Courier, Express, and Parcel: Market at a Crossroads

Transcription

1 Courier, Express, and Parcel: Market at a Crossroads As CEP companies feel the heat of intensifying competition in Pakistan, Bangladesh, and Sri Lanka, competitive advantage will go to those with great service, adaptive pricing, and solid risk management strategies. 1

2 The courier, express, and parcel industry (CEP) in Pakistan, Bangladesh, and Sri Lanka had a stellar performance in the past two years, posting impressive growth and experiencing a complete recovery from the slowdown caused by the global financial crisis. Revenues rose 13 percent per year and volumes increased 3 percent per year (see figure 1). Now the market is becoming increasingly competitive, with local CEP players competing with multinational companies for market share. The industry is also undergoing structural changes as parcel customers consolidate shipments to cut expenses, and document shipments stabilize following a sharp decline in the past few years. As CEP customers look for more cost-saving opportunities, smaller CEP providers, working at lower yields, are able to provide such cost savings and capture market share as a result. They are also simplifying their business models for select lanes. And, increasingly, all CEP players, including the large integrators, are focusing on price to win more new customers or simply retain their existing customers. Five Trends Shaping the CEP Industry When asked what defines the current state of the CEP industry in Pakistan, Bangladesh, and Sri Lanka, executives are quick to answer: increasing price competition, with all players granting high discounts. One executive points to rising competition from smaller, local players on specific lanes in both import and export segments: Some of these players are developing capabilities on European and U.S. lanes, which are major export lanes for the region. A head of sales for a CEP company in Bangladesh adds, Many small players have developed significant inbound capabilities on China, Hong Kong, and Singapore routes, which account for the majority of the national imports. Figure 1 CEP market indicators Size ( million) Shipments (Million) % = CAGR +8% % 1% % Sources: Primary interviews, industry reports; A.T. Kearney analysis 2

3 Within this context, we launched our study to determine the current state and future direction of the CEP industry in Pakistan, Bangladesh, and Sri Lanka (see sidebar: About the Study). Based on interviews with industry executives and research on the performance of CEP players in these three countries, our analysis highlights some interesting developments. We found five main trends shaping the industry: Core industries are driving CEP growth. Garment manufacturing drives the express parcel industry in Pakistan, Bangladesh, and Sri Lanka, which means there is a strong correlation between the growth of the textile industry and an increase in CEP shipments. We predict strong growth in the textile industry over the next five years. Garment exports from Sri Lanka are expected to grow at 10 percent over the next three to four years, explains a study participant and industry expert in the Sri Lanka garment industry. An executive of a leading Bangladeshbased garment manufacturer adds, If the infrastructure improves especially the availability of power, better connectivity to ports, and less port congestion we will be able to expand our capacity and further reduce total production costs, Overall, the CEP industry will experience an impressive 8 to 10 percent annual growth rate in the next three years. With governments committed to de-bottlenecking infrastructures, we expect significant infrastructure improvements in the next five years, enabling more garment exports that will support growth in parcel shipments. Further, after idling for the past few years, document shipping is expected to grow steadily. The banking industry, which has been the mainstay of the express document business, saw stagnation in shipments in the past two to three years. However, the document business from banks is expected to grow in line with anticipated bank expansions. Given that usage is now primarily for original documents, a shift to electronic media is not expected. Overall, we expect the CEP industry to experience an impressive 8 to 10 percent annual growth rate in the next three years (see figure 2 on page 4). A shift is occurring toward heavier shipments. The industry has witnessed a steady increase in weight per shipment in the past few years. Overall, weight per shipment in the export express market grew at a compound annual growth rate (CAGR) of 8 to 10 percent from 2007 About the Study A.T. Kearney periodically releases white papers and research studies on the global courier, express, and parcel industry, and the logistics and transportation sectors. The findings discussed in this paper focus exclusively on Pakistan, Bangladesh, and Sri Lanka. To determine the status and future direction of the CEP industry in these countries, we performed secondary research and conducted one-on-one interviews with major stakeholders, including executives of companies doing business in the region, industry experts, and customers. Our analysis focuses on the scheduled express and standard network business. 3

