T&L companies can achieve profitable growth by focusing on the right success factors, says BCG Report

Oct 19, 2016: There is a need to refine current business models by some transportation and logistics (T&L) companies to capitalize on opportunities in industry segments that are attractive in terms of both growth and returns, says a new report by The Boston Consulting Group (BCG).

The report titled ‘Transportation and Logistics in a Changing World: The Journey Back to Profitable Growth’ was made after BCG conducted an industry-level analysis of critical performance metrics and complemented it with detailed analyses of business segments and individual companies.

“Indian T&L sector is at the cusp on a big shift with the expected introduction of GST, rapid improvement and investments in infrastructure, use of digital to optimize asset investments and utilization, and the emergence of ecommerce. Companies that are able to transform their business models to create a sustainable advantage from these trends will create shareholder value,” said Amit Ganeriwalla, Partner and Managing Director.

Some T&L companies have succeeded in combining strong growth with high returns, while for many others this has been an elusive goal. To understand what sets apart the top performers, BCG conducted the analysis.

“We found that top-performing companies set themselves apart in two ways. First, they understand the success factors and related best practices that are critical to maximizing their profits in the market today. Second, to maintain their competitive advantage, they proactively position themselves to capture opportunities arising from the megatrends reshaping the global economy—such as urbanization and digitization,” said Jens Riedl, a Munich-based partner at BCG and coauthor of the report.

“Despite T&L’s growth in recent years, our industry-level analysis found comparatively low returns, measured in terms of return on capital employed (ROCE) and total shareholder return (TSR),” said Hady Farag, a New York–based principal at BCG and coauthor of the report.

The ROCE for T&L from 2011 through 2015 was 10.1 per cent, falling short of the industry’s weighted average cost of capital of 10.3%. Not surprisingly given its low ROCE, the T&L industry did not reward its shareholders with high returns. During the five-year period from 2011 through 2015, the T&L industry ranked only 17th for annual TSR among the industries, BCG studied.

Performance has varied widely at the level of T&L business segments. Combining the perspectives of growth and return on assets (ROA), the study found that the most attractive segments are logistics advisors, CEP (courier, express, and parcels) delivery, hinterland terminals, and, to a lesser extent, rail transport (outside of Europe). All other segments do not earn the cost of capital. The segments facing the most intense challenges in terms of both growth and ROA include sea and air transport and postal delivery.

But challenging market conditions only partially explain why profits did not keep pace with revenue growth, according to the report. For many T&L players, organic growth strategies aimed at gaining market share in new regions and in new business segments failed to deliver profitability. In some instances, companies accelerated growth through acquisitions, but these inorganic strategies also failed to realize the anticipated profit growth—often because the companies did not adequately integrate the acquired businesses into their operations and networks.

“To achieve profitable growth in the near term, companies in all T&L segments will need to adapt their traditional business models to the changing market environment,” said Riedl.

To capture long-term opportunities, T&L companies also need to prepare for six key megatrends that are changing their industry: the rapid development of emerging markets, urbanization, sustainability, infrastructure congestion and scarcity, e-commerce, and digitization.