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Specialise or perish. That's been the message from industry commentators since the economic downturn on how to survive in Australia's notoriously competitive road transport sector. But a look at the data shows the cost of transforming business models can outweigh the benefits and some operators in the industry may have taken a wrong turn.
Transport businesses have always been forced to strike a balance between low operating margins, cost bases which can be difficult to change, and heavy indebtedness given a need to regularly reinvest in fleets to maintain safety and service quality. This balance is being made more difficult by an increasingly apparent skill shortage, driving wage inflation.
"Integrated operators are not generating margins to compensate for the additional investment required to provide their services."
Angelo Manos & Glenn Jennings, General Manager EC and Property, ANZ & Associate Director, Client Insights & Solutions, ANZGeneral Manager EC and Property, ANZ & Associate Director, Client Insights & Solutions, ANZThe lesson supposedly learned has been for companies to insulate themselves from the sector's competitive pressures, they should either:
- Operate in a niche by transporting specialised goods such as heavy machinery, refrigerated, or hazardous materials, allowing these businesses to charge a premium relative to “general goods” transporters; or
- Specialise by becoming embedded in their customers' supply chains, providing value added services such as storage, distribution and inventory management.
TESTING THAT THEORY
So, how effective is either strategy? Utilising financial data on 46 road transport businesses over five years, along with industry and other data, we put both to the test.
Road transport, the largest component of the transport and logistics industry, is a systemically important part of the Australian economy. In fiscal 2015 an estimated 43,000 operators nationally are expected to generate combined revenue of $A52 billion (compared to $A102 billion in total for transport and logistics), underpinned by economic and trade activity, and servicing a wide range of industries.
Through analysis of the sector we hoped to test which business model has led to the best financial performance, characterised by revenue growth, profitability and returns. The results were fascinating.
The data showed the financial returns of operators transporting specialised goods are outperforming general goods, as expected. However, integrated operators are not generating margins to compensate for the additional investment required to provide their services, relative to transport-only businesses.
This may be attributed to the popularity in recent years of companies transitioning from transport-only to integrated services, making the latter a crowded market and impacting pricing and margins.
Additionally, a number of companies have been consistently generating financial returns below their cost of capital in the last five years. History suggests that this position will be unsustainable without either uplift in profitability or outside financial assistance, and that industry consolidation will continue. The form of that consolidation is a key question to be answered, and will define success for many firms.
VEHICLE INVESTMENT – HOW LOW CAN IT GO?
After years of declines, vehicle investment across the industry has reached an unsustainably low level in view of projected growth in freight demand.
On average only $A3.10 of every $A100 earned was allocated to investment in fiscal 2014. This lower investment reflects prevailing conservatism, whilst driving reduced leverage, and increasing the average age of vehicles on the road.
Despite currently low levels of investment, underlying demand for services is expected to remain robust - the Bureau of Infrastructure, Transport and Regional Economics estimates 2.8 per cent pa growth in the domestic road freight task to 2030.
To meet growth in freight demand, ANZ estimates that over the next five years the industry will need $A3.4 billion more funding, translating to $A6.6 million of additional capital for an $A100 million turnover operator.
SAFE AT HOME
These findings bring about important questions for the industry. In the last five years returns have been strongest for operators that stayed with transport rather than diversifying into other services.
Direct Freight Express
General Goods, Transport Only - $A161 million revenue in FY14
Headquartered in western Sydney, New South Wales, DFE provides express linehaul services through a national network of depots in metropolitan and regional centres.
By focussing on transport services across wide range of goods and materials, ASIC details show that the company has tripled revenue over a decade to $A161 million in FY14, recording an enviable 19 per cent return on capital that year.
General Goods, Transport Only – $A34 million revenue in FY14
Headquartered in Tamworth, New South Wales and founded in 1991, the company initially offered express overnight freight services, in the North West of the State.
Today, the group services customers across New South Wales and Queensland, offering a premium express freight network for a variety of goods, and completing deliveries nationally through network partners.
The company's continued focus on transport has resulted in stable revenue growth, recording $A33 million in FY14 reported to ASIC, and return on capital averaging 25 per cent in the last three years.
Specialised Goods, Integrated Services – $A35 million revenue in FY14
FBT Transwest provides integrated services for both hazardous and nonhazardous materials. This includes liquid storage and distribution for the agricultural, waste stream, edible oils, chemicals and plastics sectors.
The company is headquartered in Melbourne's western suburbs, with a major dangerous goods licensed facility on site.
FBT Transwest's niche operating model and industry coverage has seen revenues grow stably to $A35 million in FY2014, as reported to ASIC, and 19 per cent return on capital in both FY13 and FY14.
General Goods (Electrical Retail Supply Chain), Integrated Services – $A3m revenue in FY14
M3 Logistics has dedicated itself to warehousing and distribution services for the electrical retail supply chain. The company provides holistic services for its retail and wholesale customers including linehaul, wharf cartage, customs clearance, long and short-term storage, and last-mile delivery.
Headquartered in Bankstown New South Wales, M3 has a presence in most Australian capital cities.
Alignment with the electrical appliance industry has seen the company grow revenue by 25 per cent in the five years to FY14, recording $A33 million reported to ASIC, and a massive 82 per cent and 45 per cent return on capital in FY13 and FY14 respectively, attributed to a capital-light operating model.
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The question of whether those operators will have the right capabilities to meet their customers' needs as industry supply chains become more complex and closely entwined remains.
So does the question of what sectors should the industry pivot to for the next five years and beyond. Recent operating conditions have been a function of the broader economic environment.
Elevated commodity prices and export volumes drove Australia's terms of trade to a peak in mid-2011, coinciding with a peak in mining investment and the Australian dollar's all-time high of $US1.10.
The additional purchasing power of consumers increased demand for imported goods, benefitting wholesalers whilst eroding local manufacturers' ability to compete. How each business assesses its options in terms of sector alliance and geographic coverage will be critical.
Angelo Manos is general manager, emerging corporate and specialist property at ANZ. Glenn Jennings is associate director, client insights and solutions at ANZ.
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
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Wrong way, go back: Australia's transport sector
2015-08-10
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