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Executive Summary Table of Contents
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Distribution, in the context of this report,
involves the physical distribution of the output of companies engaged in the
production of goods. The UK distribution sector, therefore, consists of firms
providing distribution services to manufacturers located in the UK, or
importers serving the UK market, and includes both domestic and international
distribution services. In order to aid analysis, this report is broken down by
mode of transport -- road, rail, sea and air. In addition, there is a fifth
category of distribution service provider, namely that of freight forwarders,
who play an important supporting role to the overall distribution industry. The
latter sections of this report deal with issues regarding the industry's
customers, analyse industry opinion and, finally, examine the future prospects
for the industry as a whole.
As transport and distribution activities are
closely tied to overall economic activity, it is not surprising to find that,
in the current economic climate, the distribution industry has experienced
significant volume growth over the last few years. However, it is important to
note that the relationship between the level of economic activity and the
distribution sector has become less pronounced over time. This is because the
UK economy as a whole has become considerably more service-based over the past
few years, with industries such as the financial services sector (which
requires very little in the way of physical distribution) becoming increasingly
important to the UK's economic performance.
One way of measuring the
importance of distribution to the UK economy is through the level of
employment. In 1998, 835,000 people were employed directly in transport
industries, while 937,000 were employed indirectly in transport-related
sectors. Not surprisingly, the vast majority of those employed directly by the
transport industry are involved in road haulage, which accounted for 75 percent of the
workforce in 1998. Between 1994 and 1998, the overall level of employment in
the transport industry has remained relatively constant. This, however, masks
the considerable fall in employment in the rail sector which declined by 48.4 percent
over the period. However, it is important to note that much of this decline
occurred in the period between 1994 and 1996, when rail operations were
substantially restructured prior to the transfer from public to private
ownership. The only sector to experience any significant increase in employee
numbers is air, which has recorded a 12.1 percent rise between 1994 and 1998.
Given the considerable variation in the capital requirements of each of the
individual sectors of the distribution industry, it comes as no surprise to
find that each of the sectors display widely differing characteristics in terms
of industrial concentration. At one end of the scale is the rail industry,
where English, Welsh & Scottish Railway (EWS) manages virtually all
Britain's rail freight transport. At the other end is the road haulage
industry, which has traditionally been characterised by a high degree of
fragmentation. As in many other parts of UK industry, however, there is
evidence of a move towards greater consolidation bought about both by advances
in technology and customer demands.
The table below outlines the
approximate market share of each of the major modes of distribution. The table
clearly demonstrates the dominant position held by the road transport
operators, which accounted for an estimated 68 percent of goods moved in 1998.
|
Estimated Share of UK Distribution by
Mode |
|
|---|---|
|
Mode |
|
|
Road |
67.8 |
|
Rail |
7.6 |
|
Water |
19.5 |
|
Pipeline |
5.1 |
|
Total |
100.0 |
|
Source:Department of the Environment, Transport and the Regions/Key Note |
Despite attempts by successive governments to
improve the attractiveness of other modes of transport, the importance of road
haulage has continued to rise during the 1990s. This is largely because of the
inherent flexibility which road haulage offers, allowing for point-to-point
pickup and delivery. The absence of this facility is a major weakness in road
transport's major competitor, rail.
However, the competitiveness of road
transport is increasingly being threatened by continuing increases in fuel and
vehicle duty. In the March 1999 Budget, the Government introduced a series of
changes to fuel and vehicle excise duty which, in the view of the Freight
Transport Association (FTA), has resulted in road haulage companies paying
almost double the tax as their continental counterparts. In particular, in
terms of fuel sales, the Government introduced its highly controversial `fuel
duty escalator' which will systematically increase fuel duty every year by at
least 6 percent above the rate of inflation. The situation for operators has become so
difficult that many have threatened to shift their operations overseas.
However, those that do so face significant problems associated with licensing
and depot maintenance.
Theoretically, the major beneficiary of any decline
in road haulage activity is rail. After decades of decline, the rail freight
sector has recently staged a minor recovery, with domestic rail freight
increasing by 37.5 percent between 1994 and 1998 to 43.3 billion tonne kilometres.
Part of the reason for the increase is that the Government is now willing to
partly subsidise rail freight transport through the introduction of grants
which cover, or partly cover, the additional costs of rail transport compared
to that of road.
One of the most important factors behind the growth of
rail freight has been the growth of intermodal transport. Railtrack, which is
currently working on a £1bn scheme to promote the switching of freight
between road and rail, plans to create rail corridors that take the same route
as major motorways and will lead to eastern England getting 20 new road/rail
terminals. The company hopes that it will eventually gain a 25 percent share of
long-distance freight transport. Growth will further be driven by the launch in
1999 of an initiative by rail freight provider, EWS, for maritime traffic. As
part of this, the company plans to run 1,000 new intermodal wagons and a fleet
of 75 heavy haul locomotives. Nonetheless, for many customers, the historical
perception of rail freight as being unfriendly and inefficient, remains. The
industry still has some way to go to convince the sceptics.
