British CEP market consolidates further
by Paul Needham
The fragmented British courier, express and parcels market looks set for a new wave of consolidation following this week’s GBP 210 million acquisition of independent parcels carrier Target Express by Rentokil Initial, parent holding of leading player City Link. The deal makes City Link into a top competitor to DHL, TNT and UPS in the domestic next-day parcels market.
Growth in Europe’s second-largest express and parcels market has slowed over the last year, especially in the domestic sector. The market is forecast to grow only moderately at about 3% over the next few years. At the same time, the traditionally fierce price-based competition in Britain and higher operating costs, especially fuel costs, have combined to put pressure on profit margins. These factors have hit smaller, domestically-focused companies in particular, and opened up new opportunities for mergers and acquisitions.
There have already been several important transactions in the UK in recent years. UPS improved its domestic market position with the acquisition of Lynx Express last year, while Amtrak Express Parcels broadened its portfolio through the takeover of Nightspeed. DHL had earlier jumped to become market leader with the acquisition of the Securicor Omega Express business, while GeoPost had acquired Parceline and Interlink Express.
The latest acquisition brings together two of the country’s leading independent players. In 2004, according to CEP-Research information, City Link was the UK number four behind DHL, TNT and Parcelforce (Royal Mail) and ahead of UPS, Parceline (GeoPost) and Business Post while Target Express was one of several smaller top ten companies. The overall market is estimated to have been worth some EUR 5.9 billion in 2005.
Head-to-head with UPS/Lynx
In 2005, City Link had network turnover of GBP 240 million and made an operating profit of GBP 29 million. Target Express had turnover of GBP 146.1 million and an operating profit of GBP 17.3 million in the year to 30 April 2006. The new City Link-Target Express group would thus have combined revenues of about GBP 386 million, putting it head-to-head with UPS/Lynx in the battle for third position.
The Rentokil Initial group, a conglomerate of service companies in a diverse range of industries, has now clearly decided to invest in the express and parcels market as one of its growth businesses. Alongside the GBP 210 million acquisition price for Target Express, it has spent a further GBP 50 million to acquire 33 City Link franchises. It plans to buy the remaining 13 franchises in 2007 to gain full control of the network, and will then merge City Link and Target Express into one company.
City Link has grown faster than the overall market in recent years, according to Rentokil CEO Doug Flynn. The new merged company would be in a strong second position to DHL in the GBP 2.8 billion overnight express parcels market with a share of about 15%, he said. He did not foresee any major integration problems since City Link and Target Express shared similar operations and customer service approaches.
Pressure grows on medium-sized operators
The acquisition will inevitably put pressure on competitors to strengthen their domestic businesses in response. In contrast to Germany and France, the other two major markets, the British market remains fragmented. Alongside multinationals DHL, TNT and UPS and the Royal Mail parcel division Parcelforce, there is a large number of British-owned companies competing in the B2B and B2C segments. These include City Link, Business Post, Parceline, Amtrak and ANC.
The major trends in the British market are good international growth rates of about 6% a year but slow domestic growth of about 1.5%. The B2B sector is characterised by competitively-priced next-day express services. The B2C segment is growing strongly thanks to booming online and mail-order sales. Leading B2B players are increasingly moving into this segment that has largely been served to date by home delivery specialist firms.
