Europe s CEP Market: Growth on New Terms

Europe s CEP Market: Growth on New Terms The European courier, express, and parcel industry has been growing consistently over the past two years, but growth is mostly from low-margin areas. Several trends are expected to alter these dynamics and soon. 1

The courier, express, and parcel (CEP) industry in Europe saw growth in 2011 that was almost identical to the year before: Revenues grew 4 percent and volumes rose 6 percent for the second consecutive year (see figure 1). While this is good news for the industry, overall revenue per shipment (RpS) declined further in 2011, underscoring the industry s continued margin pressures even as international shipments which have a higher RpS grow steadily. As one industry CEO told us, Overall volume growth was in line with our expectations, but we haven t been able to raise prices high enough to offset rising fuel surcharges and network costs. Figure 1 CEP market development from 2009 to 2011 Revenues ( million) Shipments (million) 43,550 12,474 (29%) 31,076 (71%) +4% 7% 3% 45,451 13,312 (29%) 32,139 (71%) +4% 6% 3% 47,224 14,091 (30%) 33,133 (70%) +6% 5,308 4,993 437 (9%) 10% 478 (9%) 4,556 (91%) 6% 4,830 (91%) +6% 8% 6% 5,621 517 (9%) 5,104 (91%) Both segments, domestic and international, saw revenue per shipment decline International continued to grow faster than domestic, totaling 30% revenues and 9% volume 2009 2010 2011 2009 2010 2011 International Domestic Sources: Annual reports, expert interviews; A.T. Kearney analysis This paper highlights the findings in A.T. Kearney s latest study on the current state and future direction of the European CEP industry. Based on more than 500 interviews with industry executives and research on company performance in 16 European countries, our goal is to gain a better understanding of the industry and why it has continued along this path (see sidebar: About the Study). About the Study A.T. Kearney s annual courier, express, and parcel study assesses the status and future direction of the industry in 16 European countries Austria, Belgium, Czech Republic, Denmark, France, Germany, Italy, the Netherlands, Norway, Poland, Russia, Spain, Sweden, Switzerland, Turkey, and the United Kingdom. The CEP market is segmented according to customer demand, with domestic versus international services on the one hand, and standard versus express on the other. Only a few players compete in every segment as each segment has different requirements such as, for example, a dedicated air network. The study focuses on the scheduled express and standard network businesses. Non- network-related traffic such as same-day, in-night, and intra-city services is not included. The totals represent countrybilled volumes, including import shipments. Express products include the fastest possible service with guaranteed delivery times, while standard products offer day-certain and deferred delivery times. The study includes package weights up to 2,500 kilograms (about 5,500 pounds). 2

Four Trends Shaping Europe s CEP Industry Four trends are shaping the European CEP industry. While the market has been historically segmented to align with customer needs domestic versus international services on the one hand, and standard versus express on the other only a small number of players compete in all market segments. The following discusses the trends in more detail: Trend 1. The international segment continues to surpass the domestic segment The international segment (express and standard) grew 8 percent in volume and 6 percent in revenue in 2011, higher than the 6 percent volume growth and 3 percent revenue growth in the domestic segment. These totals continue the 2010 growth trajectory. Only Russia, Poland, and Austria see domestic growth outpacing international (see figure 2). Some of the markets that have a large share of international business are either hosts to large European distribution centers, such as Belgium and the Netherlands, or are fairly small countries with high population density, such as Austria, the Czech Republic, and Denmark. 3

Across the 16 European markets in our analysis, 80 percent of international express revenue is outbound. The inbound-outbound ratio differs by country, depending on the general structure of the economy. For instance, Norway s share of inbound revenues is 45 percent of total business, reflecting the elevated importance of imports. Further drivers of this trend are price differences between outbound and inbound countries and the location of headquarters of major customers. Trend 2. Standard products are a well-established segment During the economic downturn that began in 2008, standard products that offer broader transit times at less expensive rates were in greater demand as customers tried to optimize their supply chains where possible. CEP players in many markets responded to this demand with improved service levels for standard products. As a result, most domestic and international markets, with the exception of Spain and Italy, have stronger growth rates in standard than in express. That said, the migration from express to standard products in 2011 has been less significant than in previous years. The express segment continues to dominate in markets with a perceived poor quality of standard mail services, in remote locations within Europe, and in markets with high shares of volumes to or from non-european locations (see figure 3). Countries with more heavyweight business and with central positions in intra-european trade and traffic see more standard volumes. Figure 3 Breakdown of Europe s courier, express, and packaging market by country Market size, 2011 (million ) 10,176 9,508 Domestic standard Domestic express International standard International express 5,844 4,876 4,156 2,157 2,156 1,190 1,167 1,113 1,074 1,071 854 809 587 486 France Germany United Kingdom Italy Spain The Netherlands Sweden Russia Norway Switzerland Denmark Poland Turkey Belgium Austria Czech Republic Sources: Annual reports; expert interviews; A.T. Kearney analysis 4

