The Contract Logistics sector
has seen a lot of merger and acquisition activity in the past few
quarters. What information we have from large 3PLs and contract
logistics players indicates that this is likely to continue for at least
the immediate future, and be a major factor in the profitability, or
lack thereof, in the sector as a whole.
Large scale mergers and acquisitions were common before the economic recession that is just beginning to pass. This time last year, many would have speculated that as investment money becomes more fluid again, large scale takeover bids would once again be the norm. However, in the aftermath of UPS’s failed takeover bid for TNT, consolidation is likely to continue on a more selective, careful fashion. Smaller organisations are more likely to be targeted for takeover or merger, especially those operating in niche industries or peculiar geographic regions.
Takeover of a smaller contract logistics company may offer a beachhead in new markets
Rather than large companies merging (on polite, hostile, or somewhat ambiguous terms) to combine their holdings and assets into an ever larger empire, we can expect to see specific, relatively self-contained operations which can add both territory and a great deal of synergy to the larger operation to be the preferred targets.
FedEx’s acquisition of southern African contract logistics firm Supaswift last year is a good example. At the time, it represented a very large operation moving to incorporate a new geographic territory along with a great deal of specialist knowledge and experiencing serving that territory in one package. Another example is CH Robinson, a US firm traditionally involved only in its own domestic market, who bought out a Polish logistics operation called Apero in order to spread its own influence to new markets. Last year CH Robinson opened an Istanbul office, so it seems to be working.
Other analysts point out that this shift to smaller targets may not be purely due to voluntary factors. It could be more important that there are fewer large scale contract logistics companies in particularly attractive markets, or at least few that are vulnerable to takeover on terms ‘good’ for the acquiring company. The developing Asian, and particularly Chinese market is one that seems like it would be ripe for large scale takeover bids, but there are few if any large scale contract logistics operations to be found, and none that offer multinational concerns (or would-be multinationals) many of the things they want in a contract logistics beachhead.
The Chinese contract logistics market is highly fragmented, with each solid player limited to a particular geography or niche industry, and often both. There aren’t really any national providers yet. On the other hand, many of these smaller operations have begun to consolidate amongst themselves, so that may soon change. Once a few national or international consortiums form in and around the Chinese market, much will depend on whether they make themselves vulnerable, or deliberately attractive to, international contract logistics interests.
The contract logistics market in Europe and the UKCloser to home, European and UK contract logistics operations are
beginning to attract interest from big players in the US, despite the
slow economic recovery in the region. This shouldn’t really be
surprising. Analysts are quick to point out that the European and UK
contract logistics market was listed as the largest single such market
in the world by the FTA’s Global Contract Logistics Report
in 2013. This market accounted for more than 1/3 of the amount spent on
contract logistics worldwide, solidly ahead of Asia (with 31%) and
North America (at 27%).
This is expected to change only slightly in coming years. Experts predict that Asia will be the largest contract logistics market by 2016 (with 36%) followed by a still significant Europe (31%) and North America (with 28%). It is important to remember that a loss of 7% of a rapidly growing global market is still a prediction of substantial growth. This kind of stability is bound to be attractive to American organisations who are having to look farther afield for promising opportunities every year.
The global contract logistics market remains fragmented, and profits remain low
The contract logistics industry remains fairly fragmented on a global scale. DHL Supply chain is still the largest operation by far. Its 2012 revenues were more than £10 billion, well in advance of the next largest, CEVA, whose contract logistics takings were just over £3 billion, much closer to the third and fourth place holders Hitachi Systems and Kuehne & Nagel (2.9 billion and 2.8 billion, respectively). Nonetheless, DHL Supply Chain only accounted for 8% of the global market last year, and only 12% of the European market. Even combining the top ten contract logistics firms together would account for only 22% of the 2013 global market.
The industry hasn’t been fantastically profitable lately, either. The fact is that the contract logistics industry is still struggling to shrug off the lingering effects of the last recession. Before the downturn, average profit margins in the industry were around 4%. At the deepest point of the recession they were barely 1%. Now they average little more than 3%. Industry leader DHL’s profits were -1% at the worst point, and are still less than the industry average. They may not be in a position to expand at all.
Profits are so low that many investment professionals question the long term sustainability of the industry. This is another factor arguing against large scale consolidation, as expected profits don’t argue in favour of large investment at this time.
The trend will most likely continue with larger forms snapping up profitable, well-places smaller contract logistics companies, and eschewing mergers with other larger companies.