The latest UK Logistics Confidence Index
from Barclays and Moore Stephens reveals that confidence amongst senior members of the UK’s logistics sector is at its lowest level since the biannual survey began in 2012. The Index does however stand at just above its critical *50.0 mark.
Optimism in H1 2016 has fallen significantly to 51.8 compared to 61.9 in H2 2015. This fourth successive drop is the largest that this biannual barometer of levels of confidence in the sector has recorded and takes it to its lowest point in its four-year history.
Yet, perhaps surprisingly given the low levels of confidence, almost 7 in 10 expect their turnover to increase in the next twelve months and the same number feel sufficiently confident to be planning to invest in capital expenditure over the next six months.
The index reports that logistics businesses are facing increasing pressure from customers for lower prices during a period of rising competition and increases in costs. To respond, logistics businesses are increasingly focusing on value-added services and technology as a route to retaining existing clients and to attract new business.
Services and technology seen as opportunities for growth
The development of value-added services was most commonly cited as an opportunity for the sector and a key driver of contract wins. With 24% of respondents highlighting the trend, this represents a threefold rise on H1 2015.
Respondents identified offering value-added services such as last-mile delivery, co-packing, returns management services, labelling, pre-assembly or even basic manufacturing as a way to establish long term customer relationships based on value.
Technology is also seen as an opportunity for the sector, cited by 16% of respondents, double the number who said this in H2 2015 as the sector seeks to realize the cost, service level and efficiency benefits on offer through cloud services, digital tracking technology and the insights available through big data analytics.
Rob Riddleston, Head of Transport and Logistics at Barclays, said: “Confidence in the UK logistics industry has taken a knock from price pressure and increasing competition. Under such pressure, the high level of planned capital expenditure is welcome news and reflects the sector’s pressing need for investment in technology. It is also encouraging that the role of technology is recognized as a route to both control costs and improve service levels and investment in this area is a key trend for the sector.”
Downward price pressure squeezes revenues
The index reveals that the biggest concerns for the sector in the short term are customer price pressure and cost control. Customer price pressure is identified as the most
important issue facing their business by 49% of respondents, a rise of 6.5 percentage points on H2 2015, and has even eclipsed the long-running issue of lack of drivers and other skills in the industry (30%) as the most important issue facing operators. Whilst 40% of respondents say that business conditions have stayed the same, 49% say that they are ‘more difficult’ – an increase of 30 percentage points compared to H1 2015 (20%) and 17 percentage points compared to H2 2015 (29%).
Competition from industry rivals and the pressure facing many retailers and manufacturers is continuing to squeeze revenues in the logistics sector. While some logistics customers are using falling fuel prices to demand lower rates, the sector reports that savings in fuel are more than outweighed by the rising cost of insurance, driver salaries in a sector hit by labour shortages and the costs of investment into technology and vehicles.
Confidence expected to fall further throughout 2016
Just under half of respondents (47%) expect the outlook for the UK logistics sector to deteriorate in the short term. Whilst a narrow majority anticipate conditions remaining steady, the number that anticipate conditions to be ‘more difficult’ is 26 percentage points higher than this time last year.
Philip Bird, Partner at Moore Stephens, said: “There is no doubt that logistics companies are more pessimistic about the short-term outlook for the sector than our previous survey. This may be due to uncertainty surrounding the EU Referendum and also the continued sluggish growth of the UK and global economies. Within this environment we expect to see further price pressure and consequently continued focus on cost control and M&A activity as a means to achieve economies of scale”
Pricing could be a challenge to the long-term health of the logistics sector
Price competitiveness is now seen as the most important factor in winning new business, with respondents reporting that 62% of new business wins stem from displacing an incumbent provider, a rise of 9% year on year.
This rise appears in part to have been prompted by a slump in the amount of new business coming from the expansion of existing customers, with the H1 2016 figure at 17%, down 11 percentage points (28%) on six months ago and 16.5 percentage points year on year. Some respondents to the index are concerned that the logistics sector is facing a ‘price war’ or a ‘race to the bottom’.
Cost control and scale driving trend towards industry consolidation
More than a third (35.5%) of respondents say that their business is likely to acquire another business over the next six months, a continuation of a trend established in H2 2015 and reflective of continued consolidation within the sector.
According to respondents in the index, the two key drivers of M&A activity is the pursuit of economies of scale and the opportunities on offer from newly acquired service offers as the sector continues to seek to cut costs and unlock new revenue opportunities.
Click here to download the full report from Barclays and Moore Stephens