Contrasting
with the recent performance of the rail transport industry, UK shipping remains
very much in the doldrums. UK shipping companies currently have to contend with
unequal competition from two different sources: substandard shipping and
subsidised shipping. Substandard ships, often operating under `flags of
convenience', with low-paid and generally poorly-trained crews, benefit from
the cost advantages of lax safety regulations. At the same time, shipping lines
based in some developed countries and operating under their national flags are
crewed by well-trained and relatively highly-paid crews with good safety
standards, but benefit from government subsidies and tax concessions provided
to compensate for their higher costs. In terms of infrastructure, Britain's
port operating companies have performed well in recent years, aided by the
strength of the UK economy which has resulted in an increase in demand for high
value-added goods which attract a premium charge from port operators.
The
difficult market conditions faced by UK ship operators, both in terms of tax
and regulation, has resulted in many opting for `flags of convenience'. The
process of `flagging out' has resulted in only 20 percent of UK-owned vessels being
registered in the UK -- up until the 1970s, it was almost unknown for UK-owned
ships to be registered anywhere other than the UK. Over the past few decades, a
wide range of shipping registries have developed to cater for this growth in
demand. Most UK-owned companies opt for countries which are Crown Dependencies
or overseas territories, which together account for around 75 percent of UK vessel
tonnage.
The UK air freight market has experienced impressive growth in
the past few years and is now recognised by many of the world's major airlines
as being a highly attractive area of operation. Whereas once major passenger
airlines were content to have freight operations as an adjunct to their core
passenger business, today they are having to decide over whether to settle for
being simple providers of capacity or to concentrate on the value-added side of
the supply chain.
Perhaps the most exciting development in the air freight
market in recent years has been the creation of alliances along the lines of
those that already exist in the passenger market. Although these alliances are
only at a preliminary stage, they offer an important way for airlines to
deliver the standards of service and geographical coverage demanded by their
customers. Some cargo alliances are already under discussion and a few are in
place. Lufthansa Cargo, for example, is understood to be in talks with its Star
Alliance partners SAS and United, as well as current Lufthansa partner
Singapore Airlines.
The role of freight forwarders has changed
dramatically over the past 2 decades, from one which was essentially involved
in bringing together all the elements of transport and distribution in addition
to processing relevant documentation, to its position today, where forwarders
can control and monitor the whole supply chain.
Recently, a number of
acquisitions and alliance announcements have signalled moves by freight
forwarders to become more involved in the maritime sector. The developments
involve leading players both in Europe and the US, and come as pressure mounts
from customers for global, mulitimodal services.
Virtually every sector of
the distribution industry has been affected by technological change in the past
few years. Developments such as electronic data interchange (EDI), which allows
the tracking of consignments through the supply chain, are now becoming
relatively commonplace within the distribution sector. Of particular
significance, however, is the fact that technological advances are leading to
greater differentiation among service providers. Inevitably, this tends to
favour larger companies, who are both willing and more financially capable of
making the investment required for new technology. However, it is important to
note that over the last 2 to 3 years, a number of sophisticated, but relatively
inexpensive, software packages have been launched onto the market which are
able to perform stock tracking and control functions. Nevertheless, only large
operators will be able to afford systems that can link directly with those of
the major manufacturers and retailers.
In recent years, the impact of the
distribution industry on the environment has attracted considerable public
attention. In particular, road freight operators have been singled out by
various pressure groups for causing significant levels of environmental damage.
This is despite the fact that it is actually the private motor vehicle which
has a greater detrimental effect on the environment. The road haulage industry
has responded with a number of initiatives aimed at reducing the impact of
their activities on the environment.
However, evidence is growing that
these actions will be insufficient to deal with the problems on Britain's roads
and the Government has hinted that it may introduce some form of road pricing.
Although, the Government has resisted such measures to date, it seems likely
that a variation on the theme will be introduced in the next few years which
will further reduce the competitiveness of the road compared with that of other
modes of transportation.
Not surprisingly, given the considerable
differences that exist between the various modes of transport, the future
prospects for each sector vary widely. The most unattractive sector of the
market will remain road transport, which has been hit by both increases in fuel
and tax charges, and the growing importance of other sectors of the industry.
In the future, its position is likely to be further undermined by the
introduction of road pricing and the continued effects of the Government's fuel
duty escalator.
Key Note's forecasts estimate that the rail freight
industry in the UK will grow by 63.4 percent between 1999 and 2003. These forecasts
are based on the commitments made by Railtrack to invest in improving the
capacity of the network, as well as work currently being undertaken that will
create a network of regional distribution depots. These depots will allow rail
to work in parallel with road.
The shipping industry is currently at a
crossroad. Although the Government has publicly pledged support for the
industry, without major changes to vessel taxation it seems unlikely that the
industry will benefit from the predicted growth in world seaborne trade.
Freight forwarding will continue to be affected by the recent wave of
consolidation that has swept the industry as major players seek to increase
their geographical coverage and the services they provide. The same is true for
air freight, although the major players will achieve this through alliances
rather than through takeovers or mergers.
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