Michael Herson of The Strategy Works investigates the drivers behind the trends in the express market ?

Whilst supposedly more fashionable sectors, such as IT and telecoms, have grabbed the stock-market headlines over the past couple of years, as their star has first ascended and then declined, the traditional parcels and express services market has been quietly re-inventing itself as a new glamour sector to watch. 3i certainly think so having taken significant stakes in 4 UK parcels companies. Tim Simpson a director of 3i and head of their Transport & Logistics team believes "its an attractive growth market - driven by changes in the supply chain, as the balance shifts from manufacturing push to consumer pull"

MARKET CHANGE
Driven by foreign acquisitions/investments in the UK from newly deregulated European postal authorities, the market is undergoing a metamorphosis. Recently, there have been 3 major 'plays' by European Postal Authorities on the UK market. The German Post Office (Deutsche Post) has acquired 50% of Securicor Omega Express and 75% of DHL; The Dutch Postal Authority (TPG), owners of the TNT global network have realigned its TNT UK operation; and the French Post Office (La Poste) has acquired the Mayne Nickless express business which includes the Parceline and Interlink Express brands.

The other two powerhouses in Europe are Consignia (the new name for the British Post Office incorporating Parcelforce and Royal Mail) who have made acquisitions, firstly in Germany, and then built a broad network in other European markets under the General Parcel brand ; and American group UPS, also built by acquisition into a major global force.

Nick Basford, Marketing and Product Development Director at Lynx sees domestic deregulation as the main driver behind foreign acquisitions. "Post Offices are attempting to create European, even worldwide Businesses, because of the threat to their traditional domestic operations". Lynx themselves have signed an agreement with the United States Postal Service, giving the "sleeping giant" a toe hold in Europe, and Lynx a useful potential partner on the world stage.

Paul Murray MD of Target Worldwide believes that foreign postal groups want to take on the independent integrators (i.e. UPS) globally. Chris Kalla-Bishop, Commercial Director at Parcelforce Worldwide primarily sees the European "single market" as the key driver. Tim Simpson believes that, as postal deregulation has opened up their domestic markets, postal authorities want to acquire the constituent parts in other key countries in Europe - in effect a "strategic land grab".

Between them these 5 groups now control broadly half of the total European parcels market. All believe there will be further consolidation and clearly in the long term, the UK cannot sustain three times as many major brands than now dominate in the much larger USA market, where there are now in effect only 3 major players - UPS/DHL/FedEx.

TRADE
However, most independent carriers in the UK are currently trading at too high a P/E ratio to be attractive acquisitions. Indeed, Target has been the subject of two recent VC backed MBO's. Firstly Legal & General Ventures in 1998 for £160m and then 2 years later, a secondary buy-out took place involving 3i in 2000 for £200m, representing the largest ever secondary buy-out of it's kind."

Although in theory the 'man in the van' can still operate within this market (and thousands still do), the reality is that only those companies willing to make the investment in IT and logistics are going to be able to seriously compete for the large corporate business. To meet the demands of their customers, parcels companies have had to transform themselves into sophisticated logistics businesses - either setting up separate divisions or growing via acquisition.

VALUE-ADDED SERVICES
This is confirmed by Nigel Goodson of UPS, who says "the main thrust of UPS' most recent acquisitions has been in the logistics area". Customers now demand a range of sophisticated value added distribution services from suppliers, supported by integrated data interchange solutions, helping them to manage their business. This is all part of a new "empowering the customers strategy" according to John Acton, Director of Marketing at Geopost. Paul Murray agrees - "the request for information is almost as important as the delivery itself".

"So UPS's software package - 'Online WorldShip TM' - allows customers to import information onto their own database, providing them with valuable profile data on deliveries/order value and sales analysis within country/by day, etc. It is "absolute free flow real time visibility - it helps them run their business better" according to Neil Taylor - UPS's. Business Development Director. UPS take this a step further by deploying "customer automation consultants" to discuss customers' needs and understand how their processes work.

Alan Jones, Group managing director of TNT Express says TNT has set up a Global Data Centre in Atherstone to give them a uniform set of applications and processes around the world.

John Hogan, Chief Executive of Securicor Omega Express, reinforces the point - "The customer looks to you to provide solutions, not services". Hogan believes the heavy IT investment now required has raised the barriers to entry, and that parcels and express services are now a scale business, and like logistics, are driven by economies of scale. Globalisation is another external driver as companies seek to acquire the necessary scale to compete across borders. The other driving force is the increasing focus on large corporate accounts. Nick Basford believes that "80% of the market is now controlled by the intelligent buyer - the top clients call the shots".