The rising importance of the international standard segment and fierce competition has led to an overall decrease in RpS in all markets, except for Russia. The Russian market benefits from faster growth on more expensive mid- and long-haul lanes, a general price increase, and higher weights per shipment (WpS). Trend 3. Major networks are expanding their dominance from express into the growth segments of B2C and standard In 2011, the biggest networks increased their share of the European CEP market in express and standard products, both domestically and internationally. The top six networks now account for 91 percent (the integrators DHL, FedEx, TNT, and UPS alone account for 87 percent) of the international express delivery market, a trend expected to continue given recent developments such as the planned merger between UPS and TNT, which could have an effect on mid- to long-term prices in the express markets. Most domestic and international markets, with the exception of Spain and Italy, are experiencing stronger growth in standard than in express. With their dominance well established in the express segment, the major networks have shifted their focus to the growth segments of B2C and standard. B2C remains a main growth driver for CEP markets, specifically for domestic standard. Internationally, both express and standard are benefiting from B2C growth. Large networks actively targeted the B2C segment in 2011, benefiting from their extensive reach in home markets and their broad international network. However, different patterns have been observed, with some players experiencing growth through a rising customer base and others through increased volumes from current customers. As a result, network players market share in international standard has risen to 52 percent. This trend is not seen, however, in markets with a preponderance of heavyweight shipments (such as Spain, France, and Russia), as these markets are not experiencing high levels of consolidation. Trend 4. WpS remains stable The 2010 rise of WpS across segments did not continue in 2011, demonstrating some industry sluggishness. Weights for overall domestic shipments and international express remain stable at 10 kilograms and 7 kilograms (22 pounds and 15 pounds), respectively, while there is a slight upward trend for international standard (an average of 16 kilograms, or 35 pounds) driven by countries such as Russia, Belgium, and Switzerland. Despite the apparent stability of WpS, it is worth taking a more detailed look. Domestically, there are two opposing trends. On one hand, WpS declines are due to strong volume growth in low-weight B2C shipments. On the other hand, there is consolidation of shipments and general WpS growth in B2B. For international express, WpS remains stable overall, but with different underlying trends. The faster volume growth in parcels over documents, resulting from more 5

time-critical, high-quality shipments, is balanced by a decline in parcel weights in a few markets (caused by growth in lightweight B2C parcels). The Market Outlook Based on these findings, we see several trends for the future of the European CEP market. Growth will continue. Our growth expectations for the coming years remain strong, mostly in international where standard is the most promising segment. We expect little significant change to weight per shipment (see figure 4). Figure 4 CEP industry growth will continue into the future Million shipments CAGR +5% 6,462 159 CAGR +6% 5,621 143 454 4,993 128 309 4,556 374 5,104 5,849 2009 2011 2014e International express International standard Domestic Sources: Annual reports, expert interviews; A.T. Kearney analysis RpS will remain under pressure. Despite official price increases in 2011, RpS continues to deteriorate to a new low. At the segment level, domestic overall and international standard faces a drop of 2 percent in RpS, while in international express the decrease is 1 percent. This is at least partly due to the strength of cheaper standard services and lighter shipments; it is also due in part to the fact that service providers do not fully forward price increases on to customers. As a result, we expect further price hikes, at least for standard products. And more margin pressure might drive further consolidation in the market. E-commerce will lead to alternative solutions. As more e-commerce companies enter the market as specialists in segments with high levels of returned shipments, such as textiles and apparel, CEP industry players will need to either develop alternative solutions to cope with 6

increasing costs or raise prices although the latter approach is unlikely given the fierce competition and the aim to transport returns free of charge in most European markets. While B2C-focused players have so far not managed to threaten the dominance of established players, there appears to be an extended concentration on B2B among those players. Innovative solutions will have a significant impact on the competitive environment in the future. Europe s emerging markets will show the strongest relative growth. Europe s emerging markets (Poland, Russia, and Turkey) will continue to demonstrate the strongest relative growth because of ongoing low saturation levels with CEP services. Germany will have the fastest absolute growth, thanks to its positive economic developments and orientation on exports. There is huge growth potential for the B2C segment in emerging markets given its current size. International express will play a larger role in emerging markets because of longer distances to destinations in remote locations. B2C will remain an important growth segment. Network providers will continue their focus on B2C as a major source of growth. International B2C is expected to gain importance for the standard segment, as network players build their cross-border networks in the short term. In absolute terms, the vast majority of B2C shipments are still domestic by nature. In the long term, larger e-commerce players will set up logistics operations in each of their key markets which will convert international shipments into domestic ones. To cope with higher last-mile costs in this segment, they will need to develop innovative solutions, particularly as e-commerce companies establish their own solutions. In the United States, for example, drop points have already been deployed by e-commerce companies. Delivering the Goods Our findings suggest there is plenty for Europe s CEP industry to be optimistic about primarily that growth should continue. As industry players seek to build long-term success amid the latest macroeconomic developments in Europe, those that come up with innovative solutions to overcome the challenges ahead, particularly in terms of pricing, will do best. Authors Ferry Salehi, partner, Berlin ferry.salehi@atkearney.com Lars Ryssel, consultant, Berlin lars.ryssel@atkearney.com The authors wish to thank Daniela Doll for her valuable contributions to this paper. 7

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