Europe s International CEP Market: Solid Growth With Challenges Ahead

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1 Europe s International CEP Market: Solid Growth With Challenges Ahead As international volumes flourish, delivering profits will require juggling several trends while also keeping an eye on a handful of challenges looming just over the horizon. 1

2 Europe s International CEP Market The European international courier, express, and parcel (CEP) market experienced a period of double-digit growth in volume, fueled by the region s economic recovery and an e-commerce boom. The CEP market in the 13 European countries in our study grew 5 percent in value and 10 percent in volume, reaching 16.2 billion and 720 million shipments. In all countries, growth in international standard outpaced international express In every market in our study, the international standard segment outgrew international express. However, the share of express and standard in total international CEP revenues differs significantly. While Sweden or the Czech Republic have a share of international standard revenues of 70 percent and above, more peripheral countries such as Russia and Turkey show an opposite distribution. International express vs. standard B2C is seeing above-average growth rates European average 2016 Among large countries, high B2C growth resulted in above-average results, notably in Great Britain and the Netherlands. Smaller Eastern European countries are catching up with their Western counterparts, with growth of 10 percent and higher in volumes in the Czech Republic, Poland, and Romania. International express 44% 56% International standard B2C outpaced B2B in relative growth, not only in standard shipping but also in express. One might think the CEP industry is However, recent developments 2

3 Europe s five largest markets France, Germany, Great Britain, Italy, and the Netherlands grew at a combined 5 percent in revenue and 9 percent in volume while the remaining countries in our study grew 6 percent in revenue and 11 percent in volume, showing only a faster growth by 1 percent in revenue and 2 percent in volume. Figure Countries across Europe saw a spike in the number of shipments Volume growth of Europe s international courier, express, and parcel market ( ) 0 5% 5 10% 10 15% >15% Not included in study Note: The courier, express, and parcel market includes international standard and express shipping. experiencing its Golden Age. reveal there are challenges ahead. 3

4 The European international courier, express, and parcel (CEP) market has been experiencing an upswing in both revenues and volumes, fueled by the region s economic recovery and an e-commerce boom. Over the past two years, the market in 13 European countries has grown 5 percent in value and 10 percent in volume to reach 16.2 billion and 720 million shipments. However, the growth story is not entirely optimistic. Thanks to a trifecta of factors, revenues are not rising as rapidly as the volume of shipments. First, when fuel prices dropped, so did fuel surcharges. Second, the industry is seeing a shift to lightweight e-commerce shipments, which is driving the revenue per shipment down. And third, the intra-european lane has grown faster than intracontinental lanes, favoring growth of the less expensive standard shipping. A.T. Kearney s study of the European CEP market reveals several significant trends are changing the face of the industry and transforming its outlook for the future (see sidebar: About the Study). In this paper, we examine the state of the industry and take a look at the opportunities and the risks that are on the horizon. The Defining Trends Considering the substantial growth in volume across almost all countries in our study along with frequent reports about volume peaks and growth in online retail, one might think Europe s international CEP industry is in its golden age. However, four trends tell a different tale: With volume growing, investing in capital and human resources is now essential Even though international shipping is a small fraction of Europe s CEP business, revenues are rising modestly while the volume of shipments is growing by double digits (see figure 1). The highest growth of volumes occurred in the emerging markets of Poland (up 19 percent in revenue and 31 percent in volume), Romania (up 8 percent in revenue and 17 percent in volume), and the Czech Republic (up 7 percent in revenue and 14 percent in volume). Top performers also included mature markets such as the Netherlands (8 percent in revenue and 15 percent in volume) and Great Britain (up 8 percent in revenue and 13 percent in volume). Both the About the study A.T. Kearney s European Courier, Express, and Parcel Market Study provides a quantitative picture of the market segments and identi fies the effect of the industry s economic rebound, along with its primary strategic challenges and opportunities. The study examines the industry in 13 countries: Austria, the Czech Republic, France, Germany, Great Britain, Italy, the Netherlands, Poland, Romania, Russia, Spain, Sweden, and Turkey. More than 500 in-depth interviews were conducted with senior mana gement of leading companies, industry experts, and customers, complemented by extensive research and A.T. Kearney s industry expertise. The study focuses on segments with shipments of up to 2,500 kilograms, including those that fall between express services and freight forwarding. Non-network traffic such as same-day, courier, and overnight shipments were excluded. Express encompasses the fastest possible services with guaranteed delivery times. Standard encompasses fast and reliable services, including deferred products. 4

