How has the European road freight market adapted?
When Covid-19 took hold of Europe, the shock was exceptionally rapid. Within a matter of weeks, much of the region had implemented restrictions on social and economic activity. In some countries, the transition from ‘normal’ life to the reality of closures across vast swathes of the retail, manufacturing, construction and hospitality sectors took little more than a few days. Just as rapid were huge spikes in demand from certain segments of those same sectors – supermarkets in several countries couldn’t process certain goods through their supply chains quickly enough to refill shelves. While the demand spike in grocery retail has generally evened out, there are ongoing challenges, most notably for support in transporting PPE equipment to locations of need.
How did the European road freight sector react to this situation? So far it seems the sector did well. Logistics providers with newly idle assets were quick to recognise the opportunity to match that capacity with rising volumes in other sectors but still needed to understand and plan for the reality of the situation. Despite huge spikes in demand, providers appear to have adjusted well, determining what goods needed to be moved and to which standards, along which trade lanes and for whom, amongst other factors quickly, enabling them to subsequently determine how well placed they were to offer a viable solution. It’s true the final outcome could still be, essentially, the movement of palletised goods on a truck, but this process was likely to also require changes to the internal processes at the LSPs which run deeper, from reorienting sales and commercial teams (possibly to sectors they are unfamiliar with) to repositioning assets and drivers as well as planning new routes.
However, as the situation continues to develop, what’s been a short-term and pragmatic approach to finding solutions won’t be enough. Already the debate around the benefits of assets ownership has regained prominence, while other impacts such as the near-complete shutdown of Europe’s automotive manufacturing capacity will be causing concern for LTL network operators that rely on the sector for the base-load in those networks.
Further, we’re about to enter an important point in the year for tracking this situation – Q1 reporting season. Over the next few weeks, we’ll know a lot more about whether the reactions we’ve seen over the last 8-10 weeks have been successful as the financial impacts of the crisis start to be quantified. More widely and over the medium- and longer-term, it will be in the nature and character of the recovery where we’ll see the significant strategic decisions being made and it’s through those that we’ll ultimately see how successfully the crisis has been managed.
Is there going to be a structural change in the European road freight market?
It’s extremely unlikely we’ll see a straightforward return to the ‘normal’ of the pre-coronavirus road freight market in Europe. In part, demand will return gradually as lockdown restrictions are lifted across the region, but there’s not going to be a great deal of uniformity in the lifting of restrictions, either between European countries or within economies. As an example, we can look at automotive manufacturing – already some automotive production is returning in Eastern Europe, but it’s still unclear when vehicle plants in Germany, Spain and the UK, amongst others, will come back online. How close to capacity those plants will operate at in the period after reopening is even more uncertain.
Issues around asset ownership will once again be on senior management agendas, and it’s likely we’ll see an acceleration of some trends that were playing out prior to Covid-19. These include the shift towards e-commerce, mentioned below in more detail, but also an acceleration in the death of the high street – Ti undertook a survey of 130 logistics industry executives in early April and found 55% expected e-commerce-related logistics services to be most in demand after the crisis, suggesting that buying behaviour adopted by consumers during the crisis to become engrained and by extension that the need for appropriate solutions also grows. Only 6% saw high street store-based distribution as likely to be most in demand.
Will there be (increased) M&A activity? Will the biggest players gain market share?
In terms of consolidation, we’ll see players struggle to adapt for a number of reasons and that may make them targets. Monetary policy responses so far also suggest we’re in for a period of fairly cheap liquidity/debt and that interest rates will remain at the very low levels we’ve had for the last decade or more, so all the ingredients for M&A are there. It is, however, unlikely we’ll see much activity immediately and it’s still far too early to tell which players might emerge with strong enough balance sheets to make acquisitions. Certainly, some of the larger players are positioned to gain market share, but short of some consolidation amongst them, a fundamental change is unlikely – Ti data shows the Top 20 road freight providers in Europe accounted for only around 10% of the overall market in 2019.
Is rail freight going be emerge from this as a winner?
It’s certainly true that the crisis has highlighted the relative benefits of rail freight under such circumstances but whether there is enough evidence to suggest a long-term shift is unclear at this point. Prior to the Covid-19 disruption, the road freight market in Europe had been shifting towards a much more flexible and solution-oriented approach in which, primarily as a result of e-commerce, shippers increasingly need logistics services which can quickly adapt to change as retail trends and consumer tastes evolve, and the location and strength of demand become much more changeable and unpredictable. It’s very unlikely we’ll return to a European road freight market exactly like the one before Covid-19, but it does seem likely that the crisis will accelerate many of the trends we saw before it. The move towards e-commerce, and therefore towards the need for flexibility and solution-oriented approaches, is one such trend that Ti believes has accelerated. As Europe recovers, it will be on rail freight to demonstrate its value and assert its position in this new environment.
Source: Transport Intelligence, April 23, 2020
Author: Nick Bailey
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