David Breeze, International and Sameday Services Director at Target agrees - "We can give more attention to our customers by focusing on less of them". This focus on key accounts has enabled Target to recently win the largest parcels contract in the UK - Dell Computers.

TOGETHER
The net result of all this is of course is bring the relationship between key customers and the supplier closer together, thus reducing the propensity to switch suppliers. The Strategy Works research confirms multi sourcing in this market is typical, with an average of 2.7 suppliers per customer - hence the attraction of the top corporate end of the market where embedded relationships are more likely to be on a 1:1 basis. This is the 'holy grail' of the parcels/express services market, and explains why most suppliers prefer to focus on major B2B clients rather than go after potentially fickle ad hoc business. In fact, TNT does not even accept B2C business, in its B2B express network and Target discourage ad hoc B2B business.

A good example of how the routine movement of parcels has now progressed to a sophisticated logistics operation, is that TNT, through it's Newsfast brand, carries nearly all the UK's overnight deliveries of newspapers for News International and the other major publishers.

TOTAL INTEGRATION
They also collect parts on behalf of Land Rover, sort them in containers and then operate a JIT delivery system - their next logical step being the design of a sequencing centre. This total integration represents a major step forward in the supplier/customer relationship with parcels companies now offering services which compliment a range of activities within the customer's own supply chain.

The more demanding needs of customers (and in turn their customers) is nowhere better illustrated than the way the market has been broken down into hybrid delivery timed segments, such as 'same day', 'before 9.00', 'before 10.00'.

According to Roger Elliott European Transport Analyst at Schroder Salomon Smith Barney "It is increasingly two distinct markets, with the highest growth likely in the time definitive, cross border segments, where effectively the players do not compete with local providers."

Chris Kalla-Bishop confirms this belief: "The market has split into two clearly defined segments - next day and later than next day - "the former is growing whilst the latter is declining". Only those companies with the right infrastructure and 'track and trace' facilities can compete successfully in the timed segments of the market.

The potential market available for all is large - the Intra UK market is worth £2.5bn alone, according to data provided by Parceline split by timed delivery: -

Outbound international (from the UK) is worth a further £900m representing a total market opportunity of £3.4bn.

Even the £500m B2C market is also growing 5-7% a year according to Steve Johnson - Sales and Marketing Director of Reality (a division of GUS). B2C is also an area of focus for Consignia, who have a dedicated home shopping unit to develop the market. Johnson explains that Reality is now a "business process outsourcer, offering integrated solutions which embrace a large call centre operation, payment processing, printed mail, warehousing and parcel delivery."

By bundling these services Reality is able to add value to traditional parcels delivery and offer, "end to end customer handling" to customers such as Argos Direct.

According to John Acton "Time critical and time specific have become the core elements of customer service. Three companies - UPS, Parcelforce Worldwide and Parceline - already utilise the hand held scanner technology, which allows digital route control and captures an electronic signature and Securicor will be launching this soon.

Most companies dedicate specialised sales resources to their most important customers, either via dedicated call handling teams at call centres, or KAM's allocated to large accounts, according to spend band of customers.

Strategic alliances are also useful to those who want to become global integrators. Moving into airfreight is another example - Securicor Omega (Danzas), and UPS (Fritz) are new downstream relationships, which extend their logistics capability into new sectors.

Other marketing relationships are driven more by consignee driven 'pull model' as opposed to the traditional 'push model' - reflected by UPS' arrangement with Texaco where parcel recipients can designate a local 24 hour service station where they can collect out of hours. Parcelforce's response to this is "Local Collect" whereby consignees can collect their parcels from sub-post offices who are part of Post Office Counters network.

A further example would be in the management of returned stock, as an added value service, which is a new initiative from Securicor Omega Express. Another example is Vodafone's arrangement with Parceline to swap over mobile phones whilst exchanging the SIM card.

Another example of a downstream strategy is UPS' acquisition of First International Bancorp in the USA, enabling them to extend (via the newly formed UPS Capital) financial services to their clients, such as factoring, exports credits, insurance, etc. According to Neil Taylor, it is offering customers "total solutions for movements of their products".

FUTURE
Although there is an increasing 'grey area' between parcels and mail, UPS does not foresee a rush of applicants to compete directly with the Royal Mail - "I think it's unrealistic for people generally to expect that operators like UPS or any of the other major integrators is going to have any desire to get involved in the mail market". Instead, Goodson sees "competition on the fringes" for business mail, and the small percentage of the market where there is scope for product innovation.

With the move to globalisation accelerating, more European alliances are predicted by Steve Johnson - "there will be large scale players in each country who will have to form alliances to service either particular segments of the market or particular clients."

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