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ISBN 1-85765-629-6

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This report covers: distribution, freight transport, road transport, rail transport, water transport, air transport, transport activities, freight forwarding, courier activities, pipeline, own-account transport, contract distribution, express parcels, bulk fuel, container, RoRo, roll-on, roll-off, semi-bulk, deep sea routes, short sea routes,

Companies covered include: Associated British Ports Holdings, British Airways, Eurotunnel, Exel, Ocean group, Freightliner, GeoLogistics, Jacobs Holdings, Nippon Express, P&O, Peninsular and Oriental Steam Navigation Company, Nedlloyd, railtrack, Christian Salvesen, Tibbett & Britten, TNT UK, TDG, Freighliner, EWS, Sea Containers UK,British Midland, DHL International, Kuehne & Nagel, MSAS Global Logistics, Nippon Express, UPS (UK), United Parcel Service,

Executive Summary

Table of Contents

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EXECUTIVE SUMMARY

MARKET OVERVIEW

Distribution is defined in this Review as the physical distribution of goods as part of the supply chain - particularly the movement of goods from suppliers to retailers and to the final consumer. The UK distribution industry provides services both to importers supplying the UK market and to UK manufacturers, which may supply both UK and foreign customers. The Review covers domestic and international distribution services, including transport by all modes - road, rail (including the Channel Tunnel), sea, inland waterway and air - and the services of agents such as freight forwarders.

Historically, many large companies in the UK have provided their own transport link in the distribution chain through their own transport fleets (normally provided in the form of 'own-account' road haulage operations). Now, this function is increasingly being contracted out to specialist transport companies, whose role is to provide a dedicated transport service, integrated with their client's own operations and managed as part of the client's overall logistics function.

The UK transport industry is, in general, highly fragmented - especially in those sectors that provide distribution services. This is less true of those sectors that provide transport links at an earlier stage in the supply chain. For instance, the sea and rail transport sectors - each of which has an important role in the bulk transport of fuels and other raw materials - exhibit a high degree of concentration relative to the highly fragmented road transport sector.

MARKET SIZE AND SEGMENTATION

Key Note estimates that the value of the UK distribution market in 2000, as measured by the gross output of the sector, was £23.3bn. This figure excludes turnover attributable to activities that are concerned with other stages in the supply chain, such as the transport of raw materials to manufacturers. However, because of the double counting that is involved (i.e. where part of the industry purchases services from another part, or subcontracts its activities) the value added in distribution is considerably lower than this figure. On the basis that gross value added in the transport and communications sector as a whole is around 45 percent of that sector's output at market prices, value added in the distribution sector can be estimated at around £10bn.

Road transport is estimated to account for around 40 percent of the total turnover of the British freight transport industry, making it the dominant sector. If allowance is made for double counting, and if sectors such as freight forwarding and other supporting activities are eliminated from the comparison, the dominance of road transport is even more marked. By comparison, rail and water transport have a relatively minor role. Air transport also has a minor role, but its share of turnover is not an accurate measure of its economic importance, since air freight accounts for a large share of the country's foreign trade when measured by the value of goods carried.

The UK market for transport and distribution services may also be split between domestic and international distribution - the latter comprising the distribution of products exported from the UK and the distribution within the UK of products imported from overseas. However, the establishment of the Single European Market has blurred the distinction between domestic and international transport in respect of the carriage of freight between the UK and the EU. In other words, the EU is itself taking on many of the characteristics of a 'domestic' market. The consequences of this development have been felt, in particular, by the customs agent sector of the freight forwarding business, whose services are now no longer required where distribution on an intra-EU basis is concerned.

CHOICE OF TRANSPORT MODE

The distribution function is an important link in the supply chain, and managers in manufacturing, retailing and other sectors are becoming increasingly aware of the need to consider the supply chain as a whole. Failures at any stage can affect the efficiency of the whole logistics operation. Managers are now less inclined to see the transport and distribution stages of the process as being somehow less important than other links in the supply chain.

