UK Parcels Market Insight Report 2018

£1,475£2,875

Published: September 2018
Pages: 93
Format: PDF Download

 

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Description

About the UK Parcels Market Insight Report 2018

This report reviews the UK parcels market encompassing the business-to-business, business-to-consumer and consumer / small business consigned segments. Having been refined, extended and improved over the last 14 years, it is the leading survey of the UK parcels market, used by many carriers, and other parties with interests in the industry.

It quantifies the market size, historical growth rates, segmentation patterns and levels of industry profitability while reviewing key factors behind these figures. Our market size estimate is derived from our bottom-up model of the revenues of all of the operators in the market with adjustments made to add and remove non-parcels activity, as appropriate. This model has been regularly updated and refined since it was first developed in 2004 with our forecast approach fine tuned in the light of experience.

We also carry out an in-depth analysis of the relevant drivers of industry growth – in particular the macroeconomic environment, retail sales and home shopping – setting out historical trends and available forecasts. Our forecast for industry growth by segment is based on this analysis of historical trends and our understanding of growth drivers.

The UK parcels industry has continued to evolve dynamically with
– Continued overall volume growth
– New investment in additional and upgraded facilities
– 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
– Ongoing refinement of operating models and launch of new service features to enable evolving customer needs to be served profitably

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.
The report is based on
– Financial analysis of the accounts of companies in the industry
– Discussions with our network of senior-level contacts in the market
– In-depth analysis of the macroeconomic environment and relevant market drivers
– Extensive desk research
– Our own experience of advising both carriers and investors in the 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.

Market growth and drivers

The UK parcels market is now over £10bn in size. Having fallen during the 2009 economic downturn, the main drivers of growth have been home shopping and a somewhat patchy recovery in the UK economy. The recovery has frequently relied on consumer borrowing to compensate for the lack of consistent wage growth, which has resulted in ongoing but volatile retail sales growth

Segmentation

The B2C segment continues to drive growth, although pricing remains tight and, given the presence of large retailer customers – who drive a hard bargain and are willing to switch their business to achieve one – there is some market share volatility.
B2B and C2X are more fragmented and hence more stable, but supply chain and other trends mean they are likely to continue to grow more slowly.
Same day delivery is a potentially important segment an d is being offered as an option by more retailers but current take up is low, at less than 0.1% of home delivery orders

Key industry issues

An ongoing challenge for operators has been the development of a model to serve last mile home deliveries profitably, enabling them to exploit the growth segment without damaging their overall economics and service levels. To that end, most have invested in parcel shop networks to provide additional delivery options.
Customer retention remains a challenge in the B2C segment where large retail customers both negotiate a hard bargain and have a higher propensity to switch, creating greater instability within the market and more share mobility amongst carriers
Industry margins remain modest as powerful customers, such as the big retailers, have largely prevented price increases in what is a competitive market. However margins have improved over the last few years as carriers have been able to retain a portion of the benefits from automation and improvements in productivity.
Having fallen for many years, aggregated employee levels across all carriers has started to rise, possibly in response to concerns raised by HMRC and others regarding self-employment models used in the industry. Labour availability and costs are likely to become increasing concerns for carriers post-Brexit

Operator trends

The organic growth records of leading carriers show a significant degree of divergence between winners and losers. Operators who have gained share include
– Amazon Logistics, which has now rolled out to 40+ depots and delivers the majority of parcels on behalf of its parent and also marketplace sellers
– DPD, which has made a series of account wins on the back of service and systems enhancements, establishing itself as the leader at the high end of the B2C segment
– Hermes, which has also been very strong in B2C based on its cost-leading business model underpinned by ongoing investments to improve its service and add capacity
– Newer players such as brokers (Parcel2Go, Parcel Monkey), networks (Collect+) and international B2C specialists (wnDirect, P2P Mailing, Air Business)
Those who have lost market share include:
– TNT Express, which has been impacted by contract losses and lack of exposure to the high-growth B2C segment
– DX, where some business was exited during the merger of the Nightfreight and DX networks and profit warnings led to a change of management

Outlook

We expect to see continued growth in the market as home shopping continues to grow and a recovering economy supports the outlook for B2B parcels.
Price increases are expected to continue to be modest with volume being the main driver of market growth.
DHL and FedEx have the opportunity to achieve significant benefits from successful integration of their acquisitions (of TNT and UK Mail respectively), but history shows that there are considerable challenges.in bringing together parcel networks

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Introduction 2

About this report
Executive summary
About Apex Insight

Contents 7

List of charts and tables

Parcels market 10
The parcels market includes next day or deferred delivery of parcels from around 0.75-40kg in weight
Key features of the market include high operational gearing, low capital intensity, scale economies arising from consolidation and low customer retention
B2B, B2C and C2X segments have converged but retain distinct characteristics
Use of franchised and outsourced models has been widespread
The last mile for home delivery remains both a challenge and an area of innovation
Market size and growth
Our market size estimate is based on company revenues
Non-parcel activities of the main networks have been excluded and parcels activities of other operators have been included
The market has grown strongly since 2012
Figures from Ofcom support our views of market size and growth
The B2B, B2C and C2X segments are impacted by different drivers hence have grown at different rates
The market is often segmented by speed of delivery, type of item and international/domestic delivery
Consumers are increasingly opting for premium delivery services
Growth of internet retail is supporting the shift towards more deferred / economy deliveries, although the picture is more complex
Domestic deliveries account for the majority of the market
Larger / heavier items are not compatible with highly automated parcels sortation processes
Price increases have remained below inflation for many years

