Confidence in the UK Logistics sector remains high despite intensifying competition and no let-up in pressure on margins

• Over half of all new business won over the past six months has come from new customers who have switched from others service providers 
• Price competition continues to lead to what many respondents see as unsustainably low rates 
• Overall confidence remains high despite a slight dip in our Index to 69.2 from 71.4 in H2 2014 
• More than three-quarters of operators are planning to invest in capital expenditure over the next 12 months 
• Driver shortages are the single most important issue for almost half of companies. 

The latest UK Logistics Confidence Index reports of intensifying competition in the sector with over half (53%) of businesses reporting that all new business won in the past six months has come from new customers switching from others service providers. The bi-annual Index, commissioned by Barclays and Moore Stephens, also shows that less than one in ten (9%) of operators say their main source of new business has come from customers renewing existing contracts, a drop of 10% since the last survey in H2 2014. More encouragingly, a third of firms say that current customers expanding has been their primary source of new contracts.

Many respondents point to over-capacity in the market, combined with price challenges from larger multi-national providers for the increase in competition. Operators also point to a continuing squeeze on prices by customers as well as competitors. Our survey results suggest that major retailers and manufacturers are increasingly likely to shop around to meet their price and service expectations, rather than renewing contracts automatically with the result, that for many respondents, customers’ pricing expectations are becoming increasingly demanding.

However, despite these pressures, confidence in the sector remains steady with 37% saying that business conditions are somewhat more favourable compared to the previous six months; an increase of 25% since the beginning of 2012. The outlook for the next six months is similarly confident with almost eight in ten respondents (79%) expecting the outlook to improve or stay the same and over half (55%) looking to increase headcount.

This confidence is translating itself into higher turnover expectations as just over four-fifths (81%) of businesses are expecting an increase over the coming year, with almost 16% looking at a rise of 10% or more. Two-thirds of operators (67%) are expecting an increase in their profitability and three-quarters (75%) believe it likely that their company will make significant capital expenditure over the next six months with just over 40% saying that this is very likely.

Rob Riddleston, Head of Transport & Logistics at Barclays, commented: “The high level of planned capital expenditure is welcome news for the industry and reflects the sector’s pressing need for investment in technology, particularly IT, in order to drive greater efficiencies, productivity and to improve service.

“Such investment is critical to winning new business and with margins increasingly being squeezed, the survey would suggest that operators are looking to invest now in order to realise the rewards to be had in this vitally important business sector.”

This survey has recorded an increase in businesses planning to make an acquisition over the coming months, up to 32% from 24% in the previous survey. This movement reflects the trend of recent acquisition in the sector and our survey indicates the main drivers behind this are an intention to enhance or diversify the operators’ service offering, or to add further scale and reach to their businesses.

Philip Bird, Senior Director of Moore Stephens Corporate Finance, said: “The continuing confidence in the sector is starting to translate into higher levels of mergers & acquisitions activity. The recently announced FedEx/TNT Express deal is evidence of this. Many logistics companies are now financially stronger than in the previous two to three years with the result that strategic acquisitions have moved up the agenda”

However, attracting and retaining highly-skilled employees, particularly drivers, continues to be a major concern for the industry and is increasingly becoming a major hindrance to growth. Virtually half (49%) of businesses see it as their most pressing problem over the next six months. Operators highlight the fact that logistics is often seen as an old fashioned industry with a perception that it lacks significant career opportunities as well as the unsociable working conditions for drivers in particular. They also underline the lack of funding to qualify and train drivers. Across the industry, the majority of training is currently provided by companies themselves, with the result that this investment is often not realised if staff are lured to competitors by higher salaries.