5 Netherlands and Great Britain saw volumes surge because of high growth in e-commerce shipments, with demand for shipments from Great Britain also fueled by the depreciation of the British pound. Countries with the slowest volume growth are Turkey (up 9 percent in revenue and with no growth in volume), Sweden (up 1 percent in revenue and 4 percent in volume), and France (up 3 percent in revenue and 6 percent in volume). Volume growth is felt most during holiday seasons such as Christmas. Although this rapid growth boosts the top line, CEP players will need to find ways to handle peak volumes to prevent congestion and rising handling costs, including making capital investments to expand their service centers and ensuring there are enough employees during peak seasons. Figure 1 Revenue growth is sluggish for international shipping Europe s international courier, express, and parcel market Revenue ( million) Number of shipments (million) 14,646 6,530 (45%) 5% 4% 15,402 6,770 (44%) 5% 5% 16,224 7,118 (44%) (25%) 11% 8% (24%) 10% 7% (24%) 8,116 (55%) 6% 8,633 (56%) 5% 9,107 (56%) 445 (75%) 12% 498 (76%) 10% 549 (76%) International express International standard Revenue per shipment is dropping as standard shipping outpaces express and B2C outperforms B2B Just a couple years ago, CEP companies considered the business-to-consumer (B2C) segment to be the domain of the domestic markets. Yet as online shopping becomes more popular and the barriers to buying abroad (especially in Europe but also cross-continental) shrink across many countries, consumers are making more purchases across borders. Over the past three years, the international standard market has outperformed international express, increasing its share of total revenue to 56 percent (see figure 2). The split between 5

6 Figure 2 Standard shipments are bringing in more revenue than express International courier, express, and parcel market revenue ( millions, 2016) 44% European average 56% Sweden Czech Republic 25% 30% 75% 70% France 37% 63% 3,061 Spain 38% 62% 955 Germany 39% 61% 3,662 Poland 41% 59% 357 Italy 42% 58% 2,196 Austria 43% 57% 272 Netherlands 47% 53% 1,481 Romania 55% 45% 84 Great Britain 62% 38% 2,550 Russia Turkey 70% 91% 30% 9% International express International standard express and standard differs among countries, ranging from a 25 percent share of express in total international revenue in Sweden to 70 percent in Russia and 91 percent in Turkey. (Russia and Turkey are more express-driven as a result of their peripheral location in Europe: distance makes road transport less competitive than air.) Overall, revenue per shipment (RpS) declined in both international standard (6 percent in 2015 and 5 percent in 2016) and in international express (4 percent in 2015 and 2 percent in 2016). The main reasons for this drop were a higher share of standard shipments in total volumes, a higher share of lightweight shipments, lower fuel prices, and a growing share of intra-european shipments in total volumes. On a country level, only Turkey and Russia saw an RpS increase in However, this was because of local currency depreciations against the euro. The business-to-business (B2B) segment still comprises the majority of both revenue and volume in international flows. (The revenue share is higher because B2B shipments are heavier than B2C.) Nevertheless, B2C outpaced B2B in relative growth, not only in standard shipping but also in express. The latter became more attractive for international e-commerce firms as more consumers want fast international delivery and as express prices for lightweight shipments constituted a smaller portion of the online basket value. Looking ahead, competition will intensify in international express in the wake of recent mergers that reduced the number of global express operators from four to three. 6

7 Large markets are getting larger as big countries gain momentum This trend challenges the conventional assumption that small and emerging markets are quickly catching up with their larger, more developed neighbors. Our study shows that the five largest markets France, Germany, Great Britain, Italy, and the Netherlands grew at a combined 5 percent in revenue and 9 percent in volume while the remaining countries grew 6 percent in revenue and 11 percent in volume respectively, showing only a faster growth by 1 percent in revenue and 2 percent in volume (see figure 3). Although having an offering in emerging markets is an essential part of a full network, large markets will remain a priority from a business perspective. This becomes especially apparent when considering absolute growth: the five largest markets volume grew by 52 million shipments almost five times more than the 11 million shipments of growth for the remaining eight countries in our study. Figure 3 Large markets are seeing solid growth in shipments International standard market growth ( ) Revenue growth International express market growth ( ) Revenue growth 30% 25% Revenue per shipment increase 30% 25% Revenue per shipment increase 20% 15% Russia Romania Poland 20% 15% Russia Poland 10% Germany Turkey Austria Netherlands 10% Turkey Italy Spain Great Britain Czech Republic 5% Spain Great Britain Italy 0% Revenue per shipment Sweden France decrease -5% -5% 0% 5% 10% 15% 20% 25% 30% 35% Volume growth 5% Austria Czech Republic Netherlands 0% Germany Revenue per shipment Romania decrease France Sweden -5% -5% 0% 5% 10% 15% 20% 25% 30% 35% Volume growth Five largest international courier, express, and parcel markets Note: Bubble represents relative revenue size of the individual market Shipments are getting lighter The average weight per shipment (WpS) decreased in both international segments (see figure 4 on following page). With faster growth in B2C shipments, international standard saw average WpS drop by 2 percent from 19.3 kg to 18.9 kg. In international express, WpS declined by 1 percent from 7.3 kg to 7.2 kg the result of three factors: more lightweight e-commerce shipments, a shift of heavier shipments to freight forwarders, and a diminishing share of documents in the overall product mix. 7