Market drivers 36
The main drivers of the parcels market are online shopping and the overall level of economic activity
Pricing is largely driven by competition
UK GDP is slowing in the uncertainty preceding Brexit
B2B parcels has broadly tracked, but been lower than, movements in real GDP
Retail sales has continued to grow
Of the range of routes via which an online purchase can reach a consumer some, but not all, require a parcel delivery
Online retailing has grown considerably over the last decade.
Certain categories of online purchase do not lead to a parcel movement
The UK is a worldwide leader in internet shopping
International sales by UK e-retailers are growing more quickly than domestic sales
Internet shopping transaction values had been falling but this is no longer the case
Rates of returns – which are not captured by e-commerce statistics – are (slowly) rising

Competitive landscape 50
UK parcels operators can be divided into several categories
The leading international groups have continued to gain share at the expense of UK-only players
There have been several long-term share movements over the last decade
The UK parcels market is ‘moderately concentrated’
The fastest growing companies have been the newer players, followed by DPD (and DPD Local), and Hermes
DHL, TNT and DX have seen falling revenue over the last eight years while UK Mail’s growth has been modest
Estimated volumes by carrier
Differences in average revenue per parcel reflect carrier focus
Features of carrier business models underpin both segment focus and profitability
Variations in revenue per depot reflect differences in business model
Tuffnells and Hermes have business models which reflect the requirements of their respective niches
Despite a reverse in 2017 margins have been higher in recent years
The overall industry picture masks some significant variations in profitability
Several of the more profitable companies have also been amongst the fastest-growing
Those with losses have specific factors explaining their performance
There is little relationship between pure scale and profitability
Carrier rankings suggest some winners – but care is needed in interpreting
Greater industry revenues are being generated with fewer workers

Forecasts 78
Our market forecast considers the three main segments (B2B, B2C and C2X) separately
GDP is expected to grow steadily and inflation to increase
Our forecast is based on the B2B parcels segment maintaining its recent historical relationship with GDP growth
We expect to see growth in retail sales continue at a similar rate
Forecasts for growth of click-and-collect have been scaled back
Growth in international internet retail sales is expected to continue to be faster than domestic sales
We expect to see further growth in home delivery, but at a slowing rate
Our forecasts combine the different dynamics from the B2B, B2C and C2X segments
Our market estimates and forecasts are supported by other available data
There are several potential market risks which could impact the forecast

Appendix 89

List of Figures

Royal Mail parcel operations
Yodel depot
Consumer apps
Parcel shop
Amazon locker
Percentage of parcels customers buying something else by network
Hermes self-employed courier delivery
Quiqup courier platform
DHL in-boot delivery
Amazon drone delivery
Robots and driverless vehicles
UK parcels market size and growth
Market segmentation
UK domestic home deliveries by service type
FedEx UK: revenue and parcel volume
FedEx UK: revenue per parcel
Parcels market – historical volumes by segment
Parcels market – historical average revenue per parcel
UK GDP in current prices (money GDP), inflation (GDP deflator) and real GDP
B2B parcels market and real GDP
UK retail sales
B2C parcel channels
UK online retail spending : value as % of all retailing
UK e-retail spending (IMRG): value as % of all retailing
UK Internet sales (ONS): value and as % of all retailing
Internet sales resulting / not resulting in an parcel delivery
Internet retail as % of total retail by country
UK e-retailers: domestic and international transaction value
Implied number of B2C transactions
Internet shopping returns rate by category of item
Implied number of UK home shopping movements
Leading UK parcels networks – revenue
Carrier size and growth
UK parcels market share trends
UK parcels market competitiveness: Herfindahl-Hirschman index
Long term revenue growth by carrier
Estimated parcel volumes by carrier
Average revenue per parcel by carrier
Operating models and segment focus
% of top UK online retailers which use each carrier
Revenue per depot
EBIT margins – overall sector and by carrier
EBIT margin by carrier
RoS vs RMS for UK carriers
MoneySavingExpert carrier scores / % regarding the carrier as ‘good’
Which? Magazine: ‘Would you recommend…?’
TrustPilot scores
Industry employment and productivity
Nominal UK GDP, inflation (CPI) and real GDP: historical and forecast
B2B parcels market and real GDP – historical and forecast
UK retail sales / % annual change
Internet retail sales: value and as % of all retailing / £bn – historical and forecast
Internet retail sales resulting / not resulting in an parcel delivery / £m – historical and forecast
UK e-retailers: domestic and international transaction value (£bn) – historical and forecast
Implied number of B2C transactions / millions per year – historical and forecast
Implied number of UK home shopping movements / millions per year – historical and forecast
UK parcels market size and growth: historical and forecast / £m – historical and forecast

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