The contract logistics market has been a comparatively stable if rather unexciting sector over the past decade or so. But now things are changing.
Contract logistics is entering a new stage of growth fuelled by a combination of e-retailing and emerging markets. Retailing dominates the contract logistics market, accounting for almost half of revenues especially if the closely related ‘consumer products’ sector is counted as well. This is not surprising as retailing is the largest economic activity of all developed and most developing economies. It is also undergoing a revolution as internet-based shopping transforms retailers’ business models.
The logistics demands of ‘home-delivery’ are immense and quite different from traditional retailing yet many retailers have been left straddling the two in what is described as an ‘omni-channel’ strategy. Dedicated internet retailers such as Amazon may have the advantage of a more simple business model but their logistics spending is still huge. The result is that spending on logistics in the retail sector is growing rapidly even if it is unfocussed. Retailers are in the undesirable situation of throwing money at logistics solutions driven by a fear of losing market-share.
The implications for the logistics sector are not straightforward. Whilst logistics spend is growing, the companies that are benefitting are often specialist providers of fulfilment services or last mile capabilities, rather than the traditional purveyors of ‘trucks and sheds’. It is also clear that many of the larger retailers are investing in in-house capabilities rather than outsourcing.
The situation in the other area of growth is equally complicated. Emerging markets have seen a shopping explosion over the past few years as increased GDP-per head has combined with local and global stores developing modern retailing in countries that were often reliant traditional markets. Today economies such as Turkey, Indonesia, Thailand and Brazil have a demand for advanced logistics services which is growing at an extra-ordinary rate. Yet serving that demand is not straightforward. Such economies are frequently characterised by poor infrastructure and opaque business practices that make market entry difficult. Many of the big conglomerates that often characterise these economies have their own in-house logistics subsidiaries that monopolise provision to retailers who they either own or who are dependent on them in other ways.
China is in a category of its own. If measured on a national basis the market is colossal probably amounting to many tens of billions of US Dollars. However retailing in China is highly regionalised and fragmented. Despite China’s heavy investment in roads, basic provision is still difficult and entering the Chinese retail market will require a carefully worked-out strategy.
Other production sectors continue to grow at a moderate rate. The automotive business has recovered from its crisis several years ago and is seeing expansion through-out North America, Germany, China and many other markets. Consumer electronics production is not quite so buoyant although it is adapting to the drift away from China and towards South East Asia. Healthcare and pharmaceuticals continues to attract investment driven by growing health expenditure in both developed and emerging economies.
Yet all of these are dwarfed by the potential of growth in retailing. Not that this has really been reflected over the past year. Growth for the contract logistics sector was a humble 2.8%, however this number probably disguises what may be described as a growing demand for ‘advanced logistics services’ which included a broader category of activities than contract logistics and where in-house activities are growing faster than outsourced processes. It is a trend that all third party contract logistics providers need to absorb if they are not to be left behind in a rapidly changing market.
GLOBAL SUPPLY CHAIN INTELLIGENCE (GSCi)