4 Figure 2 CEP industry growth forecast Market size ( million) +8-10% ~ % = CAGR Source: Primary interviews, industry reports; A.T. Kearney analysis to 2011, while growth for import express shipments was 5 to 8 percent during the same period. This increase can be explained by the consolidation of garment samples from textile manufacturers as part of cost-saving measures. This trend is expected to continue as production costs rise with upward revisions in labor wages, putting pressure on textile manufacturers to cut costs further by consolidating shipments. This is also supported in some part by freight that has express qualities moving toward express, especially in high-end apparel. Service quality is becoming increasingly important. On-time pickup and delivery, speedy customs clearance, in-transition traceability, parcel safety, and 24-hour accessibility are important elements in overall service quality for shippers. In general, service quality is the single most important criteria cited by shippers across the region for selecting a CEP service provider. We want CEP players to go the extra mile on service, reliability, and flexibility, explains a banker in Sri Lanka. Although customers are more price sensitive, especially parcel shippers, most are willing to pay a premium to ensure a certain level of service. Competition from local players is intensifying. Local players are vying for market share on select lanes that do not require significant operational capabilities. This has led to increased competition in the past few years. There is also an evolving trend of customers opting for more than one CEP service provider. For example, textile companies in Sri Lanka generally work with more than one express company, based on rates, network, and service quality for different destinations. Most parcel customers will consider an alternate express provider if it promises a similar quality of service at a lower price. We expect the service quality of local players to improve, which will allow them to challenge the large integrators for market share. As smaller players build global networks through partnerships and alliances, the transit times will become similar on major routes. 4

5 Most parcel customers will consider an alternate express provider if promised a similar quality of service at a lower price. In-transit safety and guaranteed on-time delivery will be the only differentiators commanding a premium price. Macroeconomic risk is on the rise. The most important macroeconomic parameters for CEP players are exchange rates and fuel prices. Rates charged by most of the large integrators are denominated in the U.S. dollar or the euro; thus, currency movements have a significant impact on what customers pay for shipments. A case in point is the steep drop in the value of the Pakistani rupee (PKR) from 2007 to 2011 (see figure 3). As a result, express customers had to bear the brunt of increased prices on international shipments. Express players were also forced to absorb the extra costs because of their inability to pass on the full impact to customers. Given the strong dependency on imports, the currencies of Pakistan, Bangladesh, and Sri Lanka are not expected to strengthen, which will add to the pressure on yields. Hence, companies need to thoroughly review their contract structures and explore the options of hedging risks through international currency markets. Fuel prices also play an important role in determining the yield. Most players charge a variable fuel surcharge on top of base prices to account for fluctuating fuel prices. As fuel prices are expected to remain volatile for the foreseeable future, managing fuel surcharges will be crucial for CEP players bottom lines. Figure 3 Exchange rate for the Pakistani rupee vs. the U.S. dollar Rupees per dollar % = CAGR +3% +15% Sources: Analyst reports; A.T. Kearney analysis 5

6 Signposts for CEP Players Based on these trends, express companies operating in Pakistan, Bangladesh, and Sri Lanka will have to address several implications and answer important questions, such as: Are you equipped to handle heavier shipments? Are the network and operational capabilities sufficient to serve these needs effectively? Are you positioned in the right industries in the country? Is your service quality competitive with the best in the industry? Are your focus areas aligned with customer needs? As a large player are you able to compete with smaller players on price? What mechanisms are you using to protect your company from macro-economic risks? As fuel prices are expected to remain volatile for the foreseeable future, managing fuel surcharges will be crucial. Although the CEP industry is expected to continue on a high growth trajectory for the foreseeable future, the extent of this market escalation depends on growth and quality in the related infrastructure for power, fuel, and ports. In addition, growth implications are different for each country. Therefore, each country presents distinct opportunities. Pakistan Increasing competition will lead to the introduction of new, innovative products and services. Increasing trade with Japan and East African nations will drive CEP players to invest in reinforcing networks on these lanes. Price rationalization is expected to continue. Bangladesh Significant price rationalization is expected, given customers willingness to try low-cost services. Competition will intensify in the retail and small- and medium-enterprise (SME) segments. Africa and Australia lanes will witness steep growth in volumes with increasing drug, apparel, and leather exports. Sri Lanka Companies in Sri Lanka can expect to focus more on high-margin industries and customer segments and put into practice more flexible pricing strategies. In addition, a significant operational expansion and restructuring is anticipated for the industry with the start of operations at the airport in Mattala, Sri Lanka s second international airport. 6

7 The Road Ahead The region s courier, express, and parcel industry can expect remarkable growth in the coming years. But navigating successfully will require understanding and preparing for the expected and unexpected challenges. In a market where local players are projected to spur intense competition, the focus must be on service quality and managing the inherent risks in exchange rates and volatile fuel prices. In addition, players should be prepared for heavier shipments. Overall, the path looks prosperous for an industry that has already shown remarkable recovery and appears poised for growth. Authors Nikolai Dobberstein, partner, Mumbai nikolai.dobberstein@atkearney.com Rohan Rijhwani, consultant, Gurgaon rohan.rijhwani@atkearney.com Anshuman Maheshwary, principal, Gurgaon anshuman.maheshwary@atkearney.com 7

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