FOCUS: Opportunities for growth for logistics companies
Many transportation and logistics (T&L) companies need to refine their current business models to capitalize on opportunities in industry segments that are attractive in terms of both growth and returns, according to a new report by The Boston Consulting Group (BCG). The report, titled Transportation and Logistics in a Changing World: The Journey Back to Profitable Growth, is being released today.
Some T&L companies have succeeded in combining strong growth with high returns, while for many others this has been an elusive goal. To understand what sets apart the top performers, BCG conducted an industry-level analysis of critical performance metrics and complemented it with detailed analyses of business segments and individual companies.
“T&L players in the Middle East can definitely leverage the findings of the report to become more profitable; however, they will need to confront the transformational environment of the sector. In particular, to capture long-term opportunities, regional players would need to remove the emerging bottlenecks in infrastructure by creating seamless intermodal connections, adopt lean operations also across their corporate functions, and coordinate closely with Government entities - at different levels - to ease the evolving regulatory framework,” said Giovanni Moscatelli, a Principal at BCG, Middle East. “In addition, they must explore adjacencies by selecting business models with a lighter asset base, as well as screen, identify and secure long-lasting partnerships to explore neighbouring markets. The real challenge will be having a long term view about key trends impacting the region, while - at the same time – reacting rapidly and selectively when it comes to exploring new business opportunities”.
Strong Growth but Returns Lag
Despite T&L’s growth in recent years, BCG’s industry-level analysis found comparatively low returns, measured in terms of return on capital employed (ROCE) and total shareholder return (TSR). The ROCE for T&L from 2011 through 2015 was 10.1%, falling short of the industry’s weighted average cost of capital of 10.3%. Not surprisingly given its low ROCE, the T&L industry did not reward its shareholders with high returns. During the five-year period from 2011 through 2015, the T&L industry ranked only 17th for annual TSR among the industries BCG studied.
Performance has varied widely at the level of T&L business segments. Combining the perspectives of growth and return on assets (ROA), the study found that the most attractive segments are logistics advisors, CEP (courier, express, and parcels) delivery, hinterland terminals, and, to a lesser extent, rail transport (outside of Europe). All other segments do not earn the cost of capital. The segments facing the most intense challenges in terms of both growth and ROA include sea and air transport and postal delivery.
But challenging market conditions only partially explain why profits did not keep pace with revenue growth, according to the report. For many T&L players, organic growth strategies aimed at gaining market share in new regions and in new business segments failed to deliver profitability. In some instances, companies accelerated growth through acquisitions, but these inorganic strategies also failed to realize the anticipated profit growth—often because the companies did not adequately integrate the acquired businesses into their operations and networks.
Capitalizing on the Near- and Long-Term Opportunities
To achieve profitable growth in the near term, companies in all T&L segments will need to adapt their traditional business models to the changing market environment. Companies across all segments should design lean organization and governance structures to improve efficiency and seek to differentiate themselves through advanced IT and digital capabilities, HR excellence, dynamic value pricing, and balanced business portfolios. The report highlights success factors in road transport (the largest segment), freight forwarding (two segments with relatively high ROA), and contract logistics (a segment with high growth).
To capture long-term opportunities, T&L companies also need to prepare for six key megatrends that are changing their industry: the rapid development of emerging markets, urbanization, sustainability, infrastructure congestion and scarcity, e-commerce, and digitization. These trends affect T&L segments in different ways. Some segments will encounter headwinds (for example, road transport players will face margin pressure arising from new digital platforms and the need to meet sustainability objectives), while other segments will gain advantages (for example, freight forwarding and contract logistics stand to benefit from e-commerce). Leading players will recognize how the trends are affecting their segments and be ready to react faster and more decisively than their competitors.
“Regardless of their industry segment, all T&L companies can benefit from opportunities to combine strong growth with high returns,” said Moscatelli. “The winners will be distinguished by their ability to understand and implement the practices that foster high performance in today’s market conditions as well as in tomorrow’s transformed business environment.”
A copy of the report can be downloaded at www.bcgperspectives.com.