UK Express Parcels: market insight

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Published: July 2012
Pages: 60
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Description

About this report

In this report we review the UK parcels market including business and consumer deliveries. We quantify the parcels market size, historical growth rates, segmentation patterns and levels of industry profitability while reviewing key factors behind these figures.

We also carry out an in-depth analysis of the relevant drivers of industry growth – in particular the macroeconomic environment and home shopping – setting out historical trends and available forecasts in a data-rich document with over 40 charts and tables.

Our forecast for industry growth by segment is based in this analysis of historical trends and our understanding of growth drivers.

While many reports on the industry contain data and description, a critical objective for us in writing this report has been to supplement this with our insights and conclusions.

What are the objectives of this report?

The UK parcels industry has continued to evolve dynamically with:
– Continued overall growth
– Macro factors such as the trend growth of home shopping and the cyclical impact of the economy on volumes continuing to provide challenges and opportunities
– Some continued consolidation of the market through acquisition
– Ongoing refinement of operating models to enable evolving customer needs to be served profitably.

We believe that, in order for those involved in the parcels market to make the best decisions in this complex and changing environment, they need to have access to the best information. The aim of this report is to provide this.

The report is intended for parcels carriers themselves, users of their services, partners, investors, banks, analysts, consultants and other parties with interests in the sector.

What are the sources and methodology?

This report is based on
– Financial analysis of the accounts of companies in the industry
– Interviews with senior-level contacts in the parcels market
– In-depth analysis of the macroeconomic environment and relevant parcels market drivers
– Our own experience of advising both companies and investors in the express parcels industry

Information from these sources has been synthesised and presented clearly and concisely with extensive use of charts and tables to illuminate points and support conclusions.

Contents

Parcels market - 7
Background

Parcels market size and growth - 11
Segmentation
Volume and value trends
Adjacent markets and SIC data

Parcels market drivers - 20
Discussion of parcels market drivers
GDP
Inflation
Population
GDP: inflation, population and real output per head
Household disposable income and retail sales
Internet shopping value
Household penetration
Internet shopping: international comparisons
Internet shopping and mail order
Transaction size
Returns rate

Competitive landscape - 34
Types of parcels carriers
Carrier size and growth
Operating models and segment focus
Carrier profitability
Share price performance

Forecasts - 57
GDP
Inflation
Household disposable income and retail sales
Parcels market forecast
Forecast assumptions

Appendix - 63

List of figures (UK Express Parcels Market Report)

1. UK express parcels market size and growth
2. Business and consumer delivery segmentation
3. Indicative parcels market segmentations
4. FedEX UK: revenue and parcel volume
5. FedEX UK: revenue per parcel
6. Revenue per parcel benchmarks
7. Express parcels and adjacent market sizes
8. UK GDP
9. UK Inflation
10. UK population growth
11. UK GDP, inflation, population and real GDP per head / % annual changes
12. UK household disposable income and retail sales / % annual change
13. Internet sales: value and as % of all retailing
14. Household penetration of PC ownership, broadband access and internet shopping
15. Internet shopping penetration for selected EU countries
16. Internet sales and mail order
17. Average internet shopping transaction value
18. UK home shopping transactions per year
19. Internet shopping returns rate by category of item
20. UK home shopping movements per year
21. Leading operators – EBIT and margin
22. Industry employment and productivity
23. UK inflation by category – Transport sector wages vs whole economy and CPI /
2002=100
24. UK inflation by category – fuel and motor vehicles vs CPI / 2002=100
25. Leading UK carriers – revenue
26. Carrier size and growth
27. City Link revenue – 2011 vs 2006
28. Revenue growth by carrier
29. Operating models and segment focus
30. Revenue per employee
31. Revenue per depot
32. EBIT margins – overall sector and by carrier
33. EBIT margin by carrier
34. RoS vs RMS for UK carriers
35. Return on Capital Employed
36. Parcels carrier share prices vs FTAS: end of calendar year values / December
2005=100
37. UK GDP: historical and forecast
38. UK inflation: historical and forecast
39. UK household disposable income and retail sales / % annual change : historical and forecast
40. UK express parcels market size and growth: historical and forecast
41. UK express parcels market forecast assumptions

Report Highlights

Parcels market growth and drivers
The UK express parcels market is approaching £7bn in size, having grown slowly in recent years in response to economic conditions. Parcel volumes suffered during the 2009 economic downturn and price pressure continued into 2010 with conditions only improving slightly in 2011-12.
The main drivers of parcel volumes are :
- The growth of home shopping, which has fuelled growth in the consumer delivery sector throughout the last decade, and depends on both customers’ shopping habits and household penetration of enablers such as PCs and broadband access.
- The overall level of economic activity, because parcels carriers serve such a wide variety of customers across so many different sectors of the economy: this stalled during 2008-09 and has faltered since

Segmentation
Business parcels has been considered to be a separate market from consumer deliveries. However, there has been convergence as
- Home shopping growth has made consumers an increasingly attractive segment, drawing business carriers to enter the area where they believe they can serve it profitably.
- Consumer carriers have increasingly invested in tracking and tracing systems and, in some cases, sought business customers

Key industry issues
An ongoing challenge for operators has been the development of a model to serve home deliveries profitably, enabling them to exploit the growth segment without damaging overall economics and service levels.
Customer retention has traditionally been a challenge in what is a highly competitive industry with interviews suggesting that churn rates of over 20% not being unusual.
Scale economies are important in increasing route density and hence profitability. However, operators have not always been able to capture this; scale has not, in practice, resulted in higher profitability for UK parcels carriers.
For many customers, the physical goods shipped in a parcel represent a decreasing proportion of overall value relative to other aspects such as information, intellectual property and brand. This ultimately makes basic parcel delivery less valuable as a service

Operator trends
There has been a trend for those operators with international networks and with home delivery focus to increase their shares of revenues at the expense of standalone UK B2B players such as UKMail and City Link.
The sector continues to operate on narrow margins and, as an industry with significant fixed costs, is vulnerable to dips in volumes
Combined profitability across all the major operators fell from over 2% (EBIT) in 2006 to a net overall loss in 2008. It returned to profit in 2010 but available figures suggest another overall loss in 2011
Factors such as compatibility of operations with market segment focus appear to be far more important than the effects of scale in determining operator profitability

Outlook
Economic recovery appears weak with economists now expecting 2012 GDP growth to be only slightly above zero. The possibility of intensification of the Eurozone crisis and further weakening of domestic demand from government ‘austerity’ policies remain risks. Continued internet shopping growth brightens the picture although pressure on household disposable incomes – and continued retail bankruptcies – imply caution. Our parcels market forecast takes these factors into account.

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