Shippers wary of one-step model
The end of the summer of 2006 may well be remembered as a time when a logistics era ended. That’s when Dutch express and mail carrier TNT announced it had sold its logistics division to private equity investor Apollo Management, providing a coda of sorts to a period of intense and remarkable consolidation in the logistics industry. With its separation of transportation-focused businesses from a logistics unit, the deal also may mark a sea change in how logistics companies view themselves and are viewed by the shipping community.
TNT in the mid-1990s “kicked off the whole idea that you should be in more than one sector” to become a full-service, one-stop supply-chain management shop, said John Manners-Bell, chief executive of U.K.-based Transport Intelligence. UPS, Deutsche Post World Net and others followed suit, convinced that the road to riches lay in offering shippers comprehensive services under one roof, Manners-Bell said. That consensus may be stalled or even crumbling. Following TNT’s sell-off of its logistics unit, DPWN this month announced it would sell VfW, the reverse logistics business it acquired only two years ago along with Exel. Manners-Bell said there’s plenty of other evidence the one-stop model may be running out of gas. Shipper surveys repeatedly show most manufacturers and retailers prefer to work with fewer logistics providers, but few prefer to work with only one. Moreover, the big predators are finding their prey easier to chew than to swallow, as evidenced by Deutsche Post’s regurgitation of VfW and what industry observers say is UPS’s struggle to integrate Menlo Worldwide Forwarding into its operations. The complicated efforts to absorb massive purchases may account for some of the noticeably smaller, slower growth in mergers and acquisition activity in North America and Europe. “I think companies are becoming wary of buying for the sake of buying,” Manners-Bell said.
“Deutsche Post is the one to watch.”
The German behemoth’s DHL unit has stumbled badly in its effort to penetrate U.S. express markets. Some analysts believe the company should be concentrating on services and market segments where its financial track record is proven. Private equity investors’ interest in a bigger role in logistics and supply-chain companies are motivating those companies’ public shareholders to demand better results, too.
Ben Gordon, managing director at BG Strategic Advisors, doesn’t see the demise of the one-stop shop model but sees a shift in buyer interest toward midtier specialty service providers around the warehouse. “From a dollars and cents standpoint, transportation is the dominant force inside the supply chain,” Gordon said. Shippers spend $600 billion a year on transportation, he said. “However, from a strategic standpoint, warehousing stands at the epicenter of the supply chain,” Gordon said. Warehouse operators receive about $100 billion from shipping customers but warehouse operators are in a unique position to benefit from shippers’ demands for consolidated services.
Warehouse companies have three things that can make them the hub of a more centralized, and hence presumably more controllable, supply chain, Gordon said. First, they have the direct shipper contracts, and the trusted relationship that should follow. They also hold the customers’ inventory and the control or at least influence over its timely delivery. Third and most crucial, Gordon said, warehouses have the data associated with the contracts and inventory. According to Gordon, no other node in the supply chain has the combination of physical and information control that can help providers identify which services shippers want or need most.
Evan Armstrong, president of consulting group Armstrong & Associates, said the basic needs of the warehouse operations make it a natural center for logistics acquisitions. “The transportation piece is much more complex than the warehouse piece,” he said. Although merger and acquisition activity may be slowing down in North America and Europe, where many of the best acquisition candidates are already spoken for, Manners-Bell said there’s a lot of restless money in the Middle East. Kuwait’s PWC Logistics already has bought in big with its purchase of GeoLogistics and others are on the horizon, Manners-Bell said. “Dubai Ports World has made itself one of the biggest ports groups in the world,” he said. “There’s nothing to say they couldn’t repeat that in other market sectors throughout the world.”
