One of the great privileges of working in business transactions day-in, day-out, is that you develop an antenna for how a particular industry or sector is doing. Addressing The Road Ahead
A s you would imagine, this “nose” becomes honed with anecdotal stuff: the volume of emails in the inbox, the passing conversations with clients and others in the professional community, the approaches from potential investors and their investment criteria, the number of new client or new project enquiries coming in, the nature of such projects… For all kinds of historical and geographical reasons, transport, logistics and supply-chain is a hugely important sector for Scrutton Bland. So, it is only right that we occasionally take pause to try and make sense of these empirical experiences, not least as they impact our own business and strategy. Luke Morris, Corporate Finance Partner explores this in more detail. I have been looking at some recent UK industry data and reports published by analysts at IBISWorld. IBISWorld collates data from published sources for an industry (history) and the considered risk and macro-economic factors to analyse where that industry may be heading (future). But with such a cornucopia of data available, where to start? I have gone back to received wisdom. The origin of the phrase, “turnover is vanity, profit is sanity, cash is reality” is lost to the winds of time. But it pragmatically suggests that a sane place to start is with profit.
The last decade or so has been characterised by eroding profit margin in freight road transport – now apparently stabilising at around 10%. But it has not been a steady decline: the more striking visual image is the volatility rollercoaster showing how this profit margin has eroded. (By the way, if you think 10% looks like a decent margin compared to your own operation, keep in mind that 12% of the analysed market share belongs to DHL, Wincanton, XPO and Stobart, so this inevitably skews the overall average…).
So, what can you do? Much of this cannot easily be handled proactively. It is the speed of reactivity that is key. If you are in the industry then I have no doubt that you are already watching this, and watching your contracts, like a hawk. Customer Demand Wider economic conditions and changing customer demand have also inevitably played a role in volatility. It’s axiomatic that business confidence and industrial production are highly dependent on the economic climate. A climate which has faced the headwinds of Brexit, of the Government’s response to COVID-19 and (I argue) the corollary of severe inflation. This has damaged industrial production and reduced freight road transport spend. It is the main cause of the red-line roller coaster above. I have been saying for some time that we are not yet, in my opinion, out of the woods with inflation. High living costs are now baked in and continue to tighten consumers’ budgets. So, what can you do here? This one is trickier. Economists have wrestled with the UK’s “productivity puzzle” for as long as I have been following the numbers. And that is before the “black swan” events of the past few years. (Black swans that are feeling as common as white swans!).
So, what has influenced this volatility? Two main factors I think: fuel price and customer demand.
Fuel Fuel price fluctuations raise volatility. We know that prices have surged since Russia-Ukraine, that costs are passed on to customers, and that impacts demand and revenue levels. According to the Office for National Statistics (ONS), motor fuel prices dropped by 9.2% in the year to January 2024. However, prices remain highly volatile, being the largest upward contributor to the CPI in April 2024. Below is what the analysts think: and you can see that historic price per litre reflects profitability above. But will future volatility disappear as the analysts appear to believe? I am not so sure.
4 | SCRUTTON BLAND | TRANSPORT AND LOGISTICS
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