European Freight Forwarders: Which Way to Turn?

Abstract

So far, deregulation has destroyed profits in this essential sector But markets are growing and three distinct customer needs are emerging Here's a plan for turning around incumbents Few industries are as essential to Europe's economy as trucking. Truckers - or more accurately land-based freight forwarders - move up to 80 percent of goods within the European Union, providing not just the transport but also the collection, consolidation, storage, reloading, and tracking services that expedite the movement of goods on the Continent. The industry is worth $150 billion in annual revenue: smaller than Europe's food, automotive, chemicals, electronics, and machinery sectors, but larger than textiles, pharmaceuticals, and paper. Lest anyone forget how powerful a role it plays, periodic strikes by Continental truck drivers serve as a reminder to businesses, public, and governments alike. Today, the industry is at a crossroads. The stakes are high, particularly for traditional freight forwarders large businesses with costly regional networks - whose customers are being siphoned off by small low-cost local operators, or by sophisticated newcomers that can deliver services anywhere in Europe. The prospect of a fully deregulated EU market is forcing these old-style companies to reevaluate the way they do business. Pressure on profitability will increase, and some firms are likely to disappear. At the same time, however, new opportunities are emerging for those willing and able to change direction. The stakes are also high for European business customers that depend on high service levels in their supply chains to keep their operations running smoothly. They are likely to benefit from more and better service at competitive prices, although to what extent depends on how nimbly traditional freight forwarders move to secure their survival and then pursue growth. The threat The freight forwarding industry has not been healthy for some time. According to estimates extrapolated from an analysis of industry leaders, it has destroyed almost $10 billion in value over the past decade. Many of the sector's larger companies are either unprofitable or earning less than their cost of capital. Some have lost money for years, but carry on because their parent companies subsidize land-based operations (sometimes without realizing it) with profits from logistics and air and sea freight businesses. In addition, inadequate management information systems and consolidated financial reports - typically compiled on a country-by-country basis and combining air, sea, and land freight - have prevented shareholders and management from understanding the performance of individual businesses. These businesses are losing money for two main reasons. The first is deregulation, which has contributed to the industry's fragmentation and increased competition. The second is that traditional operators are caught in the middle of the competitor pack with high costs and undifferentiated services. These factors are likely to exert further pressure on profits in the future. Deregulation Before 1988, the freight forwarding industry was regulated nationally and internationally. All companies could count on guaranteed incomes within the boundaries of fixed prices, operating restrictions, and various taxes for national and international traffic. In 1989, free price setting was introduced, first for international traffic crossing country borders, and then for national traffic. With the opening of international borders, entry barriers began to fall (Exhibit 1). New companies found it easier to start up, and competition for customers intensified. [TABULAR DATA FOR EXHIBIT 1 OMITTED] Today, the industry is fragmented across thousands of providers, with no company claiming more than 3 percent of the market. Even the top ten traditional freight forwarders combined have less than a 20 percent share. …