Over the next few years, the 3PL market in the UK looks set to face a period of adjustment as well as growth. The result of future trade agreements between the UK and the European Union, plus the longer term effects of COVID-19, will see 3PL providers having to adapt international supply chains, and invest in new technology and e-commerce solutions that can deal with a greater demand being placed on the digital delivery of consumer goods.
From a growth perspective, the 3PL market in the UK is forecast to grow at a CAGR of 8.1% by 2021, reaching £21.2bn, including an anticipated increase of 4% in 2020. The increase in e-commerce for FMCG, Groceries and Retail is a large contributor to this growth, with online sales accounting for 32.8% of all retail sales (ONS 2020), up from 18.3% in February. As lockdown has been gradually lifted, this fell to 26.6% in August 2020, a 52.9% increase from the same time last year. This reflects the new “new normal”, where recent events have accelerated a change in society’s buying habits.
This significant increase in the demand for e-commerce fulfilment has subsequently seen the demand for fulfilment and warehousing services outperform distribution, procurement and ancillary services in the UK.
Brexit will no doubt affect supply chain management whatever the outcome. While the UK officially left the EU on 31st January 2020, the current transition period continues until the end of December 2020. With potential trade barriers and increased border controls likely to be put in place when the transition period ends, supply chains will become less efficient using current logistics processes and systems.
The new immigration points system due to be implemented in the UK from January 2021 will impact the flow of available labour into the UK from EU countries, particularly affecting the low-skilled labour market associated with a typical warehouse workforce. Currently 1 in 5 warehouse employees in the UK come from the EU, theoretically resulting in a 20% labour shortfall in this sector, further strengthening the need for contingencies and software to allow logistics companies to operate at maximum efficiency.
Companies will need to adapt quickly and seamlessly to retain existing business as well as win new market share from other 3PL providers. Investing in next-generation logistics technologies, like fulfilment software applications, other cloud-based platforms and automation inside the warehouse will help 3PL providers better manage their cost base and remain price competitive, allowing them to grow market share. The industry is at an inflexion point and this is driving M&A activity either through trade sales to large sector aggregators or private equity transactions.
At HMT we have worked on numerous transactions in the logistics sector, and as a result of both past and current mandates, we have a deep insight of the main drivers impacting on acquirer and investor views on valuation;
- Technology – as outlined already, the use of technology is one of the most significant factors when valuating companies in this sector. Tech-enabled businesses can deliver their service more efficiently, driving better margins, whilst also retaining the ability to scale much quicker than those reliant on manual processes;
- Customer base – the vertical serviced by each business is very important, as the growth of the logistics business will largely be driven by downstream demand from their client’s own customer base. Demonstrating a growing cohort of customers and low levels of customer churn will ensure a premium valuation. Important areas of consideration are the length of customer relationships, contractual terms and customer concentration. As a general rule, the largest customer should not exceed the annual growth of the business;
- Capacity to grow within the existing infrastructure – being able to demonstrate that the business can hit short to medium term growth targets within the existing infrastructure is key, as any acquirer / investor will not want to feel like that they need to fund additional capital expenditure immediately post transaction. Things to consider are the ability to add mezzanine levels to existing premises to expand workable floor space, as well as an ability to adapt and grow shift patterns to increase productive time in the warehouse and being able demonstrate the return on this investment;
- Strong management team – in any transaction, the people actually delivering the plan are vitally important throughout a disposal or fund raise process. Management who are familiar with the industry and have a proven track record for delivering growth in similar, previous roles will support a premium valuation.
Through the deals we have advised on in this sector, we have built up a detailed knowledge of potential trade acquirers and private equity investors with a strong appetite to invest in logistics, particularly e-commerce fulfilment. If you believe your business has the right attributes to be attractive to investors and/or acquirers, and you would like to get in touch to discuss your options, please contact one of the team on 01491 579740 who will be delighted to help you.