stronger margins and more competitive pricing.

Other players used acquisition to extend their service offering, such as KN’s purchase of ACR, the former contract logistics arm of Hays, and DPWN’s takeover of Exel.

Buying into another player’s capability can be safer and quicker than developing it from scratch. "As shippers’ demands have grown more sophisticated, 3PLs have had to develop new capability quickly, and at the lowest overall investment level, " says Justin Pennington, logistics director for China at Dell Computers.

Rise in complexity

Globalisation has extended supply chains and added greater complexity into their management.

Logistics providers that can respond to these needs, by selling greater value into their customer contracts, will see the reward of better margins and profits.

So how much of this consolidation has been driven by shipper demand? "I think a number of customers did encourage that, " says Ulber. There were two reasons for this, he says.

Firstly, some companies were driving a strategy to concentrate buying with a smaller number of providers to leverage cost savings. And secondly, others were encouraging providers to extend their capability to better support the reshaping of their customers’ supply chains.

"This is especially true for global companies that source globally, and for those organisations that are themselves involved in some sort of acquisitions and have to reinvent their supply chain constantly, " he says.

So to some extent, the market was driving logistics providers to consolidate, as shippers sought to reduce their supplier base, and to drive greater value from their supply chains through outsourcing logistics activities.

However, perhaps some of these acquisitions have been purely opportunistic. Tom Carroll, supply chain director at Dyson, a UK-based vacuum cleaner manufacturer, believes that this has probably been the main driver, as there has been a clear interest in acquiring assets with good returns. "These moves were more financial than service-driven, " he says.

The sector has also seen activity from private equity investors, such as Apollo’s purchase of TNT’s former contract logistics business and freight forwarder EGL to create CEVA Logistics. "3PLs have attracted a lot of interest from financial buyers, primarily due to the potential sector growth and limited capital investment required, " says Dell’s Pennington.

So to what extent have expectations been met?

Nicolette van der Jagt, secretarygeneral of the European Shippers Council (ESC), is cautious in her appraisal.

"Lower costs have been achieved. But unless you are a big client, the service is always going to be sub-optimal because the provider will look to find ’fitall’ solutions for its many clients, " she says.

Few integrations have been without disruption of some sort that affects customer service.

Some wanted to be acquired because they could not afford to invest in new capabilities - Peter Ulber

Some shippers have found themselves locked into contracts with providers they would not normally have chosen to do business with. One such shipper says: "There have been times when we will not have picked a provider to go with, but have ended up with them following some takeover."

Some shippers say that it has taken providers longer to integrate than first envisaged. Pennington believes that shippers have yet to see the full benefit of industry consolidation, as many of these integrations are still ongoing. "The transition period takes a long time, and the value is yet to transfer to customers, " he says.

Expectations were high, and perhaps disappointment has been inevitable. Alan Braithwaite at LCP says that customers are complaining that logistics providers are not delivering the promised service benefits, while providers complain that shippers are just after the cheapest rates.

"Customers want the impossible: lower prices and fantastic service. The providers are not organised enough to address the issues and manage expectations, " he says.

Barriers lowered