8 Figure 4 International shipments are getting lighter Weight per shipment for international standard (in kg, 2016) Weight per shipment for international express (in kg, 2016) Avg. 2015: 19.3 kg Avg. 2016: 18.9 kg Avg. 2015: 7.3 kg Avg. 2016: 7.2 kg D F GB I NL E S PL CZ TUR A RUS RO Total D F GB I NL E S PL CZ TUR A RUS RO Total 0% 0% -2% -3% -9% -1% -1% 3% -6% -2% -1% -7% -2% Change in weight per shipment % 2% -2% -1% -1% 1% 0% -11% -1% -1% 3% 13% 5% Change in weight per shipment Note: Countries listed by market size Challenges on the Road Ahead With the exception of a few network players, most companies are planning to focus more on international B2C a segment that is growing not only in size but also in importance. Yet, there are a variety of challenges ahead, such as offering satisfactory last-mile services and return solutions, giving customers the convenience the want, providing state-of-the-art IT solutions, and coping with both peak volumes and rising costs. Gaining a competitive edge will require striking a balance between adopting a standardized approach and adapting to a country s specific requirements. Forward-thinking companies will keep an eye on four areas: Last-mile services will become more important As cross-border online retail continues to grow, e-commerce will become more important. As a result, the last-mile space of the parcel industry is one of the most active investment areas globally, both for industry players and for start-up and venture capital firms. For example, inno vative concepts are constantly emerging, including digital lockers, autonomous rovers and drones, and package delivery to your smart car s trunk. Two trends are fueling this: the urge to reduce costs and a focus on customers, whose expectations are growing about when, where, and how their purchases are delivered. Companies hoping to compete for international e-commerce shipments will need to have a last-mile offering at a reasonable cost in all of the countries they serve. The challenge will be in obtaining enough volume to reduce the average cost per delivery, making e-commerce 8

9 shipments profitable, and having state-of-the-art last-mile delivery options to improve the first-time delivery rate. International standard will continue to outpace international express The international standard market will continue to grow faster than international express. However, express could gain some shipments from the standard segment, especially for purchases with basket values of 50 and more. Although both segments will be driven by ongoing B2C growth, standard will grow faster thanks to more traffic to neighboring countries. In fact, international standard will grow faster than express in every European market until 2019 (see figure 5). Countries with comparable volume growth projection (a difference in standard and express CAGR below 2 percent) include Germany, Spain, the Great Britain, Italy, Poland, Sweden, and Turkey. Rising costs will require having standardized offerings or adding surcharges Overall, shipping rates will remain near current levels as large accounts continue to drive growth and remain unwilling to renegotiate their base prices. As a result, covering rising costs will require companies to focus on what drives underlying cost and introducing or increasing surcharges where necessary. Some global network players have already introduced handling surcharges for non-standard shipments and shapes, and some have added surcharges for domestic shipments in the United States during peak seasons to cover extra labor costs. It is only a matter of time before European domestic and international shipments see similar surcharges. Figure 5 The volume of shipments is slowing, but standard is outpacing express International courier, express, and parcel market standard (shipments in millions, ) % 8% % 6% % 549 9% International standard International express xx CAGR 9

10 Services will become a differentiator, and new products may emerge Given the nature and urgency of shipments, fast transit and smooth delivery often justify higher transportation prices. Although surcharges may become mandatory to cover for rising cost, an optional service offering could give companies a leading edge. With greater commoditization of transport from origin to destination, services will become more important in both the B2B and B2C segments. Companies with a comprehensive service offering such as insurance, customs clearance, and payment of duties will have a competitive advantage. Of course, this requires having operational processes that can keep up with the promises of these additional services. Furthermore, because online shoppers are demanding more convenience and greater transparency in shipping prices, the B2C segment could introduce tailored e-commerce product offerings with one-size-fits-all prices or a handful of different prices based on predefined criteria. The Whole Package Europe s international CEP industry has enjoyed steady growth for the past several years. Although this is likely to continue, the factors fueling that growth will shift from standard shipments to a greater share of lightweight e-commerce shipments. Forward-thinking companies will win over customers by adapting their last-mile services and offering more convenient delivery options. The leaders will also find the right balance in pricing their services to cover costs from handling peak volumes and non-standard packages to investing in a last-mile offering. Long-term success will go to those that can compete on price while also operating effectively in their chosen environment. 10

11 Authors Ferry Salehi, partner, Berlin Denis van de Voorde, principal, Brussels Jan Matuska, consultant, Vienna The authors wish to thank Vincent Schicktanz, Marta Szostak, and Anna Wierzbicka for their valuable contributions to this paper. 11

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