The UK Road Haulage Market – Caught up in the supply chain reset
The Shape of the Market
Road haulage is a sector with many challenges, not least the narrow profit margins on so much of its activity or the heavy investment in fixed assets required and the debt levels this generates. We set out the specific challenges, which have been caused by the pandemic and Brexit separately below.
More generally, technology is penetrating every aspect of operations. Customers now expect end-to-end product tracking. Time and attendance software is increasingly being used to monitor staff punctuality and reliability. Biometric fingerprint and RIFD technology are widely in use, as is artificial intelligence-driven use of sensors and interpretation of customer behaviour. Abatement technology is in use to purify emissions. None of this comes without cost and training implications.
Poor workforce productivity is a further issue. Transport workers averagely take more than three times as much sick leave (11.4 days per annum) as in other sectors.
Sustainability and green agenda issues are forcing major strategic changes, as demands grow to waste reduction and fossil fuel usage minimisation. There is increasing government regulation with the introduction of Low Emission Zones (LEZs), Clean Air Zones (CAZs) and stricter emission standards for vehicles.
Greater transparency and co-operation requirements are emerging as anti-competition laws are eased to encourage process co-ordination and information sharing between logistics providers, following the success of delivery platform sharing between major supermarkets during Lockdown 1.
Financial Risk
We have used the Company Watch system to analyse the latest financial statements filed at Companies House by every company registered in the UK and operating in the road transport sector. Our research covered a total of 28,790 companies.
This highlighted some deeply concerning statistics. Company Watch uses complex analytics to generate a financial health score (H-Score®) for companies out of a maximum of 100. An H-Score of 25 or less indicates that the company concerned has a one in four risk of going through a formal insolvency process or a significant financial restructuring over the next three years.
Out of our sample of 28,790 companies, an extraordinary 11,331 (41%) are in the Company Watch warning area with a score of 25 or less. Across the economy as a whole, the expectation is that no more than a quarter of businesses should be in the warning area.
Debt levels were a cause for concern even before the pandemic. The sector has average net gearing of 98%, in part driven by its high dependency on capital assets such as vehicle fleets and depot premises for its business model but still unsustainably high. It should be remembered that this indebtedness relates to periods prior to the crisis, since when 36% of all UK companies have been granted government guaranteed loans to bolster their cash flow and finance ongoing trading.
Fortunately, there is no significant ‘zombie company’ issue. Only 1,645 companies (6% of the sample) had negative balance sheets and their combined deficits only totalled a relatively modest £106m.
It should be stressed that these results are based on accounts for periods ending before the Coronavirus pandemic, so any negative financial effects of the crisis are not reflected in this research.
Insolvency and Business Failure Issues
Historic insolvency levels have been modest. In the first nine months of 2020, there were just 373 formal insolvency filings, equivalent to 2.6% of all business insolvencies. In 2019, there were 569 insolvencies. The rate has slowed in 2020 because some of the government’s coronavirus support schemes and measures have severely reduced the number of insolvencies across the whole economy since March 2020.
It will remain to be seen what the impact there will be from the extra debt burdens of Coronavirus support loans and the build up of deferred liabilities for VAT and PAYE, as well the ending of the host of other measures put in place by the government to limit business failures during the crisis, which have allowed some fundamentally unviable businesses to survive.
The Impact of the Pandemic
The Road Haulage sector has been pulled in two very different directions during the pandemic, with those serving the food retail industry facing extreme demand levels, while the rest of the truck fleet has often stood idle as the non-essential retail and hospitality trade has moved in and out of lockdown usually at very short notice and sometimes on a fluctuating local basis. The initial lockdown adversely affected those working in the construction sector.
The crisis has also accelerated some trends, particularly in the retail sector where the Chair of John Lewis recently commented that she had seen ten years’ change in ten months, as consumers were forced to turn to online shopping. The working from home (WFH) phenomenon and biosecurity fears have changed the geography of retail, so that out-of-town retail parks and town centre shopping malls have suffered dramatic footfall reductions in favour of local and often independent outlets. Hauliers who service retailers have found their schedules and itineraries changed out of all recognition with no certainty about what the ‘new normal’ might be after the pandemic.
Research from Barclaycard Payments revealed that because of the lockdowns of the past year, consumers have been receiving an average of two extra deliveries per month since the start of the pandemic – averaging seven parcels now compared to five before March 2020. This equates to over 86 packages in total over the course of a year and this growth in deliveries may also here to stay, with over half of people expecting to receive either the same amount or more in the future.
Hauliers are having to adapt to clients switching their supply chain policy from ‘Just in Time’ to Just in Case’ and holding larger inventories following the issues being caused by Coronavirus and Brexit.
The output of the sector during 2020 illustrates perfectly the roller coaster conditions hauliers have had to manage. In Q2, its GDP fell by 32% during Lockdown 1. In Q3 there was a sharp recovery as its GDP rose by 15% but local and national lockdowns in Q4 halted the growth almost completely. First indications for 2021 are that its GDP fell back by 0.3% in January as Lockdown 3 (as well as Brexit) took effect.
Brexit
One reason for the rise in transport output towards the end of 2020 was the stockpiling of goods on both sides of the Channel ahead of the end of the Transition Period. Now the industry is caught up in the severe border disruption as the last-gasp Free Trade Agreement with the EU is implemented. The initial impact has been significant, but it isd unclear how this situation might play out in the medium and longer term.
Labour Shortages
Recent trends in redundancies in the industry illustrate the impact of Coronavirus. The period from November 2020 to January 2021 saw lay offs at a rate of 15 per thousand staff, a deterioration from the previous quarter when the rate was 14 per thousand. In the equivalent period pre-pandemic, redundancies were only 3 per thousand.
Despite these redundancy figures, the industry is thought to have a labour shortage of almost 60,000. This was an issue pre-pandemic but has been exacerbated by the exodus of drivers because of the unpredictable availability of work and towards the end of 2020 by the impending end of the Brexit Transition period. It is now being made still worse by the new points-based immigration system.
The introduction of the new IR35 tax reforms in April 2021 are predicted to push up agency rates for drivers by as much as 20%, which will be problematic because of the extreme price sensitivity of customers.
Crown Preference
The government’s decision to restore Crown Preference for the distribution of funds in formal insolvency proceedings as from the beginning of December 2020 could not have come at a worse time for many sectors, not least road haulage with its high levels of debt. It is likely to have a depressive effect on the willingness of lenders to provide working capital finance and asset-based facilities, just when hauliers will need all the support they can get.
Conclusion
The simple lesson from the pandemic for hauliers is that agility is paramount in a commercial world changing at breakneck speed. They must place more emphasis not just on being supremely efficient in operational terms and more secure in financial terms, but also on planning for future supply chain disruption events, whether they are small scale and local, or large scale and global.
The key issue is how best to mitigate the risk of supply chain financial instability by having the highest quality credit and procurement management. It is not just hauliers themselves who are at risk of failure in the aftermath of the pandemic, but also their customers and suppliers.
April 2021