Ensuring the timely and safe delivery of products is more than just a matter of deciding on the mode of transport to be used. In some cases, it may be appropriate to establish a distribution network based on a single mode - perhaps a road-based network of services to supply retail stores, or one based on the use of air freight for the specialist distribution of high-value or perishable items. However, in the present competitive environment, a particular mode of transport may be unable to prove that it can offer any special competitive advantages over other modes.

There are many markets where intermodal competition is intense - especially at the interface between different lengths of haul, where the advantage experienced by one mode decreases and that enjoyed by a competing mode increases. Hence, road competes with rail or air as the length of haul increases. The Freight Shuttle services operated by Eurotunnel also offer direct competition to the cross-channel vehicle ferries in the carriage of road-based freight. Similarly, the through-rail freight services operated through the Tunnel have the potential to compete with other modes in a variety of markets, although there is little evidence that this potential is currently being realised.

In such instances, it is likely that the choice of mode of transport will be made on the basis of price, as well as on the basis of the inherent characteristics of the transport mode itself.

In some circumstances - especially in the case of smaller companies which are unable to operate their own fleets of vehicles - there is a particular role for specialists such as freight forwarders or integrated carriers. The decision as to the most suitable mode of transport can be delegated to them. The client may have no need to specify the mode to be used, but may merely wish to set out the conditions to be met regarding security and timeliness of delivery. It can then be left to the specialist to decide on the mode that meets these criteria.

DEVELOPMENTS IN THE INDUSTRY

Information Technology

The transport and distribution industry uses many applications from the field of information technology (IT). Many of these are employed by a wide spectrum of businesses. Such applications include e-mail, the Internet and mobile phones, as well as long-established computer-based systems such as accounting and payroll packages, word-processing software and personnel record systems.

More industry-specific applications include electronic data interchange (EDI), providing for the automation of the process of preparing and transmitting documents to all parties involved in the transport of goods across international boundaries. Tracking and tracing systems are also of particular importance in the air freight and courier and express businesses. As pressures increase to reduce the amount of capital tied up in inventory, shippers wish to be able to check on the passage of their consignment at each stage in its movement along the chain of distribution.

Fuel Taxes

There are a number of reasons for the imposition of fuel taxes at a particular level, and these cross economic, political and social boundaries. The concept of raising fuel duties at a rate above that of general inflation (now apparently abandoned) was aimed at securing a reduction in the polluting emissions attributable to the use of the internal combustion engine, but critics of the Government's taxation policies suggest that high taxes on the transport and distribution sector (especially road goods vehicles) are imposed mainly to increase government revenues.

The opposition parties have also used public discontent with increasing fuel taxes to improve their own appeal to the electorate by promising cuts in such taxes if they are elected in 2001.

The Environment

Concern for the environment has other consequences for the UK transport and distribution sector than changes to government taxation policies. It has also led to changes in vehicle design, direct controls on vehicle emissions and noise levels, and a reduction in road construction programmes. Furthermore, it has resulted in questions as to the desirability of the 'just?in?time' techniques aimed at reducing inventories. This concern has centred on the adverse consequences on the environment of the need for a larger number of smaller vehicles on the roads.

THE FUTURE

There are some general conclusions that have relevance for the distribution sector as a whole:

• Market globalisation is likely to continue, leading to an expansion of international trade and distribution across national boundaries.
• The internal barriers to trade will continue to be removed as the boundaries of the EU are extended eastwards. However, this is unlikely to have much effect in the short term, because of delays to the enlargement process.
• Environmental concerns are likely to continue to preoccupy political leaders in the UK and the rest of the world, leading to continued constraints on the use of road vehicles for the carriage of freight, as well as for passengers.
• Developments in IT will continue to open up market opportunities for companies in the distribution sector (e.g. e-fulfilment) and will provide ways to support their operations (e.g. improved methods of communication with suppliers, actual and potential customers, and operatives).

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Text © 2001 Key Note

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Last updated by Jacob van Eldik 24th May 2001