UK Parcels: Market Insight Report 2015

Published: December 2015
No. of Pages: 79
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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.

We review the UK parcels market, looking at the business-to-business, business-to-consumer and consumer / small business consigned segments.

  • We quantify 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 take into account their range of activities. This model has been regularly updated and refined since it was first developed in 2004.

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.

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

  • For the 2015 edition of the report we have reviewed our market sizing methodology, extended our analysis of market segmentation and made a series of other changes which significantly improve the reliability and accuracy of our market data.

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
  • Discussions with our network of senior-level contacts in the market
  • Extensive desk research
  • In-depth analysis of the macroeconomic environment and relevant market drivers
  • Our own experience of advising both companies 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.

Summary

  • Market growth and drivers
  • The UK parcels market is now approaching £9bn in size.
  • Having fallen during the 2009 economic downturn, growth has since picked up with the main driver of parcel volumes continuing to be the growth of home shopping.

Segmentation

  • The three main market segments (business-to-business, business-to-consumer and consumer/small business-consigned parcels) were traditionally regarded as distinct markets served by different providers.
  • 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.
  • New services have been developed by both carriers and third parties such as internet brokers to give consumers and small businesses access to a much wider range of services.

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% are not 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.
  • 3D printing illustrates the extreme case of this where the physical goods (ie the plastic ?ink' that the printer uses) is very much a commodity, with most of the value being in the ?pattern' information transferred electronically - a form of e-substitution for physical delivery.

Operator trends

  • In the last year there has been no significant further consolidation through acquisition, however the organic growth records of leading carriers show a significant degree of divergence between winners and losers.
  • Operators who have gained share include
  • Royal Mail / Parcelforce now under private ownership,
  • DPD, which has made a series of B2C wins on the back of service enhancements,
  • APC, where feedback on service remains strong,
  • Hermes, which has also been very strong in B2C based on its cost-leading business model
  • Newer players such as brokers (Interparcel, Parcel2Go), networks (Collect+) and finally, potential industry disruptor, Amazon Logistics
  • Those who have lost market share include:
  • TNT Express, which has been impacted by contract losses disruption from the UPS and FedEx bids and lack of exposure to high-growth B2C segment
  • DX, where some business has been exited during the merger of the Nightfreight and DX parcels networks
  • Overall industry profitability has improved, largely as a result of the closure of City Link and turnaround efforts at Yodel, but remains modest. Nevertheless, several operators now earn respectable margins with six carriers having EBIT margins of at least 8%.
  • Factors such as compatibility of operations with market segment focus appear to be more important than the effects of scale in determining operator profitability

Outlook

  • We expect to see continued growth in the market at an accelerated rate 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.

Published By: Apex Insight
Product Code: Apex Insight106


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