Bosses of Britain’s transport operators are optimistic about the prospects for their own companies over the coming year, despite being gloomy about the future of the economy.
In the first Logistics Industry Confidence Index compiled by Analytiqa for Barclays Bank and professional services firm Grant Thornton, 88% of senior managers viewed current business conditions as either very or somewhat difficult. Over a quarter (26%) expected conditions to get worse in the next six months and almost half (24%) expect them to stay the same. Nevertheless nearly three quarter (73%) expect their own company’s turnover to increase in the coming year and over half (53%) expect profitability to rise.
Philip Bird, director of corporate finance at Grant Thornton, says that managers have now got used to the prolonged economic slowdown since 2008. “Are people optimistic because they believe we are at a low point and it get can’t any worse?” he asks.
One major concern is that when asked how they expected to achieve their growth plans, most managers (51%) said they expected to win new contracts, while 30% said the focus was on cost control or margin improvement. None said they were planning to offer new services.
Barclays head of transport and logistics Rob Riddleston worries that this lack of innovation could lead to even stiffer price-based competition and even tighter margins.“To do well, transport firms need to be different from the competition,” he says. “There has to be an element of innovation as well as cost cutting – though this is easier said than done.”
With the UK economy set to grow just 0.5% over the rest of 2012, the transport sector can expect similarly low growth. This stagnation in new business opportunities is being compounded by the fact that Riddleston expects more companies to in-source transport than out-source as they look to cut costs. This Bird says will put even more pressure and margins and renew the focus on cost-cutting, though he warns: “All operators have already done exhaustive reviews of costs and I wonder how much scope there is for more cost savings.”
Despite the prolonged slowdown, there have been fewer operators exiting the market than might be expected, with pre-pack administrations and mergers and acquisitions (M&A) preventing loss-making companies going to the wall.
“There have been a number of failures at the lower end of the market in the last couple of years, but that has bottomed out,” says Riddleston. “The need to invest in IT is a common theme as it enables firms to become more efficient and offer value-added services.”
Bird believes that firms which successfully expand their range of services to cover the whole supply chain – especially from fast growing Asian export markets – rather than just the UK transport leg will be most successful. “Those that source and manage the flow of goods from Asia will be a better position than run of the mill hauliers,” he says.
But as Riddleston points out, UK logistics firms have a poor track record of making overseas acquisitions, so extending coverage overseas could be problematic.
Few UK operators are actively pursuing M&A opportunities, with 71% saying they were unlikely to buy another company in the next six months. Even fewer were planning to sell part of all their business, with 94% saying a disposal was unlikely.
“This is not a good time to be selling a business,” says Bird, though Riddleston adds: “Having more buyers than sellers may push up values.”
Funding M&A will however remain tough, as banks will only lend on a cast-iron business case. “It is still a challenge raising funds for acquisitions,” confirms Bird. “Current trading is making the banks very nervous of lending.”
While uncertainty over the impact on the UK of the Eurozone crisis is an issue for 15% of managers, other more mundane issues are bigger worries in the next six months, with a third (33%) citing margin pressure and a fifth (20%) concerned about fuel prices.
“Confidence in the economy is relatively low and the Eurozone crisis is not helping,” says Riddleston. “Half of the UK’s exports go to the European Union and any disruption will damage confidence. This time last year, people felt the economy was getting better but since then it has taken a turn for the worse. No one knows what is around the corner and this make medium or long term planning very difficult.”
- The UK Logistics Confidence Index is a survey of almost 100 CEOs, MDs and other directors of UK transport and logistics firms carried out in May 2012 and to be repeated twice a year to track confidence